One of the most stunning developments in the fight over the US debt is the emergence of the “pro-default” stance among serious analysts.
Dean Baker recently wrote that default worked just fine for Argentina, and it could work in the US, too.
The latest is bank analyst, and frequent TV personality Chris Whalen, of institutional risk analytics, who urges Congress to vote NO on raising the debt ceiling because in doing so, the US would be forced to default and restructure its debt.
But far from being persuading, the piece at Reuters is juvenile. Obama is a “stooge” of the “banksters.” Ireland’s new PM Enda Kenny is in a fight with “vile” contemporaries at the ECB.
What about the merits of his argument? First, he claims that the main reason Jamie Dimon and other bankers are against a US debt default is because such a move would end the illusion of Too Big To Fail by showing that no institution is above debt restructuring. This is a total oversimplification. A far more likely concern among Dimon is that if US debt were to take a haircut, the solvency of the entire banking system would be called into question, and possibly go out the window. In every other country where there have been concerns about the solvency of the government, concerns about bank runs have arisen. There’s no reason that’d be an exception here.
The most ridiculous part though is his conclusion, which reeks of faux naivety: “Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America’s political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible.”
For one thing, we’re not sure what “run the US government on cash” actually means, but the notion of this being just an issue “for a few weeks”… Seriously? Does Whalen actually think that the government could default, and shrink the government to a level where it were run completely on tax revenue, and then rectify things after a few weeks?
There are times when a default or restructuring makes sense. For Ireland and Greece, which face years of austerity and nosebleed interest rates, it may make sense to unshackle themselves from the common EU currencies, and let their lenders suffer. The US isn’t in that position at all.
The US isn’t currently under threat by some outside force that’s going to force US worsen our way of life for years to come. As both Paul Ryan and Obama have actually shown recently, if you think the US has a big budget problem, there are ways of solving it that actually seem pretty plausible.
Right now the market shows zero concern about the debt ceiling/default issue, but there are some stunning developments out there, including the news that Boehner is talking to Wall Street about how far he can push the issue without roiling markets. The existence of articles like Whalen’s will also give cover to the more radical members of Congress that are fine with going to the matt, and letting the chips fall where they may. Whalen’s piece was picked up by POLITICO, so it obviously got attention in political circles.
It will be an interesting few weeks, to say the least.