There’s always an encore in cabaret and in Washington fiscal crises. The ink was barely dry on the cliff deal—or if you prefer a more up-to-date metaphor, we’d barely disabled our fiscal-cliff countdown widgets—when we started to focus on the next drama: the debt ceiling.
On the plus side, this latest crisis at least sounds more benign: while you fall off a cliff, you only bump your head into a ceiling. But economically, the ceiling has the capacity to deliver far more damage. Had the U.S. gone over the fiscal cliff, taxes would have reverted to higher levels, and unemployment benefits for some would have ended. But the damage could easily have been undone by a post-cliff deal.
A breach of the debt ceiling, by contrast, and a failure to pay government debts, even for a day or two, would be far more problematic. The Bipartisan Policy Center says the “X” date—the date on which the U.S. will have exhausted its borrowing authority and won’t have sufficient funds to pay all its debt—is between Feb. 15 and March 1.
So what happens when we hit the “X” date? Some people who are expecting government payments wouldn’t get them, and the republic would survive. But if the government refused (or was unable) to pay interest on its bonds for a few days, the republic wouldn’t survive. And neither would the global financial system.
Why not? Treasury bonds, the safest form of capital known to man, are held in huge volumes by U.S. and foreign banks, by the U.S. and foreign central banks, and by companies and savers around the world. A default, or even a quasi-serious threat of default, would cause U.S. bonds to lose a lot of value immediately. That would trigger a round of margin calls, capital flight, and unintended consequences that would make September 2008 seem like a paddle in a swan boat in the Boston Public Garden. The unique role that Treasuries play, and the fact that leveraged institutions (including the Fed and the Bank of China) hold so many of them, means that it’s doubly, triply important not to goof around with America’s promise to pay.
Of course, the markets, as they did with the fiscal-cliff situation, have thus far declined to freak out over the debt ceiling: the VIX, a measure of stock-market volatility, has slumped in the past week. The stock market is surging ahead. And while yields on U.S. government bonds have risen a little so far this year, the bond vigilantes are still blissed out at their all-inclusive resort in Turks & Caicos.
And yet Washington Republicans, with the tacit approval of much of the press corps, seem willing—even eager—to create a new hostage situation. Democrats believe, rightly, that the debt limit has nothing to do with future spending and everything to do with carrying out past tax and spending policies. President Obama doesn’t want to negotiate over it. Republicans are eager to use the debt ceiling as leverage to get President Obama to cut entitlements. And they’re eager to have the conversation—again and again. House Speaker John Boehner even mused about staging a debt-ceiling hostage crisis every month.
If the government refused (or was unable) to pay interest on its bonds for a few days, the republic wouldn’t survive. And neither would the global financial system.
Strangely, the business community, which was so vocal in urging Congress to make a deal on the fiscal cliff, doesn’t seem to be too exercised about a debt-ceiling drama. The U.S. Chamber of Commerce, which routinely pronounced upon the need for a fiscal-cliff deal, hasn’t put anything out on the debt ceiling. (I’ll be eager to hear what Chamber head Thomas Donohue says on the subject in his “State of American Business” address on Thursday.) In late December, Starbucks CEO Howard Schultz issued an impassioned plea for people in Washington to “come together” and deal with the fiscal cliff, annoying baristas who were required to scrawl uplifting messages on customers’ cups. He’s posted nothing since. (By the way, Starbucks may want to give some caffeine to its social-media team. The Starbucks blog on which Schultz posted has had only a single post since last July.)
How about the Business Roundtable? In the weeks after the election, the organization for CEOs of big companies sent cadres of bosses to the White House and Capitol Hill to discuss the crucial issues surrounding the fiscal cliff. Its members signed letters and held conference calls with the press. When the small deal finally came, the Roundtable issued a sad-face note. But on the debt ceiling? It’s been relatively quiet. “Timely action on the debt limit and a sensible approach to managing down our debt and deficit is urgently needed to strengthen our prospects for a healthy economy and long-term job creation,” Matt Miller, vice president of tax and fiscal policy at Business Roundtable told me via e-mail today. “Our elected leaders must act affirmatively to ensure America’s credibility.”
One group is a little more freaked out: the Financial Services Roundtable. The group, which represents huge banks and other financial institutions, isn’t always the most savvy Washington player. It hired as its new head former Minnesota governor (and Romney adviser) Tim Pawlenty—which would have been a smart move in the event of a Republican electoral sweep. (D’oh!) But now it is springing into action. “We are in favor of raising it, and we will be encouraging policymakers to increase it,” Scott Talbott, senior vice president for public policy for the Financial Services Roundtable, told The Washington Post’s Greg Sargent on Wednesday. “We will communicate with the entire Congress,” he said. Why? While the placid markets are factoring in a last-minute fiscal-cliff deal, the consequences of failure would be too dire for the Roundtable’s members to bear.
That’s progress. The problem is that the Financial Services Roundtable, which primarily represents very rich guys at huge institutions on the coasts, really needs other Republican-aligned business-lobbying groups to join its letter-writing campaign. Even though Wall Street provides a huge amount of funding for Republican campaigns, the 2013 Republican Congressional party, based as it is in the Ozarks, the Plains, and the old Confederacy, doesn’t seem to care too much what rich people on the coasts think. If bankers want the House and Senate GOP to stop playing games on the debt ceiling and raise it with a minimum of drama, they’ll have to do a lot more than write letters—they’ll have to write checks, or, better yet, threaten to stop writing them.