James Pethokoukis

Politics and policy from inside Washington

Ignore Geithner’s debt ceiling scare tactics

May 16, 2011

To employ the phrasing of Gov. Chris Christie, America hit the debt ceiling and didn’t vaporize. New borrowing has put the U.S. Treasury right up against its $14.3 trillion borrowing limit, but financial markets aren’t crashing over fear that this will lead to default.

So, given that non-reaction so far, just who is the Treasury Secretary kidding? This whole fear-fest over the U.S. debt ceiling is starting to resemble the bank bailout in 2008 when warnings of financial apocalypse shoved Congress into approving TARP. Here is how Timothy Geithner put it in a  letter to Sen. Michael Bennet:

Failure to raise the debt limit would force the United States to default on these obligations. … A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment. … Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments. … Default would also have the perverse effect of increasing our government’s debt burden. … It would increase rates on Treasury securities, which would increase the cost of paying interest on the national debt.

But why, exactly? There is no reason for the U.S. to miss a debt payment, even after the supposed Aug. 2 deadline. Team Geithner has plenty of flexibility about which bills to pay and plenty of dough with which to do it. Here is economist Ed Yardeni:

Over the past 12 months through April, net interest expense of the federal government was $213.1 billion. Will there be no money to make these payments if the debt ceiling isn’t raised? There will be plenty. Over the past 12 months through April, the Treasury collected $2.27 trillion in revenues. In April alone, when individual tax returns are due, revenues totaled $289.5 billion, a bigger than expected gain, confirming that the economy recovered smartly over the past year.

It would be criminally insane for the Treasury to stop making interest payments on our debt just because Congress failed to agree on raising the ceiling when the revenues are certainly available to make the payments and auctions will continue to rollover maturing debt. It is insane for administration officials to suggest otherwise.

And just how badly would markets take it anyway if there was a temporary payment delay but the result was a deal which significantly cut spending today and capped spending tomorrow? Famed investor Stanley Druckenmiller is willing to take his chances:

Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.

The White House would love a clean up-or-down vote on raising the debt ceiling. But David Walker, the hawkish former U.S. comptroller general said this today:

While the debt ceiling must be increased, any extension should include appropriate conditions to reduce short-term spending while also addressing the huge structural deficits that lie ahead. This should involve bringing back tough statutory budget controls, including new debt-to-GDP targets with automatic enforcement mechanisms beginning in 2013. Adopting a number of initial steps designed to reduce direct spending and tax expenditures as down payments to meet the new target would also be appropriate.

We must not allow what has already happened in Greece and Ireland to happen in the U.S. No one really knows when the markets will lose confidence in the willingness and ability of the federal government to put its finances in order. If it does, we will see a sudden and dramatic increase in interest rates that will only increase our already serious economic, fiscal and unemployment challenges.

The debt ceiling provides an opportunity to make a big dent in America’s dangerous debt situation.  Not taking advantage of this moment is what scares me.

Comments

Perhaps this is why Secretary Geithner perpetually looks as though he’s alternating between a panic attack and a prostate exam.

We’ve borrowed trillions of dollars to achieve a 1.8% Growth in GDP and a 9% unemployment rate. Bravo, Timmy.

And we absolutely, positively, had to have this guy even though he couldn’t figure out Turbo Tax?

Posted by LuapLeiht | Report as abusive
 

Right on! Whom do you trust? A multi-billionaire hall of fame hedge fund king Druckenmiller or Geithner, or Krugman, or Obama…. EASY! The hedge fund king. Besides, not only him, but ex-budget director and very very smart David Stockman reasons the same.

Posted by p__buc | Report as abusive
 

In the long run, the best course is to default in order to force the two parties to get real. DEFAULT!

Posted by Steve851 | Report as abusive
 

I would not consider Kudlow’s “Jimmy P” to be “mainstream media. He is far too knowledgable for that..

Posted by jhains2 | Report as abusive
 

You expect the truth from a self-admitted tax cheat? NOW who’s being naive?

Posted by Jack_Davis | Report as abusive
 

if a political party can not win SUPPORT for it’s positive objectives, its quite reasonable to oppose its efforts to extort support by refusing to support necessary housekeeping for circumstances faced by all or created by the past actions of that very party. I support significant reductions in both budget expenses entitled or otherwise and in tax loophole and subsidy provisions. But I don’t support playing chicken with the bills for past policy. Had the rich the frightened and the would-be rich not supported the Bush cuts, the middle east wars, no child left behind, and the medicare drug benefit, the budget would have been in surplus pre-recession and would not require surgury only restoration of economic growth.

The Hell with the Tea Party, they are smoking that tea.

Posted by johnwerneken | Report as abusive
 

The Problem with public Unions and the size and cost of government go far deeper than just outsized Salary, Benefits and Job security as compared to private employees. If that was the only problem just adjusting Salary and Benefits would address the problem. But based on my experience the ratio of public employees is at least 5 to 2 for the same amount of labor by Public unions employees as compared to private employees. In addition to this much, if not most, work preformed by Public employee,s is not necessary or required. Rules and regulations etc. have been added for years to make work-fare.

So public work has become welfare by another name.

A cost benefit study of every Dept. and Job plus employee performance evaluation in Local, State and Federal would result is eliminating many depts. and making great cuts in employees in other depts. and reduce total government size and cost by least 60% and providing better service!

Posted by BlackSaint | Report as abusive
 

We should index the debt ceiling to nominal GDP and be done with this artificial crisis. That would do more to restore US credibility than this periodic circus.

Posted by nixonfan | Report as abusive
 

Geithner’s biggest problem is that he legally can’t default on the federal debt, defund the Pentagon AND stop Social Security payments when we hit the deadline. I’m sure he’d like to do it all so he could blame it on Congressional “brinksmanship.”

The US is borrowing $180 million every hour, $130 million from its own printing presses. It’s impossible to imagine a situation more “extremist” than the status quo.

Posted by hiltonian | Report as abusive
 

I saw this here on reuters. There exists a separate economy along side the regular one. And in this separate
economy are some very wealthy vigilantes. They have
already let it be known that if things don’t go well
in this debt ceiling debate, they will shock the markets
and thus shock the regular economy.

When Geithner looks and acts scared, it is because he is
fully aware of this known threat…and he and his regular economy people can’t do anything about it because the separate economy is “separate” from them, yet in control of them.

The USA better vote to raise that limit, and the USA better get their debt in order, and the USA better get their wasteful spending cut, and the USA better get their entitlements on solid footing again.

There should be no chicken game here at all. It has
GOT to be done, no ifs, ands, or butters for Norna!

Hey, I’m not saying this. This is what I read.
This recession is unlike ANY of the past because
of this emerging powerhouse economy that cares about
only themselves and their own cash growth. Anything that crosses that better watch out.

Posted by limapie | Report as abusive
 

Conservatives need REAL leadership in the House, not John “Let’s raise the debt limit and Spend Some MORE” Boehner.

Posted by Proud_American | Report as abusive
 

James I think you’re right. But the debt ceiling issue is the right opportunity at the right time to frame our deficit/budget debate, so I’m all in favor of Geithner using his scare tactics.

Gene Marks
http://www.twitter.com/genemarks

Posted by genemarks | Report as abusive
 

Alan Greenspan once proclaimed that if we did not pass the Bush tax cuts that we would have “budget surpluses as far as the eye could see” — or at least until Social Security had to start cashing in some of the special Treasury debt that the large Social Security surplus forced them to buy.

Never forget that the budget deficit crisis is the product of a deliberate Republican policy called Starve The Beast. Republicans and the people who voted for them should pay the price to resolve the problem that they purposely and deliberately created.

Their goal from the outset has been to create this crisis and then force the government to eliminate social welfare programs like Medicare, Federal Unemployment Benefits, and Social Security. Their avarice is only matched by their greed.

Posted by GetpIaning | Report as abusive
 

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