GOP Threatens Economic 9/11 over Debt Ceiling
"The people who are threatening not to pass the debt ceiling are our version of al Qaeda terrorists.," former Bush Treasury Secretary Paul O'Neilldeclared in April, adding, "They're really putting our whole society at risk by threatening to round up 50 percent of the members of the Congress, who are loony, who would put our credit at risk." He should know, because he was there on 9/11. Despite Osama Bin Laden's goal of bankrupting the U.S., the economic damage he inflicted pales in comparison to the catastrophe should Republicans fail to increase the debt ceiling and thus trigger a U.S. default.
The horrific attacks of September 11, 2001 claimed 3,000 lives. The long term costs of fighting AL Qaeda have been estimated at $3 trillion and higher, including the disruptions wrought on the domestic economy, the wars (of necessity and choice) and the heightened security triggered by the terrorist attacks. (It's worth noting that the current Republican leadership voted for all the extra spending and debt ceiling increases even as George W. Bush became the first president to cut taxes during wartime.)
But the immediate impact of the blow to the American economy was short-lived. By the end of 2001, the Dow Jones had already recovered from the 1,400 point (15%) drop it suffered in the days after 9/11. The first Bush recession, which officially started in March 2001 and ended that November, deepened only slightly. Unemployment jumped by roughly half a point to 5.5%. GDP, which contracted in the third quarter of 2001, grew once again in the last three months of the year.
Now, with the U.S. economy limping along at an anemic 1.3% growth rate, Republican obstructionists are threatening a financial calamity far worse than 9/11.
That's the word from Credit Suisse. While putting the likelihood of a U.S. default at only 1%, the new Credit Suisse analysis warned of "massive ramifications" if it that doomsday scenario comes to pass:
U.S. stocks could tumble 30% over the following six months to a year...the U.S. economy could contract a total of 5% during the next six months to a year as well, said Luca Paolini, a research analyst at the Swiss investment bank and an author of the research report.
While Paolini fretted that "the fallout would be far worse than after Lehman's default," Pacific Investment Management Co.'s Mohamed El-Erian warned of "massive consequences" a credit downgrade for the United States.
Yields on longer-maturity Treasuries may rise relative to those with earlier maturities on a rating cut amid concern of worsening credit quality, he said.
"It's undeniable that this whole debacle is leading to lower growth, higher unemployment and more erosion of the U.S. in the standing of the global economy," El-Erian said.
The effects from the loss of America's AAA rating would ripple throughout the U.S. financial system. While nervous stock markets shed recent gains, lenders are showing signs of slowing credit even as companies prepare for the worst. A downgrade could cost the Treasury $100 billion a year in higher interest payments, wiping out any deficit reduction coming from Congress. As the Wall Street Journal reported, states and local governments would feel the pain as well:
Moody's Investors Service said it will review for possible downgrade the Aaa ratings of 177 agencies, including 162 local governments in 31 states, 14 housing finance programs and one university, affecting a combined $69 billion of outstanding debt.
The governments include 66 cities, 53 counties, 29 school districts and 14 special tax districts, with the heaviest concentrations in Virginia and Massachusetts.
Last week, Moody's similarly placed the Aaa ratings of Maryland, New Mexico, South Carolina, Tennessee and Virginia under review for possible downgrade, affecting approximately $24 billion of debt. The municipal bond market includes about $2.95 trillion of bonds in total, according to Federal Reserve Bank estimates.
Then there's the small question of what happens when the federal government has to immediately slash over 40% of its spending if the August 2 deadline to raise its borrowing authority is missed.
The Bipartisan Policy Center provided an answer. Even if the Treasury Department succeeds in paying bond holders after the drop dead date, spending on virtually everything else would be gutted.
It shows that in August, the government could not afford to meet 44% of its obligations. Since the $134 billion deficit for that month couldn't be covered with more borrowing, programs would have to be cut.
If Social Security, Medicare, Medicaid, unemployment benefits, payments to defense contractors and interest payments on Treasury bonds were exempt, that would be all the government could afford for the month. No money for troops or veterans. No tax refunds. No food stamps or welfare. No federal salaries or benefits.
On an annualized basis, the cut in spending alone is a 10 percent cut in GDP, BPC scholar Jay Powell told reporters..."There is no way to avoid really serious pain," Powell said.
Mercifully, that level of serious pain remains unlikely. While House Speaker John Boehner will likely win over enough Tea Party converts with the addition of a balanced budget amendment to his debt plan, that scheme is dead on arrival in the Senate. Nevertheless, Congress will still likely pass and President Obama will sign some form of agreement to raise the debt ceiling.
But even that good news will be bad news for the fragile U.S. economy. With spending cuts ranging between $1.8 trillion and $2.2 trillion over the next decade, the respective Boehner and Reid plans mean, as TPM lamented, "whatever the outcome of the debt vote, the Age Of Austerity is here." Bob Greenstein of the Center on Budget and Policy Priorities concluded that Boehner's plan "could well produce the greatest increase in poverty and hardship produced by any law in modern U.S. history." And even with Boehner's plan, the ratings agencies might downgrade America's credit, a development the House Speaker laughably claimed was "beyond my control."
Regardless, the potential economic calamity would be quite an achievement for the Republicans Paul O'Neill described as "our version of Al Qaeda terrorists." After all, not even Osama Bin Laden could do that.