Political Capital: A Dangerous Game

If Congress fails to raise the $14.29 trillion debt limit this spring, the United States government will default on its debt, a scenario that could throw financial markets into a state of unpredictable chaos. In a recent letter to House Republicans, Treasury Secretary Geithner warned that a default would result in “catastrophic economic consequences that would last for decades.” The Obama administration is not alone in this opinion. Many analysts have stated that Congress is playing with fire if it truly plans to stand on principle and vote against an increase in the debt ceiling. The United States has never defaulted on its debt. Will it do so now? Many think not.  Regardless, the debate will at least take up media air time and lead to uncertainty in the markets, thus impacting businesses across industries.

Why the Government Should Take a Cue from Our Members

While most of the attention has focused on the Republicans’ stance, there have even been some House Democrats who recently indicated that they may also vote against raising the debt limit. Their explanation has been that because Republicans are in the majority, it is the GOP’s responsibility. The hypocrisy and circular logic in the arguments on both sides of the aisle is undisputed.  Congressmen will have to explain how they could vote for legislation that increases the deficit (Bush Tax Cuts and repealing health care reform) and then turn around and refuse to allow the government to pay those higher debts. Further, if markets believe that a vote to raise the debt ceiling would fail and the government would be forced to default on its debts, the government’s interest rate on Treasury debt will certainly rise. Congress would be well-served to learn a lesson from some of our members’ own best practices: just as companies must weigh the advantages and disadvantages of a significant increase in leverage, the government must as well.  Treasury Leadership Roundtable members can review Oracle’s Debt Issuance Decision Dashboard to learn best practices in capital structure.

Congress’ Public Displays of Disaffection

Most Republican leaders have privately acknowledged that the debt ceiling must be raised. House Speaker Boehner (R-OH) recently indicated that he would support raising the debt ceiling, but only in return for spending cuts. House Budget Committee Chairman Paul Ryan (R-WI) recently said, “Just refusing to vote for it, I don’t think that’s really a strategy. Obviously you can’t default.” As usual, however, politics trumps common sense. With the growing influence of the Tea Party and the influx of 84 freshmen Republican Congressmen (many of whom campaigned on fiscal responsibility) and the looming 2012 elections, the continued rhetoric could create a return to the uncertainty that plagued the economic recovery in 2010.

The Unlikely Parade of Horribles

While no one knows for certain what would happen if the United States defaulted on its debt, the likely results are clear: a partial government shutdown, sharp interest rate spikes, job losses, and a double dip recession. How long would Congress let this charade of uncertainty continue? If foreign governments begin to worry that the credit of the United States is in jeopardy, they could stop investing in U.S. debt. An effective default would cause long-term damage to U.S. access to debt markets, cost the U.S. its cherished AAA credit rating, and raise borrowing costs significantly; this would then funnel down to businesses and impact the already-tight credit markets.

The gamesmanship must end. All serious politicians and government officials know that the debt ceiling must be raised. Why prolong the uncertainty? Why have a fruitless debate that will only cause trepidation in the markets and could lead to a crisis like the sovereign debt calamity Europe experienced in the summer of 2010? The answer is old-fashioned political chicanery, a dangerous ploy just as the economic recovery appears to be gaining a solid footing.  Congress needs to remember- when you play with fire, you could burn down the house.

Thoughts? Comments? Leave a note below, contact me or review more of our Political Capital blog series.