Wall Street Laughs At Pat Toomey’s Debt Ceiling Plan

Ezra Klein says Wall Street is not buying Pat Toomey’s claim that markets won’t mind if we breach the debt ceiling, so long as we keep making our coupon payments:

Would the markets really be so calm in the face of the United States government doing something it has never done before and purposefully breaching the debt ceiling? The investors I asked pretty much laughed in my face.

Mark Spindel, chief investment officer for Potomac River Capital, didn’t mince words. Over e-mail, I asked him whether we could breach the debt ceiling but keep paying off bondholders without causing markets to flip out. “Ezra,” he wrote back. “This is insane.

“If Congress (and to a lesser extent the President) continue to appear as dysfunctional as they do, then the markets will be bothered.”[...]

Thomas Gallagher, a principal at the Scowcroft Group, also focused on the effect on the economy. “Running the government on a cash basis would have a bigger impact that the cliff,” he wrote in an e-mail. “The cliff was almost 5% of GDP, and keeping the debt ceiling where it is would produce a drag of about 7%.” That is to say, the economic damage of breaching the debt ceiling, even if all went well, is about 40 percent more than going over the fiscal cliff, and that’s before you factor in the reaction from the financial markets.

Lee Sachs, a Wall Street veteran, was assistant Treasury secretary for financial markets from 1999 to 2001 and a counsel to Treasury Secretary Timothy F. Geithner from 2009 to 2010. As such, he’s a guy who has actually had to deal with the financial markets when Washington began terrorizing them. His e-mail response to my question could best be described as bemused. “As long as we are through the looking glass ” he began.

“The analogy I would use is if you were considering lending money to or buying the bonds of a company that was paying interest on outstanding debt, but wasn’t paying its employees or suppliers in an effort to save cash, would you make the loan or buy the bond without some sort of substantial yield premium?” He asked. That’s a particularly important point when it comes to government debt as we have to “roll over” hundreds of billions of dollars in debt over the course of each month. The idea that the market will treat those auctions as normal is optimistic, to say the least.

Comments

  1. John says:

    Vs. your solution, which strangely enough is, “Throw more money at it” (where have we heard that one before?), at least he’s thinking.

    • Jon Geeting says:

      My solution is to abolish the statutory debt ceiling and stop letting politicians play games with the country’s credit rating. If members of Congress want spending cuts, then they should propose spending cuts in the budget. Don’t mandate certain spending levels and then deny Treasury the legal authority to cut the checks. That’s insane.

      • John says:

        That’s not a plan.

        Jon, you hate the law, we get it, you don’t need to keep repeating yourself. But it is the law, and until such time as the law changes you have to plan for every contingency.

        • Jon Geeting says:

          It is a plan. House Democrats have proposed a bill that would do this, and the President would sign it. All that’s needed is for Republicans to do the patriotic, responsible thing and stop playing games with the country’s credit rating.

  2. John says:

    Ok I’ll give you that, that’s planning for one contingency. You still need a plan for if the law doesn’t change.

    Proper planning calls for laying out every contingency, not just one or two.

    • Jon Geeting says:

      If the law doesn’t change, you play chicken with the Republicans, insist you won’t negotiate and resist their efforts to give themselves leeway on a clean increase, such as the prioritization scheme. You don’t give them any outs.

      • John says:

        Ok, then what’s your plan if they don’t chicken out either?

        I”m not being a smart ass here Jon. This is what planning is, you plan for every contingency.

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