Although it is showing faint signs of uneasiness, Wall Street seems convinced that our lawmakers are not going to let the United States go into default, whether through ideological rigidity or political ineptitude. And if it does happen, Wall Street is convinced that it will be brief and perhaps not too costly.
Wall Street remembers the last time Congress got all shirty and self-righteous about matters of high finance. In 2008, lawmakers huffily rejected the $700 billion bailout for the financial system. The market promptly fell 778 points, and foreign markets also fell sharply.
The chastened lawmakers quickly scurried back to Washington and passed the financial rescue package. Unfortunately, many of the freshmen House Republicans missed that lesson, and some of them — notably, the tea party movement believers — think a short default might not be such a bad thing, a cold bucket of reality in the face.
Let’s say, however, the impasse is unresolved. Republicans say no tax increases; Democrats say they’ve cut spending enough. Meanwhile, the Treasury begins skipping payments on ever-larger and ever-more-important debts.
Then there will be another seat at the negotiating table of President Barack Obama, his treasury secretary, and the Democratic and Republican congressional leaders — our creditors.
They will have a subtle but significant say in our domestic economic policies. China, the United Kingdom, Japan, the European Union central banks, the International Monetary Fund and assorted sovereign wealth funds don’t care about Grover Norquist’s anti-tax pledge or tea party promises to voters or the sanctity of the safety net. They just want their money, and they will insist subtly and politely — after all, we’re still the world’s largest economy — on a plan to repay them.
That plan may look very much like the fairly drastic recommendations of the president’s debt-reduction commission — large spending cuts and large tax hikes.
Nobody is saying we’re a basket case like Greece. But look at some of the terms that international lending institutions forced on Athens as the price of two bailouts — deep cuts in public-sector pay and pensions, increases in the value-added tax, a special tax on large pensions and a 10 percent increase in luxury taxes and taxes on alcohol, fuel and tobacco. There’s more, but you get the idea.
We are not even close to those kinds of draconian measures, but the point is, the longer a default lasts, and if we delay the necessary decisions to stem the flow of red ink, the greater likelihood someone else will make them for us.