Sunday, July 17, 2011

The Coming Tsunami

“A teenage girl had her parents’ credit card taken away because she was generating too much debt on it. She pleaded that she would cut her spending if she could have the credit card back, but to know avail. Now she sits at the dinner table, tears streaming down her cheeks, explaining all the many disasters that will occur in her life if she can't have her credit card back.”

- Anonymous Comment taken from a Huffington Post article.

This is what the debt ceiling debate has come down to: mommy and daddy tearing up their daughter’s credit card because she charges too much on it. As ridiculous as this quote may seem to those who are actually informed on the subject, it personifies the sentiment of a good portion of Americans and, sadly, a majority of House and Senate Republicans. The government has spent way too much money and now it is time to take away its credit card.

The correct analogy, however, goes more like this. The teenage girl goes on a spending spree and when her parents get the credit card bill, they refuse to pay it and proceed to tear it up. The “due date” for this credit card bill is August 2nd. Astonishingly, a large number of lawmakers are prepared to tear up this credit card bill and refuse to pay it, hoping to teach their fellow lawmakers how to be responsible. Of course if, in the process of “teaching” their fellow lawmakers how to be responsible, the economy plunges into a recession or, worse, depression, oh well. Tough love, right?

That’s the reality that awaits us unless enough common sense seeps into the heads of these lawmakers. For the simple truth is this isn’t about taking away the credit card of a wayward government; that’s what budgets are for. This is about paying the bills that are due and honoring your obligations as a nation. Period. End of discussion.

And to address the other absurd belief that the government can just live off of the money it takes in and continue to pay what bills it can with that amount, thus “honoring” the interest on the debt, social security payments, paying the troops, etc, that won’t work either. Again, to use the credit card analogy – but in a way that makes sense – imagine you have four credit card bills, and you have just enough money “on hand” to pay three of them without raising the amount you can borrow to pay the other. So you pay those three and disregard the fourth. Anybody work for a bank lately? Wanna know what happens to your credit score if you try that “ingenious” tact? Your credit score goes right down the tubes. It matters not that you “honored” the first three bills; by defaulting on the fourth, you ostensibly shoot yourself in the foot. It’s that simple. When your bills come due, you don’t pick which ones to honor and which ones to default on; it’s all or nothing.

The scary part is that we may not have to wait until August 2nd to wreck this train. Days before the deadline, assuming no deal has been struck, markets will begin to tank, as nervous investors begin to pull their money out. The Lehman Brothers scenario is a fitting comparison. The shockwaves that reverberated throughout the markets after Lehman’s collapse started a domino effect that eventually led to the massive sell-off on Wall Street that caused the Dow to lose half its value. As bad as that was, a default on the debt would be even worse. With all the hyperbole about how bad America’s debt problem is, the interest we pay on our debt is a fraction of what most of Europe – especially Greece – pays.

Of course all that changes if the misfits in Congress have their way. Think the interest we pay on our debt is high now? Try looking at it when the rates for borrowing go up two to three times. My guess is we have until Wednesday or Thursday the week before to avoid a catastrophe. Beyond that point, the damage will irreversible. It might well take years to fully recover.

Everyone always looks at the tsunami wave sweeping across the shore; few, if any pay any attention to the water receding from the shoreline moments before the wave arrives. The prevailing logic goes like this: if you wait until the waters recede to run away, it’s already too late to keep from drowning. The hope here is that we won’t have to wait until the waters recede to act responsibly; that sanity may yet prevail. If we fail to do the right thing, the tsunami that follows may well drown us all.

1 comment:

steve said...

Arguments between Congress and the WH over the debt ceiling have occurred since we first started having a debt ceiling, with one party using it like a hostage to extort its demands. What's scary about this one is that the lunatic fringe of one party is holding that party hostage and actually even wants to see the economy go south so they can continue their corporate shock doctrine of using economic and natural disasters to eliminate democratic systems, establish more corporate control of government, and return us to the Gilded Age of robber barons, abject poverty, strike breakers and rampant greed.