A crisis is a terrible thing to waste. Or so must be the logic behind Congress's decision to make a highly partisan issue out of raising the debt ceiling.
Bankers should be at the front lines explaining the potential consequences on this one. It is not difficult to understand the motivation for politicizing this issue. Addressing the deficit, resolving certain issues involving entitlements and determining the size of the federal government are important policy issues that should be given priority.
But threatening the federal government's ability to satisfy obligations already incurred is a reckless game of political chicken.
There are several components to our nation's fiscal policy. Passage of a budget resolution is an important one. Establishing tax policy and appropriating funds consistent with approved programs are two others. These issues involve significant policy considerations and need to be thoughtfully debated and acted upon.
The debt ceiling issue is an entirely different matter. It would be logical for the debt ceiling to be the final component of the congressional budget resolution, as the budget creates an implicit surplus or deficit.
But there are several reasons this is not done at the federal level. One is the relative uncertainty of entitlement payments, which are not a component of the budget process.
A second reason is that at times entire fiscal years have passed without Congress's agreeing to a budget resolution. These uncertainties require us to adjust our debt ceiling on a routine basis every time our deficit spending requires more debt than the existing debt ceiling allows.
A relatively common misperception is that we can hold down government spending by not approving the debt ceiling. This is an entirely inaccurate perception. Increasing the debt ceiling does not authorize Congress to spend more money. The authorization/appropriation process is where that is addressed.
Additionally, certain expenditures that are required as a result of past congressional actions include entitlement payments and, of course, interest on our federal debt.
These are obligations that have been approved or incurred because of past congressional action.
To question whether we should raise the debt ceiling to meet these obligations is as irresponsible as a person's deciding not to pay a credit card bill when it arrives because he doesn't want to spend that much money.
Just as with any household, the correct time to make a spending decision is at the time the purchase is being considered. Once that purchase has been made, payment of the debt should occur routinely.
But Congress does not use that logic. Some members of Congress have found it politically expedient to perpetuate the myth that by voting against increasing the debt ceiling they are voting to hold down spending, and by doing so they perpetuate the misunderstanding.
This is an argument on which bankers should engage. There are only a few issues of federal fiscal policy that should be sacrosanct, but a commitment to meet our financial obligations on time and in full should be one. Bankers are in a position to recognize the hazards of being casual about meeting financial obligations.
Bankers understand that a carefully managed credit history allows access to credit that helps people meet personal and financial goals. By contrast, negative credit information causes immediate hardship and can take several years to correct.
The argument is currently being made in some quarters that a certain amount of laxity — including a brief period of being unable to meet financial obligations — is acceptable if it will lead to long-term agreements on budget and spending issues. As a matter of political expediency, this argument has some appeal. But the downside risk far outweighs any political benefit. Even though most observers believe an agreement will be reached before a projected August default, we are already seeing some troubling market reactions.
Credit-default-swap spreads on U.S. obligations have widened recently, which indicates that the credit markets are watching this issue closely.
The rating agencies have also suggested that the United States could face a downgrade in its credit rating. Not only would this be an intolerable international embarrassment, but it would result in a significant increase in the interest expense we pay on our federal debt instruments.
In both unilateral discussions and through our participation in the World Bank and International Monetary Fund, the United States has urged other nations to address weaknesses in their fiscal management.
The world is watching us this time to see if we have the desire and capability to address our own fiscal issues.
