Writing in the Wall Street Journal, Maury Harris, chief U.S. economist for UBS Investment Bank, and Drew T. Matus, senior U.S. economist, UBS Investment Bank, walk us through the likely consequences of a government default:
“Even a temporary default would eliminate the safe and liquid nature of the U.S. Treasury market, harming this country’s ability to exercise its power, to the detriment of the U.S. and the global economy….
The impact of a U.S. Treasury default could make us nostalgic for the market conditions that existed immediately after the failure of Lehman Brothers…. it would not simply be a question of whether Treasury investors would get their money; eventually they would. It would be a question of whether the U.S. would lose something that made it special. The answer would be yes and the consequences for U.S. growth could be significant.”
For those who have forgotten, when Harris and Matus warn that the chaos of default could make us nostalgic for the post-Lehman timeframe, they refer to those panicked days on Wall Street in the fall of 2008, the days that scared President Bush into warning that “this sucker could go down,” and that so humbled Henry Paulson that he literally got down on his knee to beg Nancy Pelosi for help. The consequences of default, Harris and Matus warn, could make all of that seem minor in comparison.
On the brighter side, the two private-sector economists also write that “we still do not view government default as a likely outcome” and predict “a near-term resolution of this issue.” Perhaps because they understand the dire consequences of default better than most, they don’t believe that sane people will allow it to occur.
In that, I think they are naive. Their optimism assumes, among other things, that leaders in Washington remain in control of events, and I have my doubts about that. Through their own miscalculation and overheated rhetoric, they seem to have nailed shut every escape route and have only one path, the path of confrontation, still open to them.
For example, when House Majority Leader Eric Cantor walked out of deficit negotiations yesterday, demanding that tax hikes be taken off the table, it was not a calculated decision on his part. The term “decision” implies that Cantor could have chosen to stay, but no such choice was possible. His political identity and power flow almost entirely from his opposition to taxes, and he knows that the moment he wavers in that opposition, he will be stripped of his power and replaced by someone of sterner faith. To a political movement built upon the rejection of compromise, compromise is suicidal.
Slowly, that realization seems to be sinking in.
As Politico puts it, “having picked this risky fight over increasing the debt limit, Republican leaders are genuinely uncertain — even frightened — that they don’t know where their votes will come from to avoid the threat of default.” That’s because they don’t control their followers; their followers control them.
In “Guns of August,” her classic study of the origins of World War I, Barbara Tuchman documented how a conflict that nobody wanted and nobody thought possible became terrible reality nonetheless.
“War,” she wrote, “is the unfolding of miscalculations.” As she described it, political and military leaders who felt trapped by their own domestic mythologies failed to understand that leaders in other countries were just as trapped by mythologies of their own. As a result, what should have been unthinkable had in fact become inevitable.
I hope I’m wrong in seeing certain parallels, but August looms.
– Jay Bookman