A Treasury Fire Sale Won’t Prevent Default

May 20th, 2011 at 10:13 am | 20 Comments |

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Veronique de Rugy takes issue with my recent blogpost arguing that there isn’t enough money to pay off America’s debts without a default. She claims that she is not being disingenuous on the debt. “ I have always said that the U.S. shouldn’t default on its debt” she says. In the same piece, she notes at the end:

We should fear a default. But it’s not the default that Secretary Geithner has been warning the country about. It is the one that happens some time down the road if Congress never cleans its financial house.

See that? de Rugy thinks we should fear a default, just the one that might occur in the future, say the year 2025 (when Paul Ryan claims that entitlements will consume 100% of the budget) as opposed to the year 2011.

I would argue she is being disingenuous because we should fear a default that will happen if the Congress remains deadlocked. Paul Ryan, a politician de Rugy admires, continually justifies the need for his budget because of the “predictability” of the entitlement crisis. By the same logic, a crisis that is predictable because we know it will occur in 2011 if nothing is done to change the status quo, is demanding of our attention.

So problem #1 is that de Rugy downplays the risk of a default in 2011 because she thinks a default in the future is a more immediate danger then a default in 2011.

Problem #2 is that de Rugy claims I argue something that I do not:

We do not argue that it would be easy or painless to sell assets. But it is also incorrect to argue, as he does, that all of the assets on that list are off limits.

I did not say that, my exact wording was:

While de Rugy’s point about selling off US assets is actually a fair one, there is no way selling off assets in a crisis moment makes sense, especially in the next few weeks or months.

I link to one of David Frum’s CNN columns where he argues that it would not be a bad idea to sell off some assets such as the Hoover Dam or the Tennessee Valley Authority. So no, for the record I don’t think assets are off-limits.

But this leads to Problem #3. Does de Rugy think that the Treasury can or should plan a massive garage sale within the next ten weeks of all it’s assets? What if we get to late July and there is still no deal on the debt ceiling, does she think that a sale can be done in a week?

de Rugy notes that her paper “only lists financial assets rather [than] all of the things that Treasury could sell (such as lands and building)” To give a few real world examples of the prolonged process that it takes to sell government land and buildings, it was announced in 2005 that the Walter Reed Army Medical Center would be closed and sold in five years. Six years later, in 2011, I see that they are still trying to settle zoning issues and the purchase price for the facility. From doing a quick google search, I find out that military housing privatization can take between 8 and 14 months.  The Bureau of Land Management says that it can take “a year or longer” to sell land.  And does de Rugy think that if the markets know that the US is in a crisis and selling off assets to avoid a default, that the government would get anywhere near the best possible price for what they selling?

So I suspect that selling our assets off on short notice will likely not occur with the turn around needed to have this be a viable option.

Some of the other items on her list either don’t make the cut to be large enough to fill the gap (it turns out TARP won’t pay for the military) or they are retirement funds and trust funds.

If there is one thing I’ve learned from listening to Paul Ryan, it’s that it is important to make sure that people near retirement who have planned their lives around receiving benefits are able to receive them. This is why his plan has a firewall to keep Medicare the same for anyone older than 55. (Cynics may suggest that this is because the GOP has an older electorate, but let’s take him at his word.)

I assume that most politicians would prefer to keep the Military Retirement Fund, which she lists, as off limits for what the Treasury can raid in 2011. Think of the campaigns ads that could be run (“Congressman X allowed the retirement funds of our nation’s heroes to be depleted…”).

Perhaps some of these retirement funds are more equal than others and she can list which ones should be targeted first? Or maybe we should have Pat Toomey and Tom McClintock make the list? Either way, even de Rugy has writen that raiding the retirements of our soldiers can only drag this out until September.

For Problem #4, we return to Problem #1, where de Rugy again makes a false equivalence. de Rugy argues:

forcing the Treasury to sell assets in order to pay the government’s bill may be undesirable, and brought about by a series of repeated and unbelievably irresponsible decisions by our leaders for years — yet it would be just as irresponsible to continue to pass debt-limit increases without putting in place a credible plan to reduce future government spending and put the nation back on fiscal track so that Treasury can eventually pay off the nation’s debt.

No. Once again, it is not “just” as irresponsible. If we increased the debt limit without structural changes then there would be 100% certainty that the United States would be able to meet all it’s debt obligations and there would be no default in 2011. As opposed to the de Rugy plan where the risk of default is the ominous cloud that hangs over the entire discussion during 2011.

de Rugy want’s to see the country “change the path that it is on.” This is a good goal. What is not a good goal is pretending that the threat of default in the year 2011 is less of a crisis than a default down the road for a crisis that hasn’t arrived yet.

de Rugy states “ the U.S. shouldn’t default.” If this is what she believes, then she should writes op-eds stating that, and telling lawmakers not to entertain the risk of default, as several of them have decided to do. (Such as Paul Ryan, who’s said that default would be OK for a few days.)

During the debate over the Government shutdown, Boehner told his caucus that while they would drive a hard bargain, a shutdown was something the GOP wanted to avoid.  It is not discouraging that Republicans are trying to drive a hard bargain on the debt ceiling (my own perception is that the Senate and White House have allowed themselves to be seen as pliable and able to get concessions) it is just discouraging that they can’t seem to remember the lesson they learned during the government shutdown: that they are trying to avoid a doomsday scenario, not test one out “for a day or two or three”.

Unfortunately, by advertising that “there is a world between reaching the debt ceiling and defaulting”, by pointing out that the Treasury has retirement funds it can raid, and by imaging that Geithner can auction off land and assets in a week, de Rugy is not helping the cause of those would want to avoid default.

Follow Noah on Twitter: @noahkgreen

UPDATE: The paragraph referring to “good goals” contained a double-negative which misconstrued it’s meaning. It has been corrected.

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20 Comments so far ↓

  • TerryF98

    NRO= ignorance on a stick with caramel sauce on top.

  • ottovbvs

    This Republican shill Rugy is talking out of both sides of her mouth. If she has any financial sense at all she must know that a default would be catastrophic but she has to maintain the fairy tale that there is some other way out of the need to raise the debt ceiling. Technical default (whatever that is); suspension of interest payments for four days (no more no less); asset sales (how long does she think it’s going to take to sell the TVA?). They are all fantasies from la la land. Like all these Republican idiots she’s being grossly irresponsible but trying to hide behind verbal hair splitting.

  • indy

    So I suspect that selling our assets off on short notice will likely not occur with the turn around needed to have this be a viable option.

    Anybody know what happens to prices when extremely expensive, illiquid assets are sold in an environment where buyers are aware of the seller’s financial distress?

    It’s actually the subject of some interesting financial studies.

    • ottovbvs

      Actually I think they’d get quite a good price for some of the govt’s assets like the TVA but it would take years to privatise them even leaving aside the political implications. It’s a fable Republicans have constructed to degrade the implications of an inevitable default if the ceiling isn’t raised. Hence if it isn’t raised and financial catastrophe ensues they can say this didn’t have to happen because they could have sold assets. It’s totally spurious like The Confidence Fairy but this is how they operate.

  • balconesfault

    Anybody know what happens to prices when extremely expensive, illiquid assets are sold in an environment where buyers are aware of the seller’s financial distress?

    Does anyone doubt that this is the outcome that the financial backers of the GOP want?

    We already saw the Tea Party Governor of Wisconsin push through a law where his appointee can direct, without any review from the legislature, sale of state assets to whatever party and for whatever price he desires.

    Dismantling government as a shared enterprise that works to benefit us all is the goal. And to the extent that some very wealthy entities can pick up some very valuable properties at cents on the dollar while the dismantling is taking place, so much the better.

  • Sinan

    This is how wealthy people get even more wealthy. Some of the world’s richest people got their start at government sales of undervalued assets. This is the Shock Doctrine at work folks. Instead of raising tax rates we want to sell the TVA and Hoover Dam….is Yellowstone next?

  • ottovbvs

    Speaking of fables I came across this wonderfully accurate take on Gingrich.

    Now you may ask, how did a once-powerful figure become such a clown? But that’s the wrong question: what you see now is what he always was. The real question is why so many media figures pretended, for so long, not to notice.

    This comment can aimed at an army of grotesques on the right (and a few on the left).

  • Non-Contributor

    It does not matter if the asset sale helps or not. The GOP wants the government to sell everything it has available. That is the GOP strategy.

    It does not matter if people suffer the GOP ideology of destroying the US Government and replacing it with corporate governance is paramount.

    • Nanotek

      “It does not matter if the asset sale helps or not. The GOP wants the government to sell everything it has available. That is the GOP strategy.”

      Non-Contributor + 1

      • balconesfault

        Sinan has it right. It is shock doctrine. And they’re treating us as if we’re some kind of 3rd world country … and sadly enough, a significant portion of the middle class is supporting this bananacization of the American economy – perhaps with the hope that they’ll end up on the right side of the have/have not divide as the rift grows … and perhaps just with the hopes that the wealthy class will be benevolent?

  • 325RPCB12

    [img]http://img59.imageshack.us/img59/3577/dkphazebooklogo.jpg[/img]

  • WillyP

    There are few things more vain than when purported journalists publicly disagreeing with each other about their intentions.

    de Rugy is and has been absolutely clear where she stands, why she feels the way she does, and what she believes needs to be done.

    Noah writes,
    “I would argue she is being disingenuous because we should fear a default that will happen if the Congress remains deadlocked. Paul Ryan, a politician de Rugy admires, continually justifies the need for his budget because of the “predictability” of the entitlement crisis. By the same logic, a crisis that is predictable because we know it will occur in 2011 if nothing is done to change the status quo, is demanding of our attention.”

    No, she isn’t being disingenuous. We are not at serious risk of immediate default if we don’t raise the debt limit. Government has discretion over where it spends its money, and it will have to cut non-essential programs and staff to meet its interest obligations. So what if we fire 20,000 bureaucrats? I tell you verily I don’t care, and neither would 99.99% of Americans. I can’t tell you how many friends and acquaintances I have who were laid off and are still struggling. The bureaucracy shouldn’t be immune to the pain of a recession.

    Furthermore, how are conservatives supposed to stop Obama’s agenda in its tracks if we cannot talk about the debt limit, shutting down government, or anything else substantial? Do conservatives just concede on one point after another, until it’s too late? At some point we need to pick a fight and stare this president down. Newt did this to Clinton, and the nation was better for it.

    Or am I reading this all wrong, and does the private sector now exist for the government? If so, this is new era for America; it is the dawning of an America that looks like Socialist Europe, which even as I write this is imploding with debt problems, facing cultural tumult due to unrestricted immigration (and being run by at least 1 rapist).

    Extremely myopic commentary like this pervades our media. The 800 lbs gorilla is that our society is transition away from its roots as a limited government, constitutional republic. Normal Americans – that is, those who aren’t enamored by the rule of a self-appointed elite – are absolutely and vociferously against this change. It undermines our traditions and will absolutely result in our steady decline, not unlike what happened to Great Britain. While it’s true that most people are oblivious to these currents, one would hope that the commentariate would be at least minimally cognizant. The point of all stories does not have to be confined to whether the issue of the hour is politically advantageous to Obama or Boehner. Matter of fact, I thought that the news media were supposed to look out for the public and not the politicians.

    Frankly, I’m surprised that such a serious person as de Rugy would bother reacting to the spitballs blown at her by Noah. Most conservatives and Tea Party activists ignore the spin and obscurantism, and focus on achieving results (e.g. repealing or defunding Obamacare). de Rugy would serve her country better by allowing the yappers to yap until their voices are hoarse. We have a society to save, and the pathetic nitpicking by journalists who have never done anything but offer their lame opinions is unimportant.

    • artpepper

      Some obvious candidates for elimination: FAA, FDA, USDA, CDC, NIH, TSA, FEMA, OSHA — they are all a complete waste of my tax dollars.

  • balconesfault

    So what if we fire 20,000 bureaucrats?

    To a great degree, the US Government will begin having to deal with a lot of citizen suits that will be filed when the bureaucracy is unable to do a lot of the things necessary to fulfill their congressional mandates.

    I tell you verily I don’t care, and neither would 99.99% of Americans.

    I tell you verily that you’re ignorant of what you speak of.

  • budgiegirl

    I sincerely think the Republicans are willing to default, full-well knowing it’s adverse impact on the economy – so that it bolsters their chances of defeating Obama in 2012.
    The last thing the Republicans want is an improving economy this year. Sad!

  • indy

    Furthermore, how are conservatives supposed to stop Obama’s agenda in its tracks if we cannot talk about the debt limit, shutting down government, or anything else substantial?

    Well, you can do it through elections, just like everybody else. You seem mightily convinced that Obama is going to lose in 2012. Till then, you could act like a grown up. Not that I’m gonna expect that, of course. I really expect another Chicken Little screed.

  • Frumplestiltskin

    “I can’t tell you how many friends and acquaintances I have who were laid off and are still struggling.”
    I don’t believe this at all, not that people have been laid off and are struggling, I don’t believe that WillyP has any friends at all. I mean, good lord if he can’t tell you how many of his friends have been laid off and are struggling then they sure as hell can’t be considered friends.

    Hey WillyP, did you graduate from college? I notice you said you “attended” a University in another thread, but hell, going for 2 weeks and dropping out counts as attending. Such an unserious little boy he is.

  • Churl

    While we amuse ourselves playing pundits, nattering about raising the limit on the national debt we are adding something like $180,000,000 per hour to it, and the debt is compounding with interest.

    Those who are lending the money will want it back some day. Questions for the future, much more important than fiddling with the debt ceiling, are: Can we keep up the payments if this burn rate continues indefinitely? If not, what do we do about it?

    The desire to spend is unlimited; the capacity to produce and earn – and therefore to tax – is not.

    • ottovbvs

      the capacity to produce and earn – and therefore to tax – is not.

      More amusing ignorance from Churl. Instead of giving us your back of cereal box wisdom why don’t you just compare US GDP in constant dollars in 1939 and 2009.

  • artpepper

    The Grand Canyon would probably fetch a fair price. We could sell off the Lincoln Memorial, and all that junk in the Smithsonian.