There’s a classic scene in the 1955 James Dean film Rebel Without a Cause where Dean’s character challenges Corey Allen to a game of chicken. They race their cars toward the edge of a cliff, and whomever jumps out first before the cars careen into the ocean below loses.
Though Dean’s chicken run made for great dramatic cinema, it’s not as good of a look for US lawmakers, who have spent the last month playing chicken with the global economy.
The debate over the debt ceiling isn’t just an asinine one full of political peacocking—it is a game that borders on lunacy, like playing keep-away with an atomic bomb. A White House report suggests even a short-lived default would result in 500,000 lost jobs and a 0.6 percent decline in GDP. A longer one could lead to as many as 8.3 million people out of work.
Yes, Democrats and Republicans were able to hammer out an 11th hour deal—despite the fact that some hardline conservatives called the 99-page Fiscal Responsibility Act a “turd sandwich”—but the rub here isn’t that Congress defused the bomb with one second on the timer. It’s the fact that even the nation’s top financial experts don’t seem to be worried.
I recently interviewed Robert Steven Kaplan, the former president and CEO of the Federal Reserve Bank of Dallas. Kaplan emphatically said he was not concerned.
“We’re not going to default,” Kaplan told me. “Neither side wants to default, and we’re aren’t going to default.”
Rob and I agree, however, that this general belief is EXACTLY why a default is possible.
The US gets an enormous premium from the fact that it’s viewed as a riskless asset. We pay far less interest on our debts because we have never defaulted on our loans and everyone in the world believes we never will, both because of the enormous strength of the US economy and because we are able to borrow in our own currency.
The US, in other words, functionally has a credit rating above AAA. It’s not just at low risk of default. It is treated as if it has no risk of default. The problem is that this sort of credit rating creates a great temptation. It was, in fact, one of the roots of the 2008 financial crisis. One company lay at the heart of the mortgage bubble in the United States—AIG, specifically its Financial Products division, AIGFP. AIGFP was essentially a giant hedge fund inside an insurance company. The insurance company was so solid that it had a AAA credit rating. Hedge funds are never rated AAA. AIGFP had the benefit of its parent company’s reputation and resources, allowing it to borrow money—and increase leverage—far more cheaply than any of its competitors. This was essentially a way to monetize its credit rating.
But by monetizing its credit rating, AIG incurred more financial risk, thus invalidating its AAA rating. Only the negligence of the ratings agencies kept it in place, allowing it to insure the mortgage-backed securities that were the root cause of the crisis. The US, similarly, is taking advantage of its credit rating.
If our riskless status goes away, everything about life in the US gets worse. Interest rates will increase, the amount we have to pay to maintain the interest on our debt will more than double, and we will have no choice but to cast that burden onto the taxpayer. In other words, people who argue that threatening to default is a way to force us to get our deficits under control are fundamentally misunderstanding the situation—threatening our credit rating will make our budget problems worse. Way worse. And that’s a best case scenario. If a default went on for too long, it could collapse the entire global financial system. That would make the 2008 Global Financial Crisis look like a paper cut.
There is no scenario in which playing with the fate of our nation and the world is acceptable. Republicans are essentially saying they are willing to hurt the US to get what they want. We are watching the Biblical story of King Solomon and the baby play out in real time—Republicans are willing to cut the baby in half to have their demands met.
There’s a term for people who say they’ll harm innocents if you don’t do what they want. That term is hostage-taker. Threatening to destroy the US economy unless the President of the United States agrees with your demand is the tactic of hostage-takers. When was the last time you saw a movie where someone held children hostage and said, “Yeah, those are the good guys?” Never? Well, would you feel differently if they were holding everyone in the United States—or even the world—hostage? That’s exactly what anyone threatening to make the United States default is doing.
That’s not to say the Democrats are blameless in this scenario. They should have eliminated the debt ceiling when they had the power during the first two years of the Biden Administration. President Biden could argue that the 14th Amendment says that the debts of the United States cannot be questioned, which makes the debt ceiling unconstitutional. Though that could potentially lead to a legal battle in the lopsidedly conservative Supreme Court, I have a hard time believing that Justices like Neil Gorsuch would be willing to stake his family fortune on a vote for keeping the debt ceiling in place.
Biden would also have a simple legal argument. Congress has already mandated the spending which is causing the debt. In order to not violate the debt ceiling, he would have to choose which bills to pay and which to ignore. That is also illegal. The President is not allowed to determine which items in the budget deserve funding. We do not give Presidents a line item veto for a reason. Under those circumstances, where both keeping to the ceiling and violating the ceiling would break the law, it’s clearly his obligation to abide by the Congressional appropriations that have unquestioned Constitutional standing.
Solving this, of course, would require politicians to set aside their egos and do something for the greater good. Frankly, I’m not holding my breath.
Yes, we were saved once again by a ramshackle deal to keep the country afloat, but we cannot continue on this path. Eventually, when we drive our car towards the cliff, we won’t be able to get out in time.
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