Q&A: New York Times Reporter on Next Steps in Government Debt Limit Debate

BY David Coles  May 16, 2011 at 3:37 PM EST

The United States government is expected to officially hit its $14.3 trillion borrowing limit Monday, even though the Treasury Department says that it can now meet its obligations until at least early August. The extension was due to higher-than-anticipated federal tax revenues in April. Earlier this month, Treasury Secretary Timothy Geithner sent a letter to Congress, where Republicans and Democrats remain locked in a standoff over the issue, warning lawmakers that failure to raise the legal debt ceiling by Aug. 2 “would have a catastrophic economic impact.”

In a conversation with the NewsHour, New York Times finance and banking reporter Binyamin Appelbaum laid out what some of those potential consequences might be, as well as what tools Treasury has to avert a technical default on the government’s debts, even in the absence of a debt-ceiling deal.

What is the debt ceiling and how did it come about?

It is basically the limit of the national credit card, the maximum amount of money that the U.S. can borrow at any one time. Congress put one in place during the first World War. It was much smaller, and has steadily increased as the amount of money we spend and the amount of money we need to borrow has steadily grown. Every month, the federal government spends more than it takes in; the question is, how much
more?

What are some of the means that Secretary Geithner says he has at his disposal to keep the government functioning for a period, even if the debt ceiling is not lifted?

It is important to understand that the government hits the debt ceiling on May 16. So as of Monday the government can’t increase the total amount borrowed. That means the government needs to find a $100 billion a month to pay its bills. Secretary Geithner says he can find that money without borrowing, The government borrows in different ways. First, it borrows to run the government. That is biggest portion. But it also borrows from state and local governments. It does this to help them. It borrows and then makes payments with interest to state and local governments. It doesn’t use that money for spending, but that debt uses some of the debt ceiling capacity. So the secretary says he will stop that borrowing and use it to pay bills.

The federal government also borrows money from its employee pension funds. Again, it does it as a favor, but any money borrowed there doesn’t help the government pay its bills. So Geithner says he will suspend that and use that money to pay its bills.

Finally the government has a bank account with the Federal Reserve. It is several billion dollars. They are spending that down, basically living on savings, just as someone who has become unemployed does.

Are there some government assets that Treasury might sell?

Treasury says there are a number of things it does not want to do. Part of that is to sell assets owned by the federal government. For instance the U.S. has a large collection of gold. It has an oil reserve. During the financial crisis, the government bought $100 billion worth of mortgage-backed securities. And more than $400 billion of student loans. The government has an investment portfolio. Some Republicans say, “why not sell that off?”

But Treasury says there are three reasons not to sell. First, it says that to sell them off quickly means it would become a fire sale. The government’s gold is worth roughly $400 billion at current prices. But that is true only in the case that it is possible to sell that much gold onto the market. It says that doing so quickly will drive down prices, so that taxpayers will not get full value.

As for the mortgage-backed securities, Treasury says it is selling only some of them each month, that to do otherwise they will take a loss on them, and that that is not good for the taxpayer.

The other reason not to sell is that the government holds these assets for a reason. Though the country is not on a gold standard any more, having a gold reserve provides comfort. It holds oil as a strategic reserve. And the government decided last year that having it provide student loans was a better approach than have private sources do it. So these things were all done for policy reasons, and selling off those assets would ignore those concerns.

The third reason not to sell assets, they say, is that you just don’t solve the problem that way. It would only give Congress another couple months to fret about raising the ceiling. Treasury says we aren’t going to buy them another couple of months to keep on dilly-dallying.

What are the dangers of raising the debt ceiling?

The long-term danger is that the American government ends up borrowing more money than it can repay. Or, more immediately, that they run out of people willing to lend it money and they will need to raise the rate [to entice lenders.] Right now the government goes out and borrows $20 billion or $30 billion a month from lenders. People and countries and foreign nations line up to do so, for basically the lowest interest rates in the world. The concern is that some of those people will decide that they have loaned enough or will become concerned and demand higher interest rates so that the government has to pay more. So the more the government borrows, the closer you get to a situation where borrowing becomes more expensive.

What are the dangers of failing to raise it?

Those dangers are much more immediate because the government has already promised to spend this year much more money than it has. If it can’t borrow the difference, it can’t meet its obligation. There is … a lot of concern that investors would become immediately concerned. So the situation is that you get to the same place [as you do with raising it], but much more quickly.

Treasury Secretary Tim Geithner recently painted an even bleaker picture. He says that investors would treat that as a U.S. default on its obligation, that it would be a new financial crisis. The government’s Treasury bonds are regarded as the safest in the world, so that would create a real crisis. Those Treasuries are a kind of bedrock for the global financial system. They are a kind of measure. There is virtually no risk to you if you buy a Treasury bond. But if Treasuries are no longer regarded as risk free, it disrupts the [global] system of measurement. And if that forces people to take vast amounts of money now in Treasuries and put it somewhere else, if investors become at all concerned, the consequences of that are extremely dire. Geithner said in all probability it would create a greater [financial] crisis than the one we just went through.

Are there also dangers in running out the clock, that is, of running right up to the deadline?

Yes, there are sort of two dangers. The first is that it doesn’t need to be a crisis to become very expensive for taxpayers. Any increase in the interest rate, even a mild adjustment, would cost hundreds of millions of dollars because the amounts of money the government borrows are so vast. Financial markets would become worried and charge more.

The second is a broader danger — that is that this could be a destabilizing event for the recovering economy. We want businesses to be willing to make investments or to hire new employees, and if you start to create fear, maybe businesses stop making those investments. That can spill out and stall an economic recovery.

How much of this argument is fiscal and how much is political?

They are intertwined to a point. It is clear in a fiscal sense that it is dangerous to keep raising the debt ceiling. But at some point refusing [to raise it] has the same consequence as raising it. So to some extend the question is, how do you balance the two? And that is where the political aspect comes in, as to how to do that.

There is no escaping the reality that this is unsustainable. And that stopping cold turkey would have disastrous consequence. So the question is how do you find a way to navigate between those two.