Geithner's Debt Letter To Sen Michael Bennet: Trouble Without Solutions

Treasury Secretary Timothy Geithner should be the Administration’s standard bearer as it negotiates furiously to raise the debt ceiling. He sent another one of a series of letters to members of Congress in which he warns that if the statutory debt limit is not raised, the US government’s reputation in the capital markets will be ruined. In a missive to Sen Michael Bennet (R-UT), he argued that an American sovereign default would almost certainly cause a double-dip recession. Geithner, oddly, does not make a single recommendation about how his goal should be accomplished. This comes as the US is about to reach its $14.294 trillion debt ceiling.

The theory behind Geithner’s recession argument seems sound, and if it is he ought to have offered more than a warning. Something along the lines of a set of detailed solutions is called for, since Geithner is the primary financial officer and economic spokesman for the Administration. Every time he warns without a plan of action, he appears to be more of an alarmist and less of an activist. Earlier this week, Geithner said the US was on a course which would damage its ability to pay for entitlement programs. His comments were based on the annual reports from the trustees of the Social Security and Medicare funds. Changes in demographics and a slow recovery of the economy will cause the Social Security fund reserves to run out in 2036 and the Medicare fund in 2024.  The odds that he is right are as good as the odds that anyone is, so he gave up an opportunity to develop a policy to make the funds whole.

Geithner says that the short-term health of the American economy will be rapidly ruined if Congress does nothing about the debt ceiling. Federal government debt rates set the rates for all other borrowing, he points out. Car loans, home loans, and student loan rates will rise without an increase in the statutory debt limits. He neglects any mention of the danger that another huge round of Treasury borrowing will cause if it happens immediately after the cap is moved up.

The US will have to pay higher rates as its debt increases, if capital markets operate as they usually do. Larger and larger indebtedness usually causes the rate at which lenders will offer capital to rise. Treasuries have not suffered from the enforcement of that rule much in the last year. Financial problems in the rest to the world have made the appetite for US debt plentiful. That will not last very long. Credit rating agencies may no longer be respected, but their observations about the ability of the United States to cover its debt in a slow growth, high unemployment economy are powerful

Geithner closes his letter to Bennett. “I fully expect that Congress will once again take responsible action…” Responsible action cuts two ways. Geithner knows that the Republicans in Congress expect something in the way of budget cuts in exchange for votes for an increase in the debt ceilings. His letter was a lost opportunity for the Administration to warn about what it says will be the terrible results, only weeks away, if nothing is done about the ceiling and to negotiate in public at the same time.

President Obama already concedes he will have to offer concessions in exchange for the approval of a high debt ceiling. Geithner’s letter makes it seem that the Secretary of the Treasury only plays the role of the Oracle who has no interest or leverage to force any outcome at all.

Douglas A. McIntyre