Sunday, October 13, 2013

A thought for Sunday: an out-of-the-box proposal to solve the debt ceiling crisis

- by New Deal democrat

On Thursday I wrote a post the thesis of which was pretty straightforward: when the threat by a sovereign to not pay any of its bills - including selective payment of those bills - goes from trivial to non-trivial, based on the increasing frequency of the threat and the increasing brinksmanship associated with that threat, I would expect buyers of that sovereign's bonds to price in the risk of even partial or selective default. Even though, to date, that sovereign had never in history defaulted on any of its obligations. Even if the government of that country chose to prioritize payment of bondholders over other obligations, I would expect the second-class parties to hire lawyers and try to freeze some or all of the payments to sovereign bondholders while they argued their case in court.

In fact, he more I've though about it since, the more it looks like the S&P downgrade of US debt in 2011 - due to that brinksmanship - wasn't political at all (the source of much criticism at the time), it was dowright prescient.

So here we are, only days away from what could be a calamitous economic event, casued entirely by voluntary actions of government, with no apparent way out.

Or is there? Here is an out-of-the-box suggestion:

The number 1 priority of the GOP is to extract one or more real concessions in return for its hostage-taking.

The number 1 priority of the Democrats is to make sure that hostage taking is not rewarded, so that the GOP never takes hostages again.

The parties are at loggerheads, and we have a crisis because these priorities appear to be intractable.

Except actually, they aren't.  *Both* priorities can be satisfied.

The secret is that the debt ceiling law itself is just that - only a law. It was enacted 100 years ago when the US put World War I on its credit card, causing the biggest US inflation of the 20th century.  Now that the US government has many continuing obligations, including Social Security and huge treasury debt payments, this law is a loaded loose cannon on deck, capable of inflicting great damage.  I am shocked that we haven't already seen further downgrades of US debt by credit agencies (but give it a day or two).

So, here is the out-of-the-box solution.  The democrats add a demand: they insist that the debt ceiling act itself be repealed, ending the chances of hostage taking forever.

The GOP rejects this.

Then the two parties negotiate what of the GOP's current demands the democrats are willing to concede, in return for the debt ceiling law itself being repealed.

The GOP gets what it wants - actual concessons for the hostage taking. The Democrats get what they want - the GOP can never take hostages again.

And the US public never have to go through this again.

P.S.: If someone thinks this is worth cross-posting at a political blog, be my guest. But I won't.