Threatening a US default was bad before; now, it’s colossally idiotic
Aplea to lawmakers: If it was a bad idea to threaten default on U.S. debt before, it would be astoundingly, colossally idiotic now. Recent financial-market turmoil — in regional U.S. banks, as well as some of the larger European institutions — suggests there might be much more fragility in the financial system than previously understood. In a sane world, politicians might respond to this new information constructively.
They might, for instance, figure out what they could do to ensure that financial regulators detect vulnerabilities at significantly sized banks sooner.
Politicians might also take some modest actions to combat inflation themselves, so that less of the burden of dampening demand falls on the Federal Reserve’s interest-rate increases — which are part of the reason we’re seeing stresses in the financial system today.
Unfortunately, that sane world does not appear to be the one we live in.
Faced with the second-biggest bank failure in U.S. history, lawmakers retreated to their predictable partisan talking points. Democrats blame a 2018 rollback of “stress test” requirements on small and midsize banks. While this might plausibly have contributed to Silicon Valley Bank’s collapse, we still don’t know for certain; bank supervisors might have spotted the problem on SVB’S balance sheet even without those requirements, given that the bank was relatively open about its poor risk management.
Republicans, meanwhile, have been grasping for some alternative explanation of what went wrong that would not implicate their general hostility toward greater oversight. So, some have instead blamed bank “wokeness,” a thoroughly incoherent (and yet very funny!) theory of the case. Hardcore Trumpers such as Peter Thiel patronized Silicon Valley Bank, so it’s hard to imagine the bank’s problems lay in too much emphasis on, say, critical race theory. We shouldn’t be surprised if Republicans start scapegoating drag queens soon, too.
After a scare like this, the next few months would normally be consumed with fights about what happened and how lawmakers should best address unexpected new weaknesses in the financial sector. But things have so devolved into petty demagoguing that the biggest new risk is that demagoguing about SVB’S problems will dovetail with the other crisis that has been looming for months.
Since at least last fall, Republican lawmakers have been threatening to not raise the debt ceiling, the statutory limit on how much the federal government can borrow to pay off bills that Congress has already committed to. They have laid out a mathematically impossible set of conditions they say must be met before they would consider raising the government’s borrowing authority.
There is never a good time to toy with the full faith and credit of the U.S. government, or otherwise question the validity of U.S. public debt. (Fun fact: According to the Constitution, it’s actually always forbidden.) But doing so right now seems especially unwise.
U.S. Treasury debt has long been considered virtually risk-free. The government has always paid its bills on time and in full, and all other assets are benchmarked against our relative safety. If we reveal ourselves to be unreliable borrowers — because we’d rather engage in political posturing than make good on our bills — that will not only call into question the riskiness of our debt. It will also call into question the riskiness of lots of other assets, too.
In the best of times, this kind of behavior could spook markets and set off a global financial crisis. Today, when there’s already mounting anxiety about the balance sheets of some financial institutions, is far from the best of times. Even hinting at default could trigger more panic in global markets.
Recent bank turmoil could indirectly accelerate how soon lawmakers need to raise the debt limit, too. (Before Silicon Valley Bank failed, forecasters were expecting the deadline would come as early as June.)
The FDIC’S rescue of depositors at SVB and Signature Bank should not affect how quickly the government runs out of cash, but some other things might. The Treasury’s Exchange Stabilization Fund, for example, is currently being used to backstop the Fed’s emergency lending facility. Officials have said they don’t expect this special Treasury fund to be needed, but if it is, it could have a small impact on how soon Congress needs to again raise the borrowing limit.
Of course, if that happens, “we may also have bigger economic problems,” says Shai Akabas, a researcher at the Bipartisan Policy Center. Bigger problems like: a more widespread banking crisis, and/or severe recession.
These risks have so far not led Republicans to change their course. Hours before Silicon Valley Bank failed, House Republicans proposed ordering the Treasury to prioritize payments in the event of a debt-limit breach. This is something that might not be technically feasible and is still, in any case, a different version of default.
If Congress is incapable of making financial conditions better, the least lawmakers can do is not make them worse.