Will Geithner prioritize debt repayment?

By Felix Salmon
June 8, 2011

Now that I’ve given Tim Geithner grief for looking at the world from a predominantly Wall Street, Treasury, fiscal and monetary policy point of view, I’m going to do just that myself when it comes to a potential debt default.

I was confused this morning when I read this Reuters article saying that Republicans are flirting with the idea of the US defaulting, and quoting Paul Ryan as saying that holders of government debt would be willing to miss payments “for a day or two or three or four.”

This of course is a very dangerous idea indeed, but that’s not what puzzled me. Rather, it was this:

Republican Senator Pat Toomey has even introduced legislation directing the Treasury to prioritize debt service over other payments if the debt limit is not raised. It has 22 Republican co-sponsors in the Senate and 98 in the House of Representatives, although no members of the Republican leadership have backed it.

Isn’t this a good idea, which would ensure that the US did not default? I didn’t understand, until I found this Brian Beutler article from January which explains just how crazy the bill is considered to be in Washington. Here’s Beutler’s headline:

‘Pay China First’ — Republicans’ Wild Plan To Avoid U.S. Debt Default

Beutler quotes Treasury’s Neal Wolin reiterating his silly and dangerous notion that bond investors would somehow penalize Treasury for prioritizing debt repayments, as oppose to reward it for making it clear that they’re sacrosanct.

And as Beutler’s headline suggests, the politics of such a policy are poisonous indeed:

One would think that the government’s top priority would be ensuring that citizens owed money by the Treasury would take precedence over, say, foreign governments…

“I think it is a dreadful idea,” Sen. Kent Conrad (D-ND) told National Journal. “Basically what they are saying is, pay China first. Are we going to forget about the American public and the things that they need? Somehow they are secondary? And paying the Chinese and the Japanese is the first priority of this country? I don’t even know how to describe that idea; it’s just a very, very bad one.”

His House Democratic counterpart, Rep. Chris Van Hollen (D-MD), added “What they are saying essentially is that the full faith and credit of the American government extends to a lot of foreign countries, but it doesn’t extend to the American people themselves.”

This, then, is the point at which I start devoutly wishing that Geithner will stay true to his Wall Street and IFI roots, quietly making sure that all US bonded debt is repaid even after August 2 and beyond. There’s no chance, politically, that Congress will force him to prioritize payments in that manner. But he has the right and the discretion to do so — and making payments on US debt in full and on time is a no-brainer for any Treasury secretary, especially one who, like Geithner, has a lot of personal experience with the consequences of sovereign default.

On the other hand, we live in a democracy, and it’s overwhelmingly clear that the will of the people is not to prioritize debt repayments in that manner. Would Geithner open himself and Obama up to charges of paying the Chinese before American pensioners and servicemen? (And, of course, Congress, too.) I hope he would, but there’s a real chance he wouldn’t. Which is very worrying indeed.


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The 14th amendment to the constitution would seem to prioritize debt repayment. It provides that the public debt not be questioned. If nothing else, claiming the constitution requires you to do something should help.

Posted by 3oosion | Report as abusive

Even if nothing gets through Congress, having these congressmen on the record probably provides a certain amount of political cover, especially since they are from the major party that is not the party of the administration.

And insofar as people like the founding fathers, start quoting Hamilton here; he got it.

Posted by dWj | Report as abusive

This whole plan about defaulting seems to suppose that it’s okay for the U.S. Government to break its word to its creditors. Congress authorized the debts. Now some of them want to reneg on paying. I would never do business with someone like that a second time. And it sounds like precisely the sort of behavior that these Tea Party guys would condemn. I think they should all jump off the Empire State Building.

Posted by Bob9999 | Report as abusive

So far, the United States has never broken its word to its creditors. Until now, nobody has seriously suggested that the United States should do so. In fact, the so-called “contract clause” in the U.S. Constitution (states are not allowed to “impair the obligation of contract”) is there to prevent the original 13 states from defaulting on bonds that were issued to finance the Revolutionary War. This default idea is a national disgrace.

Posted by Bob9999 | Report as abusive

I don’t think the GOP should have a monopoly on stupid/dangerous ideas. Are you saying that the Dems have no right to demagogue on this issue?

Posted by JimInMissoula | Report as abusive

I said it before: the GOP will get their cuts one way or another, whether it was an agreed-upon spending cut that accompanied the debt ceiling increase, or allowing the debt ceiling in place.

The reason why that would seem acceptable to GOP, is because there is either a tacit or explicit understanding that the US would pay its bond creditors first, preventing a sell off of US bonds, which would be politically devastating for both sides equally.

Posted by GRRR | Report as abusive

We live in a kleptocracy with democratic trappings.

Posted by lambertstrether | Report as abusive