The Debt Ceiling

The conservative argument that raising the debt limit would inhibit economic growth and, therefore, shouldn't be done is perhaps the single stupidest thing to have been written or spoken by a human being in my lifetime.  In an era that's celebrated the excesses of idiocy (Jackass, Jersey Shore [virtually any MTV vehicle], Judd Apatow movies, my sister, hip hop and country music, the ascension of the pre-teen pseudo-porn book genre, Failbook, etc.),  I want to emphasize that the refusal to raise the debt ceiling still trumps all of these things by a wide margin.  It's so incomprehensively dumb that I'm having difficulty summoning the explanation in a manner that doesn't sound like I'm explaining the plot of Green Eggs & Ham to a golden retriever.

Okay, so, the argument goes that perpetually raising the debt ceiling enforces no legislative budgetary constraints, so congress will always raise spending levels, meaning more and more of the annual budget going to interest payments, our debt-to-GDP ratio steers into the Africa zone, etc.  Incidentally this is all correct.  The linked chart is accurate, if criminally misleading in that I believe those figures aren't adjusted for inflation.  Anyway.

Then phase two of the argument is that because raising the debt limit is no constraint on federal spending, the only way to constrain federal spending is to not raise the debt limit.  WAT?!?  You can't argue both sides.  Either the debt ceiling is or is not a passive check on federal spending.  If you say it isn't, you can't then immediately turn around and claim that it will.

But this isn't even the fundamentally stupid part.  "But Chris," you say, "the Republicans mean that the debt ceiling isn't a check on spending levels when congress can just arbitrarily raise the ceiling when they need it.  Once there's a hard, unalterable limit in place, congress will be forced to cut spending."  This is the short-bus argument, and it's retarded for two reasons.

1) Federal spending is not a tap that you can turn on and off at will, all or none, instantaneously.  There are spending obligations that cannot be revoked in anything resembling a timely fashion, certainly not timely enough to immediately halt spending by, say, April, when the Treasury estimates we'll hit that limit.  You can't just immediately cut a trillion dollars of spending by snapping your fingers.  The limit WILL be hit.

2) When we do hit the limit, and we don't raise it, this is what happens.  Let me put it in some familiar context:  Do you remember the 2008 crash?  The whole thing about the derivative debt fiasco, fraudulent credit ratings, write-downs forcing some of the world's biggest banks to declare bankruptcy overnight, forcing even Republicans to support TARP and multi-billion dollar bailouts, etc?  And how it brought the stock markets crashing down, killed retirement accounts, yadayadayada?  Let's have a quick refresher course.

Housing bubble leads to lots of mortgages, given to people with questionable resources, but seem affordable because rising housing prices artificially inflates the equity value and keeps a variable interest rate low.  Wall Street discovers that if they bundle mortgages together, then chop them up into chunks again, they can trick credit agencies into rating them AAA while claiming absurd rates of return.  Wall Street gobbles up mortgages and sells them off as collateralized debt obligation vehicles (CDO) to any pension fund manager, mutual fund, institutional investor, and other bank who'll throw money at at.  It's all AAA debt.  Housing bubble bursts.  Home prices crash.  Bad mortgages have their interest rates increased.  Homeowners default on payments.  CDO revenue stream starts drying up.  Panic.  Credit agencies forced to reassess CDOs at lower ratings.  Triggers reserve clauses at banks, who now A) need to have more cash on hand to balance the bad debt and B) need to write off the loss of market value.  Banks start to go bankrupt.  CDO values nosedive.  Anbody holding a CDO is now sitting on a pile of steaming shit and doesn't know what's inside.  Mutual funds drop 45%.  State and institutional pensions experience catastrophic loss.  Stock market crash.  Banks disappear.  Investment vehicles underwritten by those banks disappear.  Global fucking meltdown.  Etc.

Ok, so this happened because CDO/CMOs, a relatively modern invention, had a sudden credit-worthiness shock, which set off the domino chain.

Now imagine how many investors worldwide, how many banks and firms, pensions and IRAs, are holding US Treasury bills right now.  Way more than were holding mortgage-based CDOs, right?  And guess what happens to the AAAAAA++++++!!!!!111eleven credit rating of United States paper when we hit the debt ceiling and have to start missing interest payments and defaulting on government-issued debt.

Take a wild fucking guess.

And it's not even just about megamclargehuge financial institutions and the circle-jerk of interconnected debt and macroeconomy.  When we hit the debt ceiling, what stops getting paid out first?  Ok, interest on debt, covered that.  What about...social security checks?  What about medicare reimbursement?  Military salaries?  That anybody could seriously consider federal default is a sign of fucking derangement.  Holy fucking shit.