Friday, October 18, 2013

The Utter Recklessness (and Worse) of Default

In my last post, I commended the 144 GOP Representatives who voted against default as well as the 24 GOP Senators who joined against default. I also commended the Business Roundtable for its farsighted stand against default.

But, one wonders why the option of default even became an issue. Virtually all experts agree that a default of the US Government would mean an economic cataclysm. For example:

"If there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over and we would be at risk of tipping yet again into recession." IMF Managing Director, Christine Lagarde.

"Inaction could result in interest rates rising, confidence falling and growth slowing. . . . if default comes to pass it would be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well." World Bank President, Jim Yong Kim.

"The point is that with each passing day the debt limit is not increased the more damage it will do to our economy. If lawmakers don’t raise the debt limit by November 1, the economy will fall back into recession. If they can't raise it by the end of November, we will be dooming our economy and the entire global economy to a wrenching economic downturn with implications for years if not decades to come." Former Economic Adviser, McCain-Palin Campaign and Chief Economist, Moody's Analytics, Mark Zandi.

"It's very hard to see a silver lining. . . . It's a constitutional breakdown, [and] threatening financial Armageddon is blackmail. . . . A good guess is that it would be worse than you think." Former McCain Adviser and Harvard Economist Kenneth Rogoff.

"What sane people should be emphasizing is that in addition to the risk of financial disruption, there’s the certainty of huge pain from spending cuts and a crippling hit to economic growth." Nobel laureate Paul Krugman.

“If we miss an interest payment, that would blow Lehman out of the water. Lehman was an isolated company, and now we are talking about the U.S. government.” Former Bush Administration Official and Managing Director, BNP Paribus, Tim Bitsberger.

So, it is fair to say that with near unanimity economists and financial experts use terms like insane or Armageddon or catastrophic to describe the financial consequences of default. One thoughtful analysis of the risk of default by Nobel laureate Michael Spence demonstrates the loss of global economic clout. He states that "the long-run effects of the US default threat will be overwhelmingly negative," endangering our global economic leadership and international leadership.
The long-run effects of the US default threat will be overwhelmingly negative
The long-run effects of the US default threat will be overwhelmingly negativ
The long-run effects of the US default threat will be overwhelmingly negativ

But, there are even more consequences of a default. For example, the Director of National Intelligence testified that the government shutdown degraded US intelligence capabilities and made a terrorist attack more likely. Fareed Zakaria reported that the shutdown comforted Al-Qaeda and encouraged them to launch more attacks to bleed us economically. The Army Chief of Staff, General Ray Ordierno, stated that "[t]he longer [the shutdown] goes on, the worse it gets. Every day that goes by, we are losing manpower, we are losing capability, so in my mind it is important we get this resolved."

Some claim the threat of default is treasonous. Given the patent costs and dangers implicit in the shutdown and the threatened default, one naturally wonders if these tactics constitutes treason. Most likely, it falls just short of treason. According to the United States Constitution, Article III, § 3: “Treason against the United States, shall consist only in levying war against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act.” Voting to defund the US government or to allow a default  is certainly weakening our national defense, our anti-terrorist efforts, our economy and rendering indirect aid to our enemies. But there was no adhering to our enemies or any apparent intent to aid our enemies. If Congress declares war then certainly the refusal to raise the debt limit would be treasonous, but Congress has not declared war.

Nevertheless, this threatened default was the most anti-American and unpatriotic attack on our government and national security I have seen in my lifetime, short of war. In my next post I will spotlight specific individuals and so-called leaders who acted with the highest degree of recklessness and irresponsibility.

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