Delayed payments in 1979 offer glimpse of default consequences

The Washington Post

Brady Dennis 

Sunday, July 10

The Sunday airwaves brimmed once again with talk of what would – or would not – happen if lawmakers fail to meet the Aug. 2 deadline to raise the nation’s legal limit on borrowing. Unmentioned by either side was an obscure bit of budgetary history in which the country did default on some of its bills, and wound up paying the consequences.

Treasury Secretary Timothy F. Geithner said on CBS’s “Face the Nation” that inaction “would be catastrophic for the economy” and added that “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.”

Bob Schieffer spoke with Treasury Secretary Timothy Geithner on the necessary steps to be made for the White House and congress to reach an agreement over a budget plan and ultimately raising the debt ceiling.

Across the dial on “Fox News Sunday,” Sen. Jim DeMint (R-SC) accused Geithner of “playing Chicken Little” and called his dire warnings irresponsible. “There certainly will be disruption, but this is not a deadline we should rush and make a bad deal,” DeMint said, echoing the views of some fellow conservatives who have downplayed the potential fallout.

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did . . . It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode entitled “The Day the United States Defaulted on Treasury Bills.”

All things considered, the incident amounted to a minor blip. The Treasury had missed payments on about $120 million worth of bills, a tiny amount even then, given the global investment in U.S. debt. Investors, some of whom joined a class-action suit against the government to recover damages, eventually were paid in full with back interest. T-bills, as they are known, continued to be considered a safe investment. Treasury officials both then and now argued that the event was not even a default, but merely a delay caused by the internal logjam.

“It was quickly forgotten,” said Jim Angel, a finance professor at Georgetown University.

And yet, the study by Zivney and his partner, Dick Marcus, found that even that brief failure to meet some obligations had expensive consequences. The pair concluded “that the series of defaults resulted in a permanent increase in interest rates” of more than half a percent, which over time translated into billions of dollars in increased interest payments on the nation’s debt, a cost shouldered by taxpayers.

“The impact is smaller at first because only new debt is affected,” they wrote. “But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized.”

Zivney said that the 1979 incident, which pales in comparison to the size and scope of payments the Treasury could have to forego if it can no longer borrow money come Aug. 2, offers a useful case study in the real-world consequences that result when the U.S. government doesn’t seem like the sure bet it has always been.

“It creates doubt, and I think that’s the real lesson,” he said. “The market has a much longer memory than individuals.”

Angel, the Georgetown professor, said that the surest way to stave off any such doubts is for Congress to find a way to set aside political fights long enough to ensure that the country continues to pay its bills. Otherwise, he said, investors will punish the United States – and ultimately taxpayers – if and when checks stop showing up.

“It’s not as if God appeared to Moses on Mount Sinai and said, ‘The U.S. will always be a AAA credit.’ Our reputation is something that we have earned,” Angel said, adding that history is filled “with countries that were once great and blew it. The simple lesson is, you’ve got to pay your bills on time. If you don’t pay your bills on time, bad things happen.”

Suck It Up and Dig In

William Rivers Pitt, truthout

The "mainstream" news media has, over the last few weeks, been giving us a clinic on the art of the self-fulfilling prophecy. To wit: Democrats are discouraged on the eve of the 2010 midterm elections, liberals are even more so, the right is on fire, and the American people in general are preparing to vent their economic frustrations on the majority party in Congress, and by proxy the president. Virtually every poll, newspaper and network has declared the upcoming vote to be the electoral version of Little Big Horn for the Democratic Party, even though the election is almost two months off.

Not so long ago, I was calling such dire predictions nonsense. After all, the Republican Party has offered nothing of substance in terms of policy proposals to explain why they deserve to be allowed back into power. The Tea Party insurgency on the GOP's right flank has knocked off a number of very electable Republicans in primary races all over the country and replaced them with candidates with views so extreme as to make Dick Cheney look measured and reasonable by comparison.

More to the point, I simply refused to believe that the American people in general could possibly be bumfuzzled enough to forget how bad things were in this country not even two years ago due to the pestilence of Republican rule. I couldn't imagine that the very people who have been suffering the economic consequences of that pestilence, who suffer it today and will suffer it tomorrow, could be damnfool enough to let the wolves back into the yard.

Well, if the prophesies of the "mainstream" news media are as self-fulfilling as they appear, the damnfool bumfuzzles are gearing up to rule the day on the first Tuesday in November. As astonishing as it may sound, the very people who have been getting ruthlessly and deliberately pummeled by the politicians and policies of the GOP are, by all reports, preparing to deliver an axe into the hands of the very headsmen who put them on the chopping block in the first place for fun, profit and power.

I'm sure there are plenty of explanations for why this appears to be happening; political scientists, sociologists and scholars of abnormal psychology will have a field day parsing the whys and wherefores of this phenomenon if the deal does indeed go down. In the end, however, I think Eugene Robinson of the Washington Post got closest to the bone last week in a column titled "The Spoiled Brat American Electorate.” In it, Robinson wrote:

According to polls, Americans are in a mood to hold their breath until they turn blue. Voters appear to be so fed up with the Democrats that they're ready to toss them out in favor of the Republicans - for whom, according to those same polls, the nation has even greater contempt. This isn't an "electoral wave," it's a temper tantrum.

In the punditry business, it's considered bad form to question the essential wisdom of the American people. But at this point, it's impossible to ignore the obvious: The American people are acting like a bunch of spoiled brats.

The nation demands the impossible: quick, painless solutions to long-term, structural problems. While they're running for office, politicians of both parties encourage this kind of magical thinking. When they get into office, they're forced to try to explain that things aren't quite so simple -- that restructuring our economy, renewing the nation's increasingly rickety infrastructure, reforming an unsustainable system of entitlements, redefining America's position in the world and all the other massive challenges that face the country are going to require years of effort. But the American people don't want to hear any of this. They want somebody to make it all better. Now.

Chalk it up to the vagaries of the ceaseless revolutions of the 24-hour news cycle. Everything proffered by the "mainstream" news media comes in instantaneous fashion, and their screaming in-the-minute coverage of epic, long-term dilemmas ably serves to create the kind of dull-witted, memory-deficient angst that leads people who have been badly screwed to volunteer for a whole new round of screwing. Chalk it up to fear, to impatience, or to the fact that the GOP and their media allies are Jedi Masters when it comes to crafting political messages that appeal to the gut while being a shortcut to thinking at the same time.

Chalk it up to whatever you like, but unless the political pundits in the "mainstream" and independent media are pulling the 21st century version of "Dewey Defeats Truman," this electorate appears to have every intention come November of hanging itself with its own hair like Rapunzel when the Prozac runs out, and it is, frankly, sickening to contemplate on any number of levels. Mr. Robinson's use of words like "brats" and "tantrum" may be harsh, but it is hard to say he is wrong.

Contemplating all of this is hard enough on the soul and the stomach by itself, but amazingly enough, it gets worse. A new poll was released on Wednesday by Democracy Corps that, quite simply, makes me want to eat my own teeth. It re-re-re-reports the oft-repeated "generic ballot" refrain, i.e. in these upcoming midterm elections, a generic Republican leads a generic Democrat by a seemingly insurmountable margin. But within the layered questions in this poll, there is a data point that literally makes me want to throw up on myself. According to Democracy Corps' survey of "drop-off voters" - a term referring to those who voted in 2008 but are unlikely to vote in 2010 - the Democrats are finally and disgracefully in the lead. By a margin of 47% to 40%, Democratic voters are more likely to refuse to show up at the polls in November, despite everything that is at stake.

47%? I don't even begin to know what to say. Perhaps there is something in the genetic makeup of Democrats and liberals that makes being in the minority an irresistibly attractive option. I can understand that. Being in the minority in politics is easy; you aren't responsible for anything, because it's the other guys who have all the power, and so you can stand on your soapbox and be unbending in your "resistance" without having to deal with pesky nuisances like leadership, compromise, or long-term goals. Perhaps 2008 was nothing more than a temporary power trip for a bunch of self-righteous ego junkies who felt like they needed to be on the winning team after eight years of George W. Bush, but who cannot now stomach the realities of majority control, because it might tarnish their so-called liberal credentials.

I know this much: anyone - be they straight-line Democratic, liberal, progressive, Left or what have you - who believed the election of 2008 would be the final cure for all that ails this nation and this world needs to find another hobby besides national politics. Because if you thought 2008 and Obama would fix everything - in two years- then politics is just that to you: a hobby, a masturbatory exercise devoid of context or comprehension that makes you nothing more than cholesterol clogging the arteries of progress.

"Politics is a strong and slow boring of hard boards," said German sociologist Max Weber. "It takes both passion and perspective.” At this point, it appears that far too many Democratic and liberal voters in this country - 47%. Seriously? - Have plenty of passion, but little perspective, and the word "strong" describes them not at all when it comes to dealing with the political difficulties of the day. Could the Democrats in Congress do better? Yes. Should they do better? Yes. Should the same be said for President Obama? Certainly, yes. Is that reason enough for 47% of Democrats and liberals to sit on their hands in November and deliver the nation back to the very people they supposedly would oppose with all their might? If your answer to that question is also "Yes," then shame on you.

If Democrats and liberals are incapable of summoning the will to keep these right-bent fiends out of power after the eight-year demonstration of what they're about that we just endured, then they don't deserve to be anywhere near political power at all. Obama has not fulfilled our hopes and aspirations, and has in several cases betrayed them egregiously. The same can surely be said for Democrats in Congress. But if you've allowed yourself to forget how bad things can truly become, then do the nation and the world a favor and follow my advice: find another hobby, and take with you with the 47% who share your lack of conviction. The rest of us will do our best to take up the slack, and God help us all if November turns out as badly as is predicted.

You can do that, or you can suck it up and dig in. There is no alternative.

Wall Street Can't Police Itself

Last week Congress passed a Wall Street reform bill that created a new federal agency in charge of protecting consumers. The agency was an idea that came from Elizabeth Warren--a Harvard professor and consumer advocate. And she's the best person to head it up.

But Wall Street bankers, Republicans and some in the Treasury Department don't want her in the top post. So I signed a petition telling President Obama and Congress that voters want a tough advocate on our side--and we want Warren to head the Consumer Financial Protection Bureau.

Can you join me at this link? (You can see a clip of her on the Daily Show there too):

http://pol.moveon.org/warren/?r_by=21938-1847710-xdbJK_x&rc=paste

Thanks!

Blaming Obama Is Easy and Irresponsible

15 June 2010

By Scott Galindez, Reader Supported News

This victory alone is not the change we seek. It is only the chance for us to make that change. And that cannot happen if we go back to the way things were.

It can't happen without you, without a new spirit of service, a new spirit of sacrifice.

So let us summon a new spirit of patriotism, of responsibility, where each of us resolves to pitch in and work harder and look after not only ourselves but each other. - President-Elect Barack Obama

When President Obama accepted victory in Grant Park, he called on all of us to join him in ushering in the change we all were seeking. Did we answer the call? Have we rolled up our sleeves and fought for real change?

I would argue that very few did. Most of us celebrated and waited for Obama to do the heavy lifting. The country was facing a devastating financial crisis while conducting two wars. We were celebrating the victory, but not looking at the overwhelming challenges our new leader was facing. We expected sweeping change, but for the most part we left the battlefield and expected Obama to bring us that change.

The Economy

Immediately, Obama took steps that did save us from economic collapse. I am no economist, but I will accept the opinion of Paul Krugman and others that without the bailouts things would have been much worse.

In addition to having this "automatic" stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it's possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse. - Paul Krugman (http://www.nytimes.com/2009/08/10/opinion/10krugman.html)

Ok, not a ringing endorsement, but nonetheless even critics of the bailouts acknowledge that they slowed the decline. That brings us to the present time - where is our anger? The corporations are flush with cash but they are not hiring. Why are we not out in the streets demanding jobs from the institutions that got the bailout money? Instead, we are letting the fringe Tea Party movement blame Obama for the mess that the previous administration left him with. It wasn't just the previous administration, but the greed of corporate America that has put us in this mess, and instead of fighting we have conceded the playing field to birthers, racists, and people who are inspired by Glenn Beck and Sarah Palin.

We can criticize the bailouts all we want, but if more banks and financial institutions had failed, Main Street would have been hurt as much as Wall Street, probably more. It was a decision that no one wanted to face, but Obama was forced to act or be blamed for a depression.

Should the stimulus have been bigger? Probably, but was the political will there? Did we go fight for it and send a message to the deficit hawks that they would pay the price for opposing a bigger stimulus? Obama erred in thinking that the bank bailout would free up capital for small businesses and create more jobs. The administration didn't foresee the sustained job losses, and they low-balled the stimulus package. It was a mistake, and while we should call him on it, the way to do that is to demand more. Giving up and pointing fingers will not solve anything.

There is spending in the energy bill that will help. While we may not want more offshore drilling, more nuclear power and more coal, we must fight for the good in the energy bill. No legislation ever gives us everything we want, but no energy bill will be devastating to our economy.

The Wars

Why are we silent? Other than Cindy Sheehan and other dedicated activists, the rest of us have gone silent. We marched and made noise when we had a president that could care less what we said. Now we have a president who needs our support to win, why not let him know what we want? A hundred thousand people in Washington would have a much larger impact on Obama than it had on Bush. We always make the mistake of thinking our job is over after we elect a Democrat. The truth is, with a Democrat in the White House we should increase the pressure since there is a chance they might just listen.

Many are mistaken that believe Obama pledged to get out of Afghanistan. He campaigned on finishing the job there. There has never been a mass movement around getting out of Afghanistan, so the Obama administration believes they are doing what their constituents elected them to do. The war in Afghanistan will continue until it becomes political suicide to support it. Again, if Liberals and Progressives stood up and demanded an exit from Afghanistan Obama would be forced to listen, we are his base.

While the war in Iraq is winding down, many of us would like it to end faster. We should call for a faster withdrawal of troops. We need a movement that creates a political climate for what we are for, not one that focuses on what we are against. Barack Obama can be an agent of change if we unite and call for the change we want. Calling Obama a war criminal and tearing him down accomplishes nothing. We need to unite around themes that we agree on: money for jobs, not for war; build homes, not bombs. We need to create a climate for the change we seek.

Environment

The disaster in the Gulf should be used to create a climate for green energy. We must demand an end to offshore drilling. The tragedy in the Gulf should also be a call to act against other potentially dangerous forms of energy. Are we prepared for a nuclear disaster? Wind farms and solar energy will not result in the destruction that fossil fuels and nuclear power can lead to.

Obama's support for offshore drilling, nuclear energy and "clean" coal is not ideological; it is political, and can be reversed. He would rather pass an energy bill that does not include increases in any of those options. In the current political climate Obama must compromise to get anything. While it is true that the Republicans still say no, the lobbyists make the deal and the Democrats in their pockets go along.

That has to change.

On that historic night in Grant Park, Obama also said:

The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term. But, America, I have never been more hopeful than I am tonight that we will get there.

I promise you, we as a people will get there.

There will be setbacks and false starts. There are many who won't agree with every decision or policy I make as president.

He was right, many liberals and progressives disagree with many of Obama's policies, but let us focus on what we agree on.

While it isn't a perfect bill, millions of Americans will have access to health care that didn't before, and millions more will not lose their health care coverage if they get sick.

Did you know that Obama signed legislation that forces banks to honor your lease if your landlord goes into foreclosure? I wonder if McCain or Bush would have done that?

While the financial reform legislation isn't as strong as we wanted, it is more than we would have gotten from "Keating Five" McCain.

Then there is the Lilly Ledbetter Fair Pay Act of 2009 that moves us closer to pay equity for women.

The list goes on, but too often we forget the gains and focus on the areas that we disagree on with the president.

Obama always said he couldn't do it alone; the entrenched powerful interests in Washington are not going to just surrender. We need to support him when he is doing the right thing, and create a new political climate that allows him to change his policies when we think he is wrong.

I believe that he believes in the right things, but he can only achieve what the political climate allows. We have failed to provide the political climate for the change we believe in. It is time for us to organize and seize back the momentum for change.

I hope I haven't offended any of you, if you are active and fighting for change keep going, many of you are doing more than I am. I am speaking to those who went and voted for Obama and expected him to change everything on his own. I am speaking to the people who only criticize him, and are doing nothing to help. And I guess I am asking everyone not to give up.