I am spending most of my meager surfing time reading as much as I can about the range of possible repercussions from US debt default, which I now rate as very likely. I can't help coming to a conclusion similar to Meagan McCardle:
And about that, Wall Street knows less than we here in Washington. I dialed into a sell-side conference call last week to hear what sort of high-level analysis the bond vigilantes were doing, and the answer seemed to be that they knew less than I did. I didn't hear anything about the process that I couldn't have read in the pages of the New York Times or the Wall Street Journal--or my own blog. Listening, I thought of the frustration I've often had with people in New York who blithely lay out political strategies for their favored party that couldn't possibly actually work, either because said New Yorkers don't understand the institutional barriers, or because they don't understand what is actually popular outside of Manhattan and Brooklyn. Even a misunderstanding of small technical questions--like the need for a CBO score, the vulnerability of bills to amendment, or the time it takes to whip votes--lead people outside of Washington to frequently underestimate the difficulties of doing the "obvious" thing.On the flip side, it's also clear to me that many people in Washington are living in a bubble where procedure and politics often shut out common sense. I know I'm losing valuable intelligence about what's happening in the financial sector, because I'm simply not marinating in it every day. On that same call, I heard an analyst made a point about proposed 14th Amendment bypass of the debt limit, which was so obvious that I couldn't believe I hadn't thought of it: to wit, even if the Treasury simply went ahead and issued more debt, who was going to buy these instruments of dubious legality? And at what price? Yet all the DC people I'd seen writing about the "14th Amendment Solution" had focused on the legality of the move, or the political fallout; no one had thought about, like, finding customers for the debt.Washington almost never really thinks about the customers for our debt. They're useful bogeymen who can be deployed against policies you don't like. You see liberals claiming that bondholders will be horrified if we cut Social Security benefits (they won't, though they might be horrified if this becomes necessary because we don't lift the debt ceiling--but that worry will be a fear that Congress is crazy, not a fear that this means we're defaulting on our "obligations" to seniors) You see Republicans claim that they'll be spooked by tax hikes (maybe if we were hiking them from 70% to 80%, but no, the bond market does not care whether top marginal rates are 35% or 45%.) But on questions where it's actually important, we ignore the core problem of finding customers in favor of arguing about constitutional arcana. I had an email exchange with someone about the legitimacy of the 14th amendment route, to whom I pointed out that it didn't seem very practical, and he replied "practicalities aside . . . " Practicalities aside? Who cares whether it's constitutional for the Treasury to issue bonds no one buys?And don't get me started on the people who think that some sort of "technical" default wouldn't be a problem.There are people in Washington who get Wall Street, and people on Wall Street who get Washington. But they are a small minority in both places--and in both places, outcomes depend on the majority. I submit that this disconnect is dangerous. Wall Street is giving us too much rope to hang ourselves because they don't really understand the barriers to achieving fiscal sanity--and Washington is taking it, because they don't really understand how Wall Street thinks, and what the bond traders will do when they finally decide that we're likely to default. [More]
To be sure, our financial industry has passed into inscrutability in many areas like derivatives. This makes substituting simple models for true knowledge very tempting for both sides. But it would seem to me when we are so unsure what might happen to this huge, global economic lynchpin, driving the car over the edge to see what happens is absurd.
The level of misunderstanding is not faked either, I now believe. May Republicans subscribe to a theory that default is no big deal and not to use it to achieve their agenda is to pass up the chance of a generation.
Carl Hulse of The New York Times goes full scale shrill blogger and accuses House Republicans of deliberately engineering economic chaos in an effort to secure political advantage: “many Congressional Republicans seem to be spoiling for a fight, calculating that some level of turmoil caused by a federal default might be what it takes to give them the chance to right the nation’s fiscal ship.”More surprising to me is the idea that the No. 1 priority for Republicans is exactly what Mitch McConnell stated some months ago: make Obama a one-term president. Why that takes precedence over the economic health of the country baffles me, but I now believe he was sincere. For the right, this is not just about the economy, it is more about political power.
But he seems to have the goods:
“I certainly think you will see some short-term volatility,” said Representative Austin Scott of Georgia, the president of the freshman class. “In the end, the sun is going to come up tomorrow.”[More]
Such sentiments are strongly influencing the negotiating posture of House Republican leaders as they try to strike an agreement with the White House while remaining well aware that the rank-and-file seem more than prepared to oppose a deal if they believe it falls short of the deep spending cuts they contend are required.
We are preparing for some rude shocks here at Route 2, even though I'm not clear what form they will take. Certainly an exit of fund money from commodity markets might be one reflex, and it would be capable of overpowering a simultaneous drought threat in the short run.
We've already locked in as much long term interest rates as we can, and we are looking at the "transfer tax" window to take advantage of offloading appreciating real estate to downstream generations, since all bets would be off on estate taxes in recessionary government revenue shortfall.
Speaking of which, lost in all the insistence for tax cuts is the fact they are really, really low right now. And the fact that deficit reduction by spending cuts alone is not all that popular outside the far right.
I have no idea whether the political payoff will be there for those betting on default as an election strategy. But I think we we learn about the consequences both quickly and brutally.