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Why This Default Debate Is Different

Wall Street’s warnings will carry far less weight than they did in the ‘90s


WASHINGTON - JULY 10:  From left Speaker of the House John Boehner (R-OH), President Barack Obama and Senate Majority Leader Senator Harry Reid (D-NV) sit before a meeting in the Cabinet Room of the White House July 10, 2011 in Washington, DC.  President Obama met with Speaker of the House John Boehner (R-OH), Senate Majority Leader Senator Harry Reid (D-NV) and other Congressional leaders to negotiate increasing the United States's debt ceiling in order to avoid the nation defaulting on its debt.  (Photo by Brendan Smialowski/Getty Images)(Brendan Smialowski/Getty Images)

Things were different the last time a Democratic president and a Republican House played a drawn-out game of chicken with the “full faith and credit” of the United States. That was the mid-1990s, when Newt Gingrich, then the new Speaker of the House, seemed to see himself as a Man of History. Like today’s tea partiers, Gingrich was supremely self-confident that his party’s decisive takeover of the House represented a broad shift and a mandate for drastic cuts in spending and a balanced budget.

Yet after Gingrich and Majority Leader Dick Armey suggested they might go so far as to allow the government to default on its debt, the political mood changed dramatically. Standard & Poor’s and Moody’s issued warnings and Wall Street, whose views were channeled by then-Federal Reserve Chairman Alan Greenspan in private meetings with Republicans, made its unhappiness known. Following two unpopular government shutdowns, “the idea of default became so politically charged that few people wanted to be associated with it any longer,” former Treasury Secretary Robert Rubin wrote in his 2003 memoir, In An Uncertain World. “At some point, our opponents simply stopped fighting.”


How things change. Barring a horrific market plunge over the next week or so, Wall Street is less likely to have as much influence on the current standoff between Obama and the GOP over the biggest issue at present: whether to raise the nation’s debt ceiling, currently at $14.3 trillion, yet again. Indeed, the financial community, said Sen. Mark Warner, D-Va., in an op-ed in The Washington Post on Friday, “has been strangely silent.”

Or perhaps not so strangely. In the wake of the financial crisis of 2008, a bailed-out Wall Street knows it has little credibility in Washington. The warnings of S&P and Moody’s, their reputations still blackened by their disastrous miscalls during the subprime mortgage bubble of the 2000s, aren’t taken as seriously. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have nothing like the prestige that a Rubin and Greenspan commanded in an era when Washington and Wall Street agreed on most things about how to maintain a booming economy.

Above all, the Right believes the stakes are so much higher today after repeated debt-ceiling rises and no action on government spending. “The tea party has no respect for Wall Street,” says a GOP-affiliated financial expert who advises Capitol Hill conservatives, including Sen. Pat Toomey, R-Pa., a tea party favorite and former bond trader. “The view is, ‘These are the last people I would listen to on fiscal responsibility.’ Some of the guys on the Senate Banking Committee, most of all Sen. Toomey—who rightfully feels he understands these guys—thinks at the end of the day there’s no possible way we’re not going to pay interest even if there is a default. He thinks demand will go up for U.S. Treasuries if there’s a default, because he believes the markets will view this as being very serious effort to get spending under control.”


That may be wishful thinking. Most economic and financial experts warn that it could take years for Washington to recover its reputation after a first-ever default on U.S. debt, and the combined effect of panic, rising interest rates, a sense of global crisis (combined with the ongoing uncertainties in the eurozone over Greece’s debt), and possible double-dip recession.

Warnings of a devastating blow to U.S. credibility have always come from the financial community whenever a national default was contemplated. But the political axis, which was already heading rightward in the mid-'90s as Bill Clinton “triangulated” against Big Government, has shifted much further right since then. A growing number of conservatives now view the possibility of default as less serious than the existential threat of too much government debt.

“We raised the debt ceiling by $1.9 trillion at the beginning of this administration,” says Adam Brandon, a spokesman for tea party-allied FreedomWorks, a tea-party-affiliated activist group. “If we do it again we’re going to blow through this just as we did before. Wall Street may like that. My guess is they’re going to hire lawyers and go talk to establishment Republicans [about the dangers of default].... But they don’t understand how politics in America have changed. They wouldn’t know who to talk to or how.” 

It’s hard to know how much tea party Republicans genuinely minimize the consequences of a default, and how much they want to seem crazy simply to gain bargaining clout.  But it’s fair to say that cynicism about the debt ceiling has been building for a long time. The George W. Bush administration pushed five increases through Congress, much like the Clinton and even Reagan administrations had to do. Both parties blatantly exploited those “must-pass’’ moments to score political points.


It’s small wonder that traditional Republican totems no longer resonate. Last week, White House spokesman Jay Carney cited a statement from Ronald Reagan in 1983 that "the full consequences of a default—or even the serious prospect of default—by the United States are impossible to predict and awesome to contemplate.” But it had little effect. Catastrophically wrong or not, activists on the right are elated by the game of chicken this time around. They believe Democrats would never would have entered into serious discussions about spending if they hadn’t held the debt ceiling hostage. They’re almost certainly right about that. And apparently they have forced House Speaker John Boehner and the GOP leadership to agree.

In truth, most people believe that Boehner and the other GOP leaders simply want to play out the game a while longer. And with almost two weeks to go before they hit the legislative deadline of July 22, they can. Obama, in a statement on Sunday, said he needed to have a deal in 10 days. Republicans believe that the president was shoved onto the defensive by the grim jobs report on Friday, which showed virtually no employment growth last month and pushed the unemployment rate up to a politically dangerous 9.2 percent. The report almost certainly fortified the Republican position that the GOP can dictate the terms on debt trimming—that any deal should consist entirely of spending cuts, without any tax hikes. The Republicans know they can better make the case to the public that any tax increase at all—even a deal that closes egregious corporate tax loopholes, and even if the tax increases are several years in the future—could only harm a fragile economy.

Are they right? Have the Republicans already pulled off the steering wheel and chucked it out the window in this particular game of chicken? Are people like Pat Toomey kidding themselves about what will happen to the U.S. economy in the aftermath of default? Is it likelier that the world will see a U.S. default as evidence of supreme determination to get spending under control—or of a political system irredeemably broken?

The chances are greater than they have been in a long time that we may actually find out the answers to these questions.

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