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http://www.nytimes.com/2013/09/30/opinion/krugman-rebels-without-a-clue.html?ref=paulkrugman
This may be the way the world ends — not with a bang but with a temper tantrum.
O.K., a temporary government shutdown — which became almost inevitable
after Sunday’s House vote to provide government funding only on
unacceptable conditions — wouldn’t be the end of the world. But a U.S.
government default, which will happen unless Congress raises the debt
ceiling soon, might cause financial catastrophe. Unfortunately, many
Republicans either don’t understand this or don’t care.
Let’s talk first about the economics.
After the government shutdowns of 1995 and 1996
many observers concluded that such events, while clearly bad, aren’t
catastrophes: essential services continue, and the result is a major
nuisance but no lasting harm. That’s still partly true, but it’s
important to note that the Clinton-era shutdowns took place against the
background of a booming economy. Today we have a weak economy, with
falling government spending one main cause
of that weakness. A shutdown would amount to a further economic hit,
which could become a big deal if the shutdown went on for a long time.
Still, a government shutdown looks benign compared with the possibility
that Congress might refuse to raise the debt ceiling.
First of all, hitting the ceiling would force a huge, immediate spending cut,
almost surely pushing America back into recession. Beyond that, failure
to raise the ceiling would mean missed payments on existing U.S.
government debt. And that might have terrifying consequences.
Why? Financial markets have long treated U.S. bonds as the ultimate safe
asset; the assumption that America will always honor its debts is the
bedrock on which the world financial system rests. In particular,
Treasury bills — short-term U.S. bonds — are what investors demand when
they want absolutely solid collateral against loans. Treasury bills are
so essential for this role that in times of severe stress they sometimes
pay slightly negative interest rates — that is, they’re treated as being better than cash.
Now suppose it became clear that U.S. bonds weren’t safe, that America
couldn’t be counted on to honor its debts after all. Suddenly, the whole
system would be disrupted. Maybe, if we were lucky, financial
institutions would quickly cobble together alternative arrangements. But
it looks quite possible that default would create a huge financial
crisis, dwarfing the crisis set off by the failure of Lehman Brothers
five years ago.
No sane political system would run this kind of risk. But we don’t have a
sane political system; we have a system in which a substantial number
of Republicans believe that they can force President Obama to cancel
health reform by threatening a government shutdown, a debt default, or
both, and in which Republican leaders who know better are afraid to
level with the party’s delusional wing. For they are delusional, about
both the economics and the politics.
On the economics: Republican radicals generally reject the scientific
consensus on climate change; many of them reject the theory of
evolution, too. So why expect them to believe expert warnings about the
dangers of default? Sure enough, they don’t: the G.O.P. caucus contains a
significant number of “default deniers,” who simply dismiss warnings about the dangers of failing to honor our debts.
Meanwhile, on the politics, reasonable people know that Mr. Obama can’t
and won’t let himself be blackmailed in this way, and not just because
health reform is his key policy legacy. After all, once he starts making
concessions to people who threaten to blow up the world economy unless
they get what they want, he might as well tear up the Constitution. But
Republican radicals — and even some leaders — still insist that Mr. Obama will cave in to their demands.
So how does this end? The votes to fund the government and raise the
debt ceiling are there, and always have been: every Democrat in the
House would vote for the necessary measures, and so would enough
Republicans. The problem is that G.O.P. leaders, fearing the wrath of
the radicals, haven’t been willing to allow such votes. What would
change their minds?
Ironically, considering who got us into our economic mess, the most
plausible answer is that Wall Street will come to the rescue — that the
big money will tell Republican leaders that they have to put an end to
the nonsense.
But what if even the plutocrats lack the power to rein in the radicals?
In that case, Mr. Obama will either let default happen or find some way
of defying the blackmailers, trading a financial crisis for a
constitutional crisis.
This all sounds crazy, because it is. But the craziness, ultimately,
resides not in the situation but in the minds of our politicians and the
people who vote for them. Default is not in our stars, but in
ourselves.
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