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Entries Tagged as 'debt default'

Just Lift the Debt Ceiling!

David Frum July 21st, 2011 at 10:44 am 27 Comments

Larry Kudlow and The New Republic like the Gang of Six plan. Keith Hennessey does not

Obviously some people here are kidding themselves. And isn’t that just inevitable when plans are being cobbled together by weary legislators working long hours in a summer heatwave? It’s only asking for trouble to make long-term fiscal policy in this slapdash way, with the threat of fiscal armageddon overhanging us all.

We have budget processes for a reason. We don’t threaten defaults also for a reason. Can’t we all have a cold glass of water, recover perspective, and retrace our steps so as to avoid either triggering a catastrophe or else committing ourselves to long-term frameworks full of details few understand or appreciate.

I know this won’t happen, but how about this alternative:

Lift the damn debt ceiling now. Period.

Then resume the budget process in the full light of public scrutiny, with an aim to restraining future government spending, holding the line on taxes, and reducing budget deficits as the economy returns to health. The House has passed a budget. Let Senate do the same. Go to reconciliation. Do normal politics. No more of the fiscal equivalent of live-fire exercises with nuclear weapons.

Will Contractors Sue After Default Day?

July 14th, 2011 at 10:43 am 11 Comments

What happens on the day after Aug 2 if the debt ceiling is not raised? FrumForum this week contacted a number of government vendors and contractors who unanimously stated: they had no idea whether they would be paid or not.

The Washington Post today offers some guesses.  David Frum has suggested that people owed money by the US Government will go into debt themselves, remedy but ultimately will be forced to litigate, seek lay off workers or default on their own obligations.

In 1985, troche under circumstances very similar to the debt ceiling crisis of today, the U.S. Government Accountability Office issued an opinion asserting that the Secretary of the Treasury is within his rights to not only prioritize debt service over domestic spending, but also more broadly “liquidate obligations in any order it finds will best serve the interests of the United States” in a situation where Congress fails to raise the debt ceiling.  The GAO reaffirmed that position in May of this year and an independent report from the Bipartisan Policy Center agreed that the Executive Branch may be forced to simply “pick winners and losers.”

But the GAO position only states that the Treasury Secretary has the right to prioritize the order of payment, not void contracts.  The obligations would still be in force and the U.S. Government would still have defaulted on an obligation and unpaid creditors could theoretically attempt to sue in federal court.  Whether a contractor whose biggest client is the U.S. Government would actually take their client to court over a ten or fifteen-day delay is another matter.

But if the delay gets longer – all bets are off.

Who is the Priority Creditor on Default Day?

David Frum July 12th, 2011 at 12:48 pm 24 Comments

Here’s a skill-testing question in this time of debt showdown.

Who would be the more senior government creditor after Default Day:

- A disabled Social Security recipient?

- Or a vendor with a contract to provide toothpicks to the cafeteria at the Department of Waste, Fraud & Abuse?

I’d guess the vendor, right?

Turning A Crisis Into A Greek Tragedy

June 27th, 2011 at 12:30 pm 8 Comments

Looking back at historic events, say the protracted tragedy of World War One, one is frequently puzzled by the inability of the actors involved to understand the futility of their actions. The temptation is to rationalize away such obtuseness as being the product of the backwardness of an earlier age. However, today one can can recognize similar epically-scaled ineptitude in the management of the ongoing Greek crisis.

The political management of the Greek financial crisis is akin to the generalship exhibited in World War One — and, depending on the final outcome, the fluid situation in Athens could have similar catastrophic consequences for the political unity of Europe.

There are the three major players in the Greek financial crisis:

The Greek administration. The issue here is not just the ruling socialist party. The reality is the Greek political class, in general, has lost the skills necessary for governing. After decades where governing meant spending borrowed money, hiring huge numbers of public servants and giving voters generous early retirement packages, problem solving, budgeting, awareness of market forces etc. are not in the skill sets of any possible administration. Things are more complicated for the present government since it is being called on to implement a reform program  it doesn’t believe in — actually, a program it campaigned against in the last elections. The current administration, after making some general cuts in government salaries and pensions, has made every excuse possible to avoid any meaningful reform. It is a government now pledged to make budget cuts but which has vigorously pursued more tax revenue from a weak and shrinking private sector. The socialist government will not touch the annual 603 million euro subsidy to employees of the public electric company, but it is ready to slap people making a thousand euros a month with a retroactive tax on past income. It’s no surprise that a strategy of making an inefficient system somewhat less expensive and then taxing the heck out of the rest doesn’t seem to inspire much confidence in the people or the financial markets.

The European Union. Trying to work with a Greek government during the worst financial crisis since the Great Depression could be described as many things — but certainly not as a pleasant task. And, unfortunately, the European Union for the time being remains a big part of the problem rather than a vehicle which will provide a solution to Greece’s potential descent into default. It doesn’t really know how to handle the Greek political class, it doesn’t know how to communicate with the Greek public and, worst of all, it’s unable to avoid its own institutionalized bad habits. It treats all budgetary questions from a rather neutral point of view — budget cuts are equal to tax increases and vice versa. The Greek government has to reach a certain debt-to-GDP ratio this year — but how Greece will actually acheieve this to be a non-issue for the EU. Can you make budget cuts? Good. Can you make tax increases? Great. But budget cuts and tax increases are not equal: especially, in the case of Greece where — despite the widely-held stereotypes about rampant tax evasion and avoidance — the tax revenues are rather close to the European average. However, the government imposes huge tax, regulatory and corruption costs on an already squeezed private sector — structural problems which will have to be addressed sooner rather than later. So instead of dealing with the issue of the Greek insolvency, the EU treats the whole issue as a liquidity problem in the hope that at a future date things will be more manageable. Adding debt to more debt, glossing over important policy questions and being hostile to the Greek conservative party (it is opposed to the tax increases) because it’s not willing to sign up to the socialist government’s ruinous program is simply the wrong way to go.

The Greek public. Despite all the reports and video footage of continuous riots and demonstrations, the vast Greek silent majority remains dumfounded by the unfolding news. Its assumptions and expectations about life have been dramatically altered. Gradually, albeit slowly, it has come to the realization that the economic system it embraced for the last 30 years is not sustainable. The problem here is that if a program of reform is not put in place soon — one which offers some realistic hope of both avoiding default and stimulating economic growth — Greek society will regress to its old default positions of victimhood and isolationism. And such a withdrawal inwards will only further hamper efforts to resolve the country’s deeply entrenched fiscal woes..

Up until now the Greek government and the EU have played the game according to the traditional rules. The problem is that the conditions have changed dramatically but, like the generals who presided over the carnage of 1914-1918, they are fighting the last war. The brief, heady belle époque of the euro is over. What Greece needs now is an orderly restructuring of its debts which will reduce them at least by half. Such restructuring needs to be be yoked to a drastic — but gradual — reduction of the humongous Greek public sector: that’s the tricky  but unavoidable part.

But without such urgent and overdue remedial action, the Greek government and the EU run the very real risk of transforming a crisis into an economic cataclysm — one which will produce another “lost generation” of Europeans.

Debt Fight Could Give Obama More Budget Powers

David Frum May 16th, 2011 at 10:21 am 17 Comments

Some Republicans suggest that there’s no special need to worry about hitting the debt ceiling: after all the Treasury will still collect much more in revenue than it spends on interest payments. The Treasury can continue to pay bondholders while ceasing to pay other bills.

Do these Republicans understand that even assuming this idea were legally and technically feasible (which it is not), it would amount to handing President Obama recission authority over the entire federal budget?

Under this scheme, if feasible, could the president decide: OK then, I’ll just stop paying Medicaid bills in states led by Republican governors?


Stop Flirting with Debt Disaster

David Frum May 14th, 2011 at 11:02 am 126 Comments

The Wall Street Journal‘s weekend interview with famed investor Stanley Druckenmiller may have the most eyebrow-raising statement I’ve ever heard from a financial personality.

Druckenmiller muses at length about why a debt default by the United States would not be a reckless act of financial irresponsibility:

“I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction.

Druckenmiller uses a euphemism we may soon hear more often: “technical default.” A “technical default” you see is a default whereby the country could pay the money – it just doesn’t choose to.

By that definition, almost all defaults are “technical,” since it’s very rare that a country cannot find some way to pay its debt if it really, really wants to: say by rounding up billionaires and confiscating their wealth at bayonet-point.

What is ominous about the Druckenmiller interview – and even more about its placement in the Wall Street Journal and the non-horrified reaction of conservative pundits to the statement – is the trend of mind it reveals. Here is John Boehner speaking last week to the New York Economic Club:

It’s true that allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.

Wrong! Default would be the single most irresponsible thing the United States of America could possibly do. America’s debt has been paid in full and on time since 1789. To cast away that record even in a genuine financial emergency would be a terrifying action. To cast away that record to score a political point? Reckless almost beyond description.

I always assumed that the first American political party to contemplate default as a way to achieve its political goals would be the Communist Party of the USA, not the GOP. I’m going to tell myself that it’s all just a bluff, and that Boehner is talking wild as a prelude to lowering the boom on the Tea Party. But wild talk has a way of generating its own momentum – and leading to wild results.

The GOP wants to push for a budget deal? That would be welcome.

But what this default talk looks like is that the GOP wants a crisis, not a deal. A deal would involve real pain for real voters: Medicare reductions, farm spending reductions, military reductions, and revenue measures. A crisis creates an exciting substitute for such a deal – especially if the GOP can temporarily and delusively convince itself that it can pin the blame for the crisis on President Obama. That will not be true. The whole world will see that the crisis was avoidable, and will see who insisted on forcing it. And however high you imagine the financial and political price – it will be higher.