House GOP Hatches Harebrained Debt Ceiling Fix

Under President Obama, the deficit has been going down.

Fiscal Times

By Rob Garver
October 16, 2015

Having exhausted the extraordinary measures that have allowed the government to keep paying its bill despite having reached its debt limit seven months ago, the U.S. Treasury is just weeks away from a major fiscal crisis. If the debt ceiling is not raised by early November, the U.S. government will not have enough money on hand to pay the millions of bills and other obligations that come due every day.

In response, House Republicans have a plan. It isn’t a plan to raise the debt ceiling, though, even though that is currently the only viable option for avoiding default. It is, instead, a scheme to allow the government to claim – in the narrowest possible technical sense – that when it stops making payments to some of its creditors that it hasn’t actually “defaulted.”

The plan, which could come to the House floor next week, relies on making a distinction between a “debt default” and more generalized default. The so-called Default Prevention Act makes it possible for the Treasury Department to borrow additional money “solely” for the purpose of making principle and interest payments on the nation’s publicly-held debt and debt held by the Social Security trust funds.

The measure basically prioritizes bondholders and Social Security recipients over everyone else the government owes money to – veterans, contractors, government employees, and more.

Protecting the reliability of U.S. Treasury debt is, of course, vitally important. The U.S. enjoys extraordinarily low interest rates on its debt precisely because bondholders are confident that they will be repaid on time and in full. Treasury securities are the closest thing investors can get to a completely risk-free asset.

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If the Treasury paid off bondholders, but denied pay to the military and stiffed contractors, building infrastructure projects and government employees, the credit markets would immediately begin viewing U.S. government debt as much riskier. Rates would go up, credit ratings would come down, and the Treasury would be facing a situation similar to what it could expect from missing a bond payment, except with the added bonus of voters furious about their missing checks.

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House Speaker John Boehner (R-OH), who has announced his desire to retire at the end of the month – assuming he can find someone willing to take his job – and has hinted that he wants to strike a debt limit deal before he goes. But the misleadingly named Default Prevention Act is almost as bad as no deal at all.