The latest crazy idea floating around Washington is that a failure to pay the nation’s bills is no big deal. Tell that to investors who lend money to the government. On Tuesday, the mere prospect of such a dire event set off alarm bells in the bond markets, an ominous foreshadowing of what could happen if the government actually defaults on its debt.
Overnight, from Monday to Tuesday, the political impasse over the debt ceiling in the capital pushed up the price that the government pays for short-term borrowing (one month) to its highest level since 2008, a doubling from one day to the next.
Ultimately, if the deadlock is not resolved quickly, long-term bonds will suffer the same effect, which will drive up the cost of borrowing for average Americans — everything from credit cards to mortgages — because consumer rates are pegged to long-term T-bills.
The end result in this scenario would be to freeze the credit markets altogether.
Such is the cost of brinkmanship. Simply talking about default creates harmful effects as lenders contemplate the prospect that the mighty dollar — until now a solid, no-risk investment — is suddenly no better than a gambler’s IOU.
The market was reacting to reports in Washington that some of the nation’s “leaders,” dare we use that word, were dismissing the seriousness of a default. One widely quoted report had Republican Sen. Richard Burr of North Carolina saying that a default would be “manageable for some time.” And that’s from someone not usually considered a GOP flame-thrower.
Other, more predictable voices on the far right, like Sen. Rand Paul of Kentucky, eagerly agreed. Freshman Rep. Ted Yoho, a Republican from Florida serving his first term, dismissed the seriousness of a default. He compared the situation to the veterinary practice he used to run in the Panhandle: “You address your creditors and you say, ‘Listen, we’re going to pay you. We’re just not going to pay you today, but we’re going to pay you with interest and we’ll pay everybody that’s due money.’ ”
Oh, sure, that’ll get everyone to calm down. Try that with your credit card collector, or the bank, or your mortgage lender and see what happens.
The corollary to this don’t-worry-be-happy notion is that the country could pay some of its bills on time, but not others, thus easing the pain of a default.
That would entail paying bondholders first to avoid rattling the credit markets — i.e., rewarding creditors like the Chinese government and leaving paychecks for government employees and Social Security recipients for later.
The idea is absurd on its face, but, sadly, this is what passes for clever thinking in some quarters of Washington these days.
On Thursday, a glimmer of hope appeared as Speaker John Boehner said Republicans would vote to extend the government’s ability to borrow money for six weeks on the condition that President Barack Obama first agrees to fresh negotiations on spending cuts.
Mr. Obama should take the deal. His insistence that he would not negotiate while the government is held hostage by an extreme faction of Mr. Boehner’s party in the House has merit, but a failure to agree to this offer would pose the danger of overplaying his hand.
The speaker seems desperate for a deal — any deal — that lets him save face, escape from his current predicament, and get on with the business of running the government. Of course, he should have thought of that before he decided to heed the most extreme voices in his caucus.