Today, the US federal government shut down. Obviously, that's not ideal-- working federal infrastructure is kind of a good thing. But it's not the end of the world; the long-term impact is mostly that we look like a banana republic. Functioning countries don't shut down their governments. And withholding funding to the entire government because you don't like a law that was democratically passed isn't adult behavior and shouldn't be condoned. But this post is about consequences, and the consequences of shutdown are annoying but not catastrophic-- the real fear for me is the coming fight over the debt limit. Because I honestly get the sense that the Tea Party people don't understand the implications of defaulting on the debt, and that's a terrifying proposition.
The issue, I think, is that the Tea Party neanderthals don't understand the basics of the banking system. In not just American, but global, finance, US government debt is the ultimate safe asset. It's used to collateralize all manner of loans, and is essentially as liquid as cash: the market for auto loans, credit card receivables, mortgage-backed securities, or corporate debt might dry up, but the US government has always been a perfectly safe credit risk. This makes a lot of sense-- when you borrow in a currency that you can print, you can't exactly default (which doesn't mean that deficits never matter, but that's another story), unless you deliberately stop paying your bills. Which is essentially what the Republicans are threatening at this point if they don't get their way on sabotaging the health care law. And if banks, companies, and every single entity that holds Treasury bills on their books finds that their safest asset isn't liquid anymore, that's a catastrophe with consequences that we can't foresee. Just for comparison's sake, subprime loans were a smallish portion of a sizable but not enormous market. Treasuries, by contrast, are almost a $17 trillion market, over 10 times the size of the subprime market in the US in 2007.
But the Tea Party doesn't seem to get this. When he was confronted with the consequences of a default, Rep. John Fleming of Louisiana had this gem, "Economists, what have they been doing? They make all sorts of predictions. Many times they're wrong, so I don't think we should run government based on economists' predictions." No, if you believe Fleming, we should run government based on the whims of the nut fringe that he's a part of. But the comment is really scary for what it implies about the mindset of the Tea Party-- like suicide bombers, they don't fear death, and that makes negotiating with them impossible. The terrifying thing about suicide bombers and kamikaze pilots is that normal deterrents don't work on them; when death is the endgame, either because they think it's desirable or because they think their God will love them in the afterlife, they'll never lose a game of chicken. And that's terrifying in this case because backing down lets them get their way by default. If normal people realize default is an unacceptable consequence, the crazies will always get their way because they're willing to take down the entire global economy if they don't get what they want; it amounts to rule by suicide vest.
So, at this point, I'm not even sure what the endgame is. The story was supposed to be that Wall Street rode in to save the day; banks throw enough money at Republicans (and Democrats) that when they talk, both sides at least listen. And even if my views aren't aligned with Wall Street's in a lot of cases, the best thing you can say about them is that they're rational; there are bankers that like the ACA, there are bankers that dislike it, but there aren't any bankers that think that defaulting on the debt to get rid of the ACA is an acceptable action. But the Tea Party won't even listen to Wall Street; their constituency is the real fringe, and those people don't like Wall Street much more than the Occupy Wall Street types do. In this case, that's REALLY terrifying because there's no one to talk sense into these people; they look legitimately ready to collapse the world economy to get what they want. And giving in to their gambit might be even worse.
