"THE WEEKLY WRAP" with Diane W. Collins

Treasury Secretary Geithner & Raising the Debt Ceiling: "The Boy Who Cried Wolf?"

Friday, July 1, 2011, 10:00 am, Central

Archive: Publications, Weekly Wrap, TIMELINE - Debt Ceiling Debate


The Weekly Wrap

Geithner: "The Boy Who Cried Wolf?"


Welcome to the Weekly Wrap. I’m Diane Collins.


This week in reviewing the handling of the debt ceiling debate by Treasury Secretary Tim Geithner, I was struck with what I believe is a situation grimly resembling “The Boy Who Cried Wolf.” Now I know a number of you are appalled at this statement and doubt I know of what I speak, but bear with me and see if my analogy doesn’t play out. You remember the story. “It concerns a shepherd boy who tricks nearby villagers into thinking a wolf is attacking his flock. He repeats this so many times that when the sheep are actually confronted by a wolf, the villagers don’t believe his cries for help and the flock is destroyed.”


It is my opinion the moral of the tale applies to the Treasury Secretary, President Obama and the vast majority of the Obama administration. When trust is lost you become totally ineffective. Something I think Geithner like so many others before him is coming to understand. Late yesterday afternoon, The Hill reported Geithner is considering leaving the Obama administration when a debt ceiling deal is reached.


So what is the controversy and what chain of events landed Geithner in this mess? The Secretary, according to several congressmen and senators has made “false and misleading” statements concerning the ability of the United States to meet its debt obligations. Further, it is believed these statements may have had a damaging effect on how our country’s credit standing is perceived and could be a factor in any potential default. Substantiating that, on June 8th FITCH warned that it will put the United States “on watch for a downgrade by all three credit agencies… if the debt ceiling is not raised by the [X Date] and timely and full payment of obligations including Treasuries secured.” Now, as you know the [X-Date] is determined by Geithner. It is the date on which the United States is perceived as no longer being able to meet its debt obligations.


  At the time of the statement made by FITCH, August 2nd was the [X Date] set by the Secretary. But it hasn’t been the first. Prior to that, Geithner set the date “as early at March 31, 2011, and most likely sometime between that date and May 16th” as mentioned in his January 6th letter to Senate Majority Leader, Harry Reid and all members of the 112th Congress. Today, according to Reuters a statement is anticipated from Secretary Geithner which is expected to provide “new debt ceiling guidance,” in other words, yet another [X Date] most likely to be set sometime in mid-August. Hopefully, the country’s business won’t interfere with President Obama’s vacation to Martha’s Vineyard scheduled for mid- to late August.


In fairness to Secretary Geithner, Treasury cash inflows fluctuate and the United States credit line which is tied to the debt ceiling provides the Secretary with the necessary cushion to make up any difference ensuring an uninterrupted ability to meet "payables" as well as service government debt instruments. Where I believe Secretary Geithner created a firestorm was in his definition of what constitutes The United States being in default and his stubborn refusal to differentiate sovereign debt from other types of "payables."


It is the view of most Conservatives that default  would occur if the United States no longer serviced (paid interest and returned principle) on the debt instruments through which foreign and domestic investors lend the federal government money. I’m talking about Treasury bills, notes and bonds. The United States pays interest and returns principle on these debt instruments at predetermined times depending upon the type of security purchased. For example, Treasury bonds pay interest twice a year and are issued with maturities of 10 years or more (usually thirty years); whereas Treasury bills are sold at a discount and pay face value at maturities of one year or less. In many cases the investor rolls the principle back into a new debt issue. China holds the largest amount of US debt, approximately $1.15 trillion worth of Treasury securities at the end of April 2011. Although, according to a CNN Money article published online June 21, 2011, “America's number one creditor appears to be losing some appetite for U.S. government securities…. China has been a big buyer of AAA-rated bonds issued by the European Union's 'bailout vehicle.'" 


Beyond our debt instruments this particular Conservative also views payments to current recipients of Social Security, Medicare, Veterans Affairs and active military duty pay as top priorities. In other words, in times of crisis these are the prioritized “must pay” (The average citizen might relate this to the mortgage, car, and credit card payments) The rest of Treasury’s “payables” (if I may be so bold)  fit into what Conservatives view as two categories: those that can be prioritized with rolling, short term, temporary suspensions; and those seen as expendable. IMPORTANT: This would be worst case scenario, meaning we do not reach an agreement on raising the debt ceiling without new taxes and deep spending cuts. Outside a crisis, everyone wishes to see all obligations including “payables” met as agreed.


The Conservative view of default is not in line with Secretary Geithner or The Bipartisan Policy Center Report on the debt ceiling produced June 28th which seems to “perfectly” mirror Secretary Geithner’s view of the August 2nd [X-Date]. In my opinion, Geithner’s feigned outcry against not making payments to all debt obligations on time(debt service plus payables) and the Bipartisan Policy Center Report (scarce on details) seems to support my theory, “the boy cried wolf.” It is true the United States has always serviced its sovereign debt obligations both domestic and foreign paying principle and interest to those who lend the federal government money. But it is not true that we consistently pay our other obligations on time. Do you know any government contractors? Why do you think there is a market for factoring their receivables? So contractors can have the cash flow needed between somewhat irregular payments.


Look, the Conservative approach to the debt ceiling debate is to face the music. That means there is going to be pain. No more kicking the can down the road. But, it preserves our future. Understand the psychology of the investor buying our debt. As long as I am reasonably assured of being paid interest and principle I will continue to purchase and roll my investments at maturity. Conservatives have been trying to provide that assurance through “The Good Faith and Fairness Act,” introduced in the House on January 25, 2011 by Rep. Tom McClintock (R- CA) as HR 421 and in the Senate by Sen. Pat Toomey (R- PA) as S.163. The legislation simply states the Treasury is to prioritize America’s debt payments over other “payables” removing any ambiguity regarding default. Geithner opposed it. A final attempt was made to pass the legislation as the Toomey-Vitter Amendment 112 to S.23 (The Patent Reform Act.) The Senate voted the Toomey-Vitter Amendment down along party lines 52 to 47. Geithner continued to spread “false and misleading statements” potentially causing those who lend us money (foreign and domestic) to fear increased risk of return. He may have increased the likelihood of the US paying higher interest rates in order to sell debt securities. He’s been a busy boy. Further, the statements bore the credibility of the Secretary of the Treasury of the United States. How could this not increase the likelihood of a run on debt instruments and the ultimate default Geithner says he is trying to avoid?


It is my hope that the new [X-Date] Geithner is suppose to reveal as early as today will begin to take into consideration some of the realities Conservatives have pushed forward. If he continues to cry wolf, nobody is going to believe him and we’ll continue dithering until we become Greece!


*Shortly, included in the Further Reading section of "The Weekly Wrap" will be a timeline of events regarding the deficit and debt ceiling battles starting with the end of the Simpson-Bowles Debt Commission and ending (when announced) with Geithner’s new “debt ceiling guidance” [X-Date].



See you next week.


UPDATE: 7-3-11

Mark Zandi in a video on Yahoo's Daily Ticker stated he didn't think investors would take much solace in getting paid interest on Treasuries if Social Security recipients aren't getting paid. My Response: Two things: (1) The largest holder of US debt instruments is China... not exactly known for humanitarian efforts. Don't think they're really in it to care about Americans. More interested in a plan that stabilizes while they continue to be paid. (2) What I have called for is prioritization that includes debt service, and payments to current recipients of social security, veteran, and active military pay; following that, categorizing programs that are capable of sustaining a rolling, temporary suspension of pay; and eliminating duplicative, and / wasteful programs that are not accomplishing their stated goals. This is what will build confidence. Sorry, Zandi... I don't agree. Nor do I believe August 2nd is the [X-Date] although it may be manufactured as such by Geithner and, thereby, cause market reaction.




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