Sane conservative economists recognize that not raising the debt ceiling on August 2nd would be a disaster.  Sane conservatives understand that the ratings agencies will lower our credit rating if we won’t raise the ceiling, and that we have almost $500 billion in maturing treasuries that we need to roll over in August alone which, as UBS argues, is a problem:

“The mistaken view that interest payments to US Treasury-holders could easily be prioritized, avoiding default indefinitely. This view requires that investors willingly roll over their holdings of Treasury debt and does not take into account the sharp increase in interest rates that may result.”

As Lawrence White explains, and S&P agrees, prioritizing payments is a default:

 “…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next.”

Our lenders understand better than those arguing that we can simply cut government spending 30-40% overnight, and lenders understand that voters won’t tolerate having foreign banks get paid while they suffer. Neil Buchanan agrees:

“Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans…Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? …No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return.”

If interest rates go up, that $500 billion we need to roll over is going to be a lot more expensive. As Barry Eichengreen says, “[e]vidence that the inmates were running the asylum would almost certainly precipitate the wholesale liquidation of US Treasury bonds by foreign investors.”

If I haven’t convinced you that not lifting the ceiling would be hugely problematic, then perhaps these sane conservative economists (and Richard Posner) will:

Gary Becker: “That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees.”

Keith Hennessey: “Congress must raise the debt limit. Not doing so would eventually lead to defaulting on Treasury bonds, a potentially catastrophic event.”

Douglas Holtz-Eakin  – “Yes, Congress should raise the debt limit. Being a good steward of the U.S. credit rating means that it has to pay Obama’s credit-card bill. And it should do so as quickly as possible — on the day it returns from recess.”

And a video from Holtz-Eakin

Glenn Hubbard: “The debt ceiling must be raised – not doing so is irresponsible”

Richard Posner: “No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit… Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner…is a deep mystery.”

I’m trying not to get shrill here, it’s getting hard.

About these ads