For months, I have been exceedingly nervous about negotiations over the debt limit. Whenever I would say there was a real chance that we would falter and default, if only for a brief period, old political hands would say not to worry — that this had happened many times before, that we would get a deal because we had to get a deal and that the leaders, namely Speaker John Boehner (R-Ohio), were telling people privately that they understood defaulting on the debt was not allowable.
Of course, we have had endgame negotiations of this sort many times before, and game playing and posturing by partisans, with their positions, votes and rhetoric changing depending on which party controlled the White House. But the previous games were different; Members on both sides of the aisle (including then-Sen. Barack Obama) knew they could safely posture without any real danger of the debt limit vote going the wrong way, and they knew leaders were both mature enough and strong enough to find necessary compromises — as with all endgames, usually at the eleventh hour.
What is different now? First is that for the first time, ostensibly credible opinion leaders are making a case that breaching the debt limit is no big deal. They include Sen. Pat Toomey (R-Pa.), GOP presidential candidate Tim Pawlenty, billionaire hedge fund manager Stan Druckenmiller and a slew of conservative editorial writers, columnists and talk-show hosts. Their declarations have now been embraced by the lion’s share of Republican lawmakers — both making it easier for them to vote against the debt limit and making it harder for their leaders to justify any difficult concessions that they make to achieve a deal.
Second is that the endgame negotiations have a less firm drop-dead deadline that usually constrains the negotiations — as we saw with the continuing resolution, when everybody knew that at midnight on a date certain, without a deal, major parts of government would shut down. This time, some of the same opinion leaders above are scoffing at the Aug. 2 date announced by Treasury Secretary Timothy Geithner. If in fact the Aug. 2 date is reached without a debt limit increase, and Geithner says that actually we can go another several days or a week or longer, it will damage his credibility and make another deadline less meaningful. If the deadline is real, and Members don’t believe it, we could slide past it and experience that unprecedented guillotine.
Third is recent history. The last time we had a credible threat of financial Armageddon came in fall 2008, when every major figure in economics and finance believed and said we were teetering at the abyss of economic disaster — with the possibility of a global credit freeze bringing the global economy down with it, creating a major depression. The response, a form of triage, was the Troubled Asset Relief Program, crafted by President George W. Bush’s Treasury secretary, Hank Paulson, tweaked by Congress, and supported by all Congressional leaders and the two parties’ presidential candidates. It failed in the House, with a substantial majority of Republicans voting against it. Only after the Dow Jones Industrial Average dropped 700 points in response did Congress reconsider and pass TARP.