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Geithner and “That Guy”

January 26, 2011

By Jim Ulacrum

A couple weeks ago, Treasury Secretary Timothy Geithner sent a letter to Senator Harry Reid urging Congress to take swift action to raise the national debt ceiling. The letter is several paragraphs long, and is publicly available on the Treasury website. One of the most noteworthy parts of Geithner’s letter is his list of “specific consequences” that would occur if the United States were to refrain from raising the debt ceiling:

  • The Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.
  • A default would impose a substantial tax on all Americans.  Because Treasuries represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs.  Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply.  Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.
  • Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.
  • Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including:
    • U.S. military salaries and retirement benefits;
    • Social Security and Medicare benefits;
    • veterans’ benefits;
    • federal civil service salaries and retirement benefits;
    • individual and corporate tax refunds;
    • unemployment benefits to states;
    • defense vendor payments;
    • interest and principal payments on Treasury bonds and other securities;
    • student loan payments;
    • Medicaid payments to states; and
    • payments necessary to keep government facilities open.

This list is noticeably similar to the kind of letter that many people have received from debt collectors in reference to overdue obligations—the “pay us or else” notice. Sadly, it is likely that Geithner is correct in his assessment of these consequences. Failure to raise the debt ceiling promptly will almost certainly have far-reaching negative results.

Timothy Geithner claw

Timothy Geithner attempting to claw back what's left of America's middle class wealth

However, Geithner’s letter fails to address the most important aspect of raising the debt ceiling. His perspective is perhaps skewed by his closeness to the slash-and-burn school of economics represented by the Federal Reserve and the big investment banks of Wall Street.

Apparently, long-term fiscal planning has become a lost art in the federal government, but the Treasury Secretary’s responsibility doesn’t end with making sure the ship doesn’t sink on his watch. Geithner has laid out the short-term consequences of failure to raise the debt ceiling fairly well, but the long-term consequences of continuing to raise the debt ceiling are also worthy of discussion.

Nearly everyone knows “that guy,” the one who lives far beyond his means and appears to have no sense of his financial future. He’s the friend or relative with so much debt that, on any given day, he can’t accurately account for it all. If there is a payment plan available for something he wants, he will buy it, even if he cannot afford it in the long run. He pays his household bills with a credit card and considers himself to be on solid financial ground if he can make his minimum payments on time, even if it means taking out payday loans to do it. A budget is a foreign concept to him…


One Comment leave one →
  1. October 8, 2011 6:03 pm

    geitner looks like gonzo. they both have that hooked nose. gonzo looks smarter.

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