WASHINGTON – At a Capitol Hill press conference yesterday, Rep. Michele Bachmann sought to downplay a failure to raise the Treasury Department’s borrowing authority when it expires Aug. 2.
“This is a misnomer, that I believe that the president and treasury secretary have been trying to pass off on the American people and it’s this,” Bachmann, who’s also running for the Republican presidential nomination, said. “If Congress fails to raise the debt ceiling by $2.5 trillion that somehow the United States will go into default and we will lose the full faith and credit of the United States. That is simply not true.”
“It’s just nonsense,” said Stan Collender, a partner at Qorvis Communications and a former House and Senate budget staffer with decades of experience, of Bachmann’s comments. “She has no idea what she’s talking about.”
Before dismissing Collender as a biased source, consider this: earlier this year, Bachmann invited Collender to speak about the federal budget before the House tea party caucus that she co-chairs.
Bachmann was promoting a bill, co-sponsored with fellow House Republicans Louie Gohmert and Steve King, that would prioritize government payments to make sure America’s creditors and soldiers would be first to get their checks in the event that the debt ceiling isn’t increased.
“Do they really want to tell Medicare and Social Security recipients they’re not getting paid?” Collender asked.
At yesterday’s press conference a reporter asked Bachmann who would not get paid in the event of a default. She evaded the question and sought to imply that Social Security and Medicare wouldn’t be touched.
According to the Bipartisan Policy Center, it’s true that debt payments, defense spending, Social Security and Medicare account together would account for slightly more than all of the revenue coming in each month, meaning that Bachmann’s priorities could be funded. All other federal government spending, from food safety to NASA would have to shut down immediately.
But it’s not clear that the government possesses an efficient payment mechanism to prioritize payments, said Collender.
“At least initially, you pay in the order in which things are presented,” said Collander. “The only control is to not issue checks, but it’s not easy to do because it’s never been done before and the Treasury and the Office of Management and Budget have to tell agencies which bills to not pay.”
Then there are constitutional issues. Congress has already made spending decisions codified into law through the appropriations process. Collender said there’s no way, absent another act of Congress, to distinguish between Congress’ other priorities.
Even if government spending were to be drastically cut after the Aug. 2 deadline to raise the debt ceiling, and Bachmann ‘s plan to pay creditors was done, Collender said it was almost a certainty that ratings agencies would downgrade U.S. government debt because the of the increased chance that bondholders would not be paid in the future.
Pension funds are required to hold vast portfolios of triple-A rated securities, including Treasury bonds. They would have to shed their holdings in a vast fire sale once a downgrade took place, said Collender. Intra-bank lending would also dry up over night because banks use Treasury bills as collateral.
Interest rates would shoot up overnight and an economic calamity would be inevitable, said Collender, comparing the implications to the financial crisis.
“It would make what happened in 2008 look like child’s play,” said Collender.