Bo Cutter on the Debt Ceiling Fight

“This view is spreading like wildfire in the GOP.” Brian Beutler notices that the argument that a so-called “technical default” wouldn’t be bad for the economy is on the rise as a talking point within the GOP. I honestly can’t tell if these people really believe it or not. Example, Senator Toomey made the case at AEI:

At an event at the conservative American Enterprise Institute Wednesday morning, Sen. Pat Toomey (R-PA) laid out the case. “This problem is so urgent that there is — an alternative school of thought has emerged recently,” Toomey said. “The most high-profile advocate for this was Stanley Druckenmiller … one of the world’s most successful hedge-fund managers, extraordinarily wealthy from his knowledge of the markets, a big money manager now, and a big holder of Treasury securities — and he has said that he would actually accept even a delay in interest payments on the Treasuries that he holds. And he would prefer that if it meant that the Congress would right this ship.”

I really can’t believe it’s come to this.  I pointed out last December that there was no potential upside in not putting the debt ceiling in the package that extended the Bush tax cuts and fighting it as a separate issue this year, and here we are.

With that in mind, New Deal 2.0 has a great two part interview – Part One, Part Two – with Roosevelt Institute’s Senior Fellow Bo Cutter that I recommend checking out. Cutter was Director of the National Economic Council and Deputy Assistant to the President from 1992-1996 during the Clinton Presidency and the last government shutdown, and was there when the Clinton administration raised the debt ceiling. He is nervous about this, putting the odds of a default at 15-20%, which makes me very worried. From the interviews:

Bryce Covert: Some conservatives are using that term “technical default” and saying that it wouldn’t be as bad for our economy as letting Congress spend over the $14.3 trillion limit. What is this distinction that they’re trying to make?

Bo Cutter: There is no difference between default and technical default. A default happens if you can’t pay interest. It’s binary. You either pay it or you don’t pay it. What they are trying to imply is that a little, teeny, short default surely wouldn’t be a problem. They’re right only in the sense that it would be less of a problem. If you were in frantic negotiations to come up with a deal and Tim ran out of money and there was nothing he could do, and he says we have four hours, we’d be in default on the payments that need to be made in those four hours. But you can probably avoid being in actual default because you could delay when you send out the electronic blips that say you’ve paid interest for half a day. That’s technical default. That wouldn’t be the catastrophe that Geithner has commented on. But it’s a truly terrible thing and it’s really stupid to get in that position. To argue that somehow or other we have until we get into technical default is crazy. I regard it as a distinction, not a difference.

I was watching Newt Gingrich on Meet the Press on May 15th and he used the same line that they all do, which is that they look very arch and say, you know there are games being played here and obviously you can stretch it out forever. But there are no games. Everybody knows these mechanisms. They’ve been written about extensively, they’re not hidden. And they’re really limited. There isn’t some other magic pot of money. There used to be something called the exchange stabilization fund, and it was a fund that was off-budget and was in theory supposed to be used to stabilize the dollar. But when we did the Mexican bailout and we couldn’t get any money out of Congress, in the end Secretary Rubin used the fund in order to do the bailout. Eventually we got back more money than he put in, but Congress got so mad that they took it away. They took away one of the big buffers…..

Bryce Covert: What are the odds of the debt ceiling being raised?

Bo Cutter: I would put the odds of a default at 15 or 20 percent. Sounds low, but it ought to be zero. It is so inconceivable to me that it wouldn’t be raised. It’s not like the shut down where there was a fairly large number of people who wanted one and there was another set of people — I was in that other set of people — who thought that if we were going to play those games, I’d rather have a shut down than a default. Unlike then when there were people who could figure out arguments for why we ought to have a shut down, no one can come up with a good argument for why we should have a default.
There are three kinds of players in this. There’s the administration, which basically wants to do everything it possibly can to not have a default. Part of that is that they are responsible. There’s a real sense of fiduciary responsibility for the country. So they’re out there trying to avoid it. Group two is the set of people, a set of the Congressional Republicans, who fundamentally believe it doesn’t matter, that there isn’t an effect. I don’t see how you change their minds other than have a real problem. Group three is a dangerous group. It’s the other group of Congressional Republicans who believe that it would be a very bad thing to do, but they’re going to push it for all they can and run some risks. For example, that’s where Newt Gingrich was on Meet the Press and that’s where a lot of them are. Some of them are there because they think that’s the right way to negotiate and the problem is not as big as people think. Others are there because that’s the politically convenient place to be. That’s the dangerous group, and that’s where the miscalculation can occur……

Bryce Covert: Who are the key players then [during Clinton] and now and are there any differences?

Bo Cutter: I think the administration side of it is every bit as capable as we were. Some of them are the same players, and the ones who aren’t are pretty able people. I don’t think there’s a big difference on the Democratic side. On the Republican side, I think that they have a much, much more difficult caucus to manage than the Republicans then did because the extreme wing is so much more extreme. They believe that they won the shut down battle, they got $38 billion worth of cuts. So you’ve got this extreme group elected six months ago that thinks they won their first battle. The reasonable — reasonable being a term you have to qualify in these circumstances — Republican leaders have crazies on their hands that they have to manage. My own sense is that the leaders probably would have preferred a short, abrupt, losing shut down battle to this scenario. Because they knew they were going to be in a situation where their crazies were pushing them right off a cliff. I think the dynamics are much worse, but it isn’t on the quality of the people on the Democratic side. It’s the structure of the caucus on the Republican side.

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2 Responses to Bo Cutter on the Debt Ceiling Fight

  1. I’ve heard the argument, that when the US hits the debt ceiling, the government won’t actually default. They’ll be taking in enough to pay interest on the debt. Instead, we would see a partial shutdown of government, as it cuts spending to avoid further borrowing.

    Not that I view this as good, by the way.

  2. LosGatosCA says:

    From a political perspective, unless the Republicans completely cave at 11:59pm on the default date deadline, Obama and the Democrats have misplayed their hands. Here, on the tax cuts and the budget. Retrospectively they should have handled all this before the election last year, taken credit for passing the tax cuts and raising the debt limit with no worse results

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