Barr: Default is Unthinkable
Ever since founding father Alexander Hamilton “touched the dead corpse of the Public Credit, and it sprung upon its feet”—in the words of Daniel Webster—the good name of the United States in global financial markets has not been impugned. Indeed, after the Civil War, the Constitution itself stated in the Fourteenth Amendment that the “validity of the public debt of the United States … shall not be questioned.”
But we have an unfortunate chance to change all that if Congress calls into question its willingness to authorize the Treasury to pay the bills of the United States by raising the so-called “debt ceiling.” Congress must periodically pass a law that permits the U.S. Department of the Treasury to pay what the United States already owes for the goods and services that Congress has already required the federal government to purchase.
Requiring a separate vote on whether the United States should continue to pay on its obligations makes no sense. If such a vote is required, it would be a serious mistake to vote anything other than yes, and yes right away. That’s why President Obama, Treasury Secretary Tim Geithner, and many in the Republican and Democratic leadership in both the Senate and the House of Representatives have made clear that the debt ceiling must be approved.
That hasn’t stopped a large block of elected officials, including those from the self-anointed “Tea Party,” from arguing that approval of the debt ceiling should be held hostage to new decisions about federal spending, or even social issues.
But even if Congress can decide—which it should—on a path to bringing down the federal debt, there are no circumstances under which the United States should refuse to pay for the debt it has already incurred. And any decisions that Congress makes about reducing the federal budget deficit would have no effect on the amount that Congress needs to authorize the Treasury to pay on the obligations that are already owed and due.
This vote must occur this spring. Treasury will run out of funds to pay the bills by the middle of May, and even extraordinary actions will only provide a short reprieve of two months’ time. Forcing Treasury to fiddle with the books to avoid default is itself horrible for the reputation and creditworthiness of the United States. And it runs the risk of increasing the cost of credit for everyone, choking off the strengthening economic recovery.
Actually defaulting would be unthinkable. The U.S. dollar is the world’s reserve currency. We benefit mightily by the desire of the rest of the world to hold our debt and transact in dollars. When doubt lingers globally, surety is found in the United States. All that would change with default.
Rates for borrowing would soar. Business credit would dry up. Homeowners and home buyers would not get finance. House prices would plummet.
Banks and other financial institutions holding U.S. Treasury bonds here in the United States and abroad would face gaping holes in their balance sheets as their securities were marked down. The “Repo” market and other funding markets critical to commercial businesses, banks and money market mutual funds would stop. We would see a wave of bank failures, business failures, runs on banks and money market mutual funds, and contagion far worse than the financial crisis we are finally pulling through.
States and municipalities would likely face massive runs and would be unable to borrow.
And the integrity of the United States, once impugned, could never be restored.
To even write or read these things is to know that Congress must and it will authorize Treasury to meet our mutual obligations. And knowing that, we need to come together now, as a nation, to avoid partisan rancor, empty threats, and misguided attempts to link a vote on paying our bills to decisions about anything else.
After all, we are still the United States of America, and our word is still our bond.
Michael S. Barr, professor of law at the University of Michigan Law School and senior fellow at the Brookings Institution and the Center for American Progress, served as assistant secretary of the Treasury for financial institutions, 2009-2010.