I Will Never Understand How the Obama Administration Thinks...
The Federal Reserve: Three Years Late--But They Did It!!

The Lurkers in Email Are Worried About the Obama Administration's Debt-Ceiling Bargaining Position

A correspondent who wishes to remain anonymous writes:

It is a problem for the Obama Administration that Bob Woodward wrote his Price of Power. That book undermines its claim that it will not negotiate over the debt ceiling, at least as long as Tim Geithner is Treasury Secretary. Woodward claims that Geithner is 100% convinced that the Obama Administration has a moral duty to fold on the debt ceiling. Woodward may well have it wrong [indeed, anybody who reads Maestro and Agenda in rapid succession presumes that Woodward has it wrong--Brad], but Republicans have read Woodward's Price of Power, and think Woodward has it right:

Geithner appeared in the Oval Office with two senior aides. They had come to lay out the latest update on how they would handle a default…. Geithner did not look so young anymore. He sounded like a general warning that the battle was coming and they were going to take heavy casualties. A U.S. default would be a first. A perfect credit rating, like virginity, couldn’t be restored once it was creditworthiness would bear the scar of default as long as the United States existed….

It would be a mess. Mr. President, Geithner said, there are no more options left. The details were sickening. The federal accounts will be dry next week. He could sell assets, property, buildings, you name it, but it would look like a fire sale. He could delay some payments, juggle and shuffle. But all this would look like semi-default, which might be as bad. Even the perception of a U.S. default would change things permanently. The economy was already weakening. What would happen in the markets? What would it do to job creation? Unemployment? Consumer confidence? Overall confidence? The moral authority of the government? The moral authority of the president? “Catastrophic,” Geithner said. The treasury secretary said he had a bottom line: A default could trigger not just a recession but a depression, one worse than the Great Depression of the 1930s….

“You can’t veto,” Geithner said. “You cannot be responsible for default.” That would be a calamity, as they all knew. Anything had to be done to prevent it. Anything to preserve the global economy. They could not foreclose such an option, awful as it might be, if that was all that was left. Remember where they were: Europe burning, world economy very weak, young U.S. recovery….

Republicans, Geithner said, some in the Senate and many in the House, did not understand the risk of default. Some of these people talked openly and publicly about how a default was the only way to get Washington to change, and how a downgrade in the nation’s credit rating would be good. That wouldn’t matter if Boehner and McConnell were stronger leaders, willing to leave those guys behind. But the leaders were trying to have it both ways and extort changes from the president that he would never make. The Republicans thought there was some kind of parachute at the end. Geithner had to deal with the possibility that the House bill could reach the president’s desk. “My recommendation to the president would be, we’ve got to sign this. If that’s what they offer us, we sign it.” Because there were no parachutes….

What would actually happen the day of the veto? The day after? “It would have massive effects,” Geithner said. Treasury had to conduct a bond auction in the open market in about five days, the regular Tuesday auction, with settlement on Thursday. That first auction could be a kind of trip wire, setting off a chain reaction. The federal government couldn’t pay its bills. “Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?”

Another possible outcome, he said, was perhaps worse. “Suppose we have an auction and no one shows up?” The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse. The reality was that if the debt limit wasn’t increased, Geithner would have to call off next week’s auction. That would surely start a panic. As he had told them before, the world financial system rested on the foundation of a risk-free asset, and that asset came in only one form: U.S. Treasury securities. They were the only place of safety in a storm. The 2008 financial crisis had been manageable for the United States because the world’s confidence that we would solve the problem kept investors buying U.S Treasury debt. “Every financial asset in the United States, every financial asset in the world, rests on that basic foundation,” Geithner said.

It would not just be that Social Security checks would not go out, or that the government would not pay businesses on time. Bank deposits, homes, stocks, any investment—anything of monetary value—would be affected. “So you put that in question, everything comes crashing down and you cannot rebuild it. It’s something that will be lasting for generations.” Default could trigger a worldwide economic depression worse than the 1930s….

“We’ve lived through government shutdowns,” Geithner noted. Lew was budget director in 1995 when Newt Gingrich shut down the government during the Clinton presidency. The world had survived. “If you can’t get into a national park,” Geithner said, that was sad—a large inconvenience. “It’s one thing to have a government shut down,” he said. “It’s another thing to have an economy shut down. We just don’t know what happens.” No one knew the mechanics. “No one has ever seen what the economic ramifications would be.” It was so far outside anyone’s thought process, he said, that the Congressional Budget Office had never done an analysis of what might happen if the U.S. government defaulted. It was beyond the threshold of the conceivable. It was almost like trying to predict what would happen if aliens landed.

What about selling assets? someone asked. Selling government property? “You can’t sell federal property that quickly,” Lew assured them. What about gold? The U.S. government owned about $275 billion worth. Could they sell it? Would that buy time? No, said Geithner. One reason, it doesn’t buy you very much time. The other reason, it’ll scare the shit out of everybody. Besides, dumping that much gold on the market would trigger a dramatic drop in price. They were out of options, Geithner said. The only one might be accepting the House bill, loathsome as it might be, if it passed the Senate. “If the U.S. government can’t borrow money,” he said, “the 2008 financial crisis will be seen as a minor blip if we default. “This is uncharted territory of a magnitude that none of us can even imagine,” Geithner added, making perhaps his strongest argument. The financial problems in Europe, most immediately in Greece, were much more severe than people realized. He and the president had been focusing on them intensely. “We are single-handedly propping up the Western financial system right now,” he said. “Play with fire, and it might take you past the point of no return.”

Greece came up again. It is one thing for Greece to be Greece, Geithner said. “It’s a different thing for us to be Greece. No one would be able to save us.”…

Geithner thought there was one other consideration. He did not mention it to anyone, not even the president, but he had thought about it a great deal. It was not just that the president faced an economic choice or a political choice. He faced a moral choice. That was the most difficult decision a leader ever faced. Suppose the Republicans and Democrats banded together and passed a bill so the White House could not keep it from the president’s desk? What then? Veto and start a global trauma?… No one could be sure how to put the American or the global economy back together again. The impact would be calamitous. “And the people who would bear the pain of that would be the people less prepared,” Geithner told others, “less able to absorb that cost. It would be something you could not cure. It is not something you can come back and say, a week later, oh, we fixed it. It would be indelible, incurable. It would last for generations.”