Threatening U.S. default now a colossally idiotic idea
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 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 take some modest actions to combat inflation themselves, so less of the burden of dampening demand falls on the Federal Reserve’s interest-rate increases.
It does not appear we live in that sane world. 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, bank supervisors might have spotted the problem on SVB’s balance sheet even without those requirements.
Republicans, meanwhile, have been grasping for some explanation that would not implicate their general hostility toward greater oversight. Some have instead blamed bank “wokeness,” a thoroughly incoherent theory of the case. Hardcore Trumpers such as Peter Thiel patronized SVB, 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.
The next few months should be consumed with debate on how to best address unexpected weaknesses in the financial sector. But things have so devolved into petty demagoguing that the biggest new risk is that the demagoguery will dovetail with the other crisis that has been looming for months.
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 no 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. But right now it seems especially unwise.
U.S. Treasury debt has long been considered virtually riskfree. 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.
Today even hinting at default could trigger more panic in global markets.
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 being used to backstop the Fed’s emergency lending facility. If this money were needed, it could have a small impact on how soon Congress needs to again raise the borrowing limit.
And if that happens, we may have bigger economic problems like a more widespread banking crisis, and/or severe recession. These risks so far have not led Republicans to change their course.
If Congress is incapable of making financial conditions better, the least lawmakers can do is not make them worse.