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August 02, 2011



Actually, I think the threat of a downgrade was the real sword hanging over heads. That's really what "default" meant.

As for the terrorism thing, the idea is that many people thought that the GOP was threatening to blow up the economy (by precipitating a downgrade and perhaps a financial crisis) unless they got everything they wanted. That's really more of a hostage crisis than terrorism, but people use the word 'terrorist' very loosely these days. Certainly I got tired of having insurgents and terrorists in Iraq conflated daily in the news back when I was trying to help my superiors see the difference (it's an important one!), and I suppose it's inevitable that now we in the US consider anyone who opposes our goals via threatening means to be terrorists.

Of course, that would imply that Tea Party types really believed there was a threat. A bunch (vis. Bachmann) loudly proclaimed that it was just a scare tactic. Of course one who believes that doesn't think they're threatening anyone by refusing to raise the debt limit. The issue is that many observers aren't ready to accept that many Tea Party-backed politicians really believe something so preposterous. And maybe they're right: in the end most of them did vote for the bill, for whatever reason.

So maybe they really were threatening to blow up the economy unless they got what they wanted. Which isn't terrorism, exactly, but it's still pretty despicable.

Nathan Smith

No, no, no! They were behaving perfectly responsibly. It's Congress's job to decide whether to authorize the government to borrow more money or not. They need to exercise judgment based on their perceptions about what is in the interests of the country. They need to exercise judgment about whether it is just and responsible to bind the American people, and especially future generations, to certain promised payments. At a time when the most fiscally reckless administration in US history was deficit-spending 10% of GDP, they judged that it was not a good idea to authorize more debt, unless major spending cuts were imposed first. That's not "terrorism" and it's not "hostage-taking" either, because the whole point about hostage-taking is that you're threatening to do something (a) bad, and (b) to which you have no right. The American people, through their representatives, do have a right to refuse to authorize a wildly profligate government to make promises on their behalf. If anything here is in doubt it's whether they have a right TO bind future generations to finance today's extreme fiscal irresponsibility, but they most certainly have a right NOT TO. In the end, for better or worse, the House GOP decided it was better to let the wildly profligate government make even more promises on the American people's behalf, once it had accepted some mild and quite inadequate constraints. Probably it was the right call. But it's quite wrong to act as if it was somehow illegitimate or immoral to contemplate using their constitutional powers to draw a line. To be more exact, it's anti-democratic to imply that. To deny the legitimacy of the House GOP's negotiation tactics is a sort of coup against constitutional government.


I think the rating agencies had already decided that it was a)bad. Further, just because it is a legal outcome of a democratic process doesn't mean that the result is one to which the legislators have a 'right.' If the debt limit was not raised, then the government would default on some responsibility or other, and that is the matter to which the rating agencies were responding. Further, major spending cuts were offered - deeper than those eventually accepted, in fact - at several points. The only thing that was not accepted was new revenue, at a time when revenues are at historic lows. So, the paramount priority seems to have been to prevent the current generation from paying any more for government, not closing the deficit for future generations.

Nathan Smith

re: "just because it is a legal outcome of a democratic process doesn't mean that the result is one to which the legislators have a 'right.'"

Well, I guess I agree with that, because I believe in natural rights, and a legal outcome of a democratic process which violates natural rights does not mean that legislators have a right to do something. But that's not what we're talking about here. To say that the government would "default" on some responsibility or other strikes me as an abuse of language. One can "default" on a debt, but to stop payment on Social Security checks or to shut down the government for a while does not strike me as a default. I just don't see how you extend the concept that far. Social Security is *not* owed to recipients, according to Flemming vs. Nestor. But I suppose that's semantic.

To me, the most interesting feature of this whole affair is the way there was in effect a constitutional change, although it wasn't really a constitutional change but just a novel precedent and a change in legislative norms. Approving the debt ceiling has in the past been more or less automatic. Now, suddenly, it's not. It turns out that to push the government to the brink of default in resistance to raising the debt ceiling is not only not political suicide, but seems to pay political dividends. Obama has been the loser in this whole affair. Hopefully future presidents will take note and not make fools of themselves by running such big deficits. It's almost as if we got a balanced budget amendment of sorts, after all. Or at least, it might turn out that way.

The rating agencies didn't exactly decide it was bad in a moral sense. They did decide that it's bad for investors in US Treasury bonds, and rightly so. Now that the precedent has been set, this brinksmanship is likely to recur. Good. The US Treasury may end up paying higher interest rates on its borrowing. That may not be a bad thing either. It's another deterrent to excessive borrowing. And it doesn't seem that it will necessarily lead to higher interest rates for other borrowers, although it might. It could even work the other way: "flight to safety" might come to mean flight to corporate bonds rather than to government bonds.

As for the revenues thing, taxes should be related to consent of the governed, and that comes from politicians persuading the median voter-- the median voter, not "the rich," who are by definition a minority and who already pay the lion's share, so that raising taxes on them occurs without effective consent and is more like plunder than taxation-- that it's worth paying more for government. They have not done so. They have not even tried. Bush and Obama both ran on tax cuts. I would not be at all disappointed to see a presidential candidate run on a platform of tax hikes and win. But right now the public does not think the government deserves more of our money, so there's definitely something to be said for the Republican refusal to raise taxes. In short, this has all worked out rather appropriately.

Three cheers for the debt ceiling! It's like in an action movie, when the hero is surrounded and outnumbered and it looks like he's done for, and then some unknown ally appears to rescue him. The Constitution turns out to have one more check and balance than we thought. It's a rocky and slightly desperate way to restore fiscal sanity, but it just might work.


""flight to safety" might come to mean flight to corporate bonds rather than to government bonds. "

Pause for a moment to imagine the upheaval this represents, and how unlikely it is that it would *not* precipitate a huge financial crisis. Even if one denies the theoretical basis, for this, I think it's undeniable that market expectations to that effect would make such a crisis more or less inevitable.

This sort of position is both radical and dangerous if legislatively pursued in any but the most deliberate way.

Having said that, I do think the outcome wasn't all that bad. It was just a terrifyingly dangerous way to get there.

Nathan Smith

Crisis tends to mean something sudden. If the disillusionment with the government's creditworthiness happened gradually, what would happen? The interest rates on T-bills rise as investors slowly rethink the likelihood of future defaults. Supply of loanable funds being partly exogenous, safety-seeking monies start going to corporate bonds instead, and they see their interest rates drop. If this sounds implausible, is that because there's some reason that it can't happen in principle, or just because it hasn't happened before and we're extrapolating from experience? But that method has its weaknesses.


My though was something along these lines: we start selling new bonds on different terms that make yields both higher and more variable, while steadily decreasing the supply of traditional tbills. 'gradual' disillusionment has usually lead to slow drift until some big mover becomes convinced the decline inexorable, and starts to short. That creates greater pressure, causing more big movers to fly, and so on. Given the size of the US debt in the balance sheets of the world's banks, the effects would be catastrophic. So the whole 'gradual' decline scenario in creditworthiness to a level comparable to corporate debt seems implausible to me. Thus the scenario I offer in the first line where the government just gets out of the ultra-safe bond business, slowly and without any sudden moves.

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That's better for us. Good in our future.

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