Ben Bernanke was chair of the Federal Reserve during what became the worst financial crisis since the Great Depression. An inside look at the meltdown from the former Fed chair and his defense of bailing out Wall Street.
President Barack Obama plans to nominate Fed Vice Chair Janet Yellen to succeed Ben Bernanke as head of the Federal Reserve. Yesterday both Obama and House Majority Leader John Boehner seemed as far apart as ever on the two questions roiling Washington: ending the current partial shutdown of the federal government and agreeing to raise the U.S. debt limit before an Oct. 17 deadline. The partial government shutdown has meant inconvenience for many and hardship for some, but most agree that repercussions of a failure to raise the debt ceiling are unpredictable and potentially devastating. Diane and her guests discuss what happens if we default.
- Dean Baker co-director, Center for Economic and Policy Research and blogger, Beat the Press; author of "The End of Loser Liberalism: Making Markets Progressive."
- Kevin Hassett director of economic policy studies, American Enterprise Institute.
- Sheila Bair senior adviser, The Pew Charitable Trusts and former chair, Federal Deposit Insurance Corporation; author of "Bull By The Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama plans to nominate Janet Yellen to lead the Federal Reserve. She currently serves as its vice chair. The nomination comes amid rising concerns over the ongoing standoff between President Obama and House Republicans on day nine of the partial government shutdown and a debt ceiling limit that expires in eight days.
MS. DIANE REHMJoining me to talk about possible short and long term repercussions of the standoff: Dean Baker of the Center for Economic and Policy Research, Kevin Hassett of the American Enterprise Institute, and, joining us by phone from her office here in Washington, Sheila Bair is senior advisor at The Pew Charitable Trust and former chair of the FDIC. You're invited as always to be part of the program. Give us a call, 800-433-8850. Send us your email to firstname.lastname@example.org. Follow us on Twitter or Facebook. And welcome to you all.
MR. DEAN BAKERThanks very much.
MR. KEVIN HASSETTThanks.
MS. SHEILA BAIRThank you.
REHMAnd, Sheila Bair, I'll start with you. The president's choice for Fed Chair is not a surprise. How strong would you guess support for her nomination is going to be?
BAIRWell, it is clearly going to be a consensus support on the Democratic side. And I'm hoping that a number of Republicans will support her nomination as well, or at least let it go to a vote so she can be confirmed. You know, the main issue on the Republican side will be monetary policy. There's some disagreements there.
REHMI'm sorry. I'm having a little bit of trouble hearing you, Sheila Bair.
REHMAnd I wonder if you would repeat what you've just said.
BAIRSure. I think…
REHMAll right. Let's go to Kevin Hassett.
HASSETTJanet Yellen's nomination today is not a surprise. And I think that it's going to be a Fed nomination that's very similar to the ones that we've seen in the past, where the person nominated is relatively nonpartisan and the number of votes that they get in the Senate in confirmation is, say, well above 80. I think that Janet Yellen is about the most qualified person in the country for the job.
HASSETTShe's been at the Fed for a long time, started out as a junior faculty member at Harvard and then moved to the Fed as a career staffer and then (unintelligible) president of the San Francisco Fed, member of the FOMC. And so when you look at that record, and the fact that she's been out in front of opinion on a lot of important issues -- she warned about the real estate crisis before anyone else.
HASSETTAnd she was about the only person in the Federal Reserve System that saw the mess coming. She, you know, people say she's a dove, but she's not really a dove if you go back and look. There were times when she was trying to tighten the head of Chairman Greenspan. I think that she's just an absolutely solid, solid candidate. And I doubt that anyone would -- except for maybe somebody who thinks we should be on the gold standard or something would be willing to resist her nomination.
REHMDean Baker, how about you? How do you see the nomination?
BAKERWell, I would agree very strongly with Kevin, although I'd be happier with her being a dove. I think for the most part she has been, but he's absolutely right. Back in the '90s, she was arguing with Greenspan. They should raise rates, but I think she knows better now. But I really do think she's an outstanding pick, and I wish President Obama had announced it sooner.
BAKERBut, you know, as Kevin said, I think she'll have bipartisan support. She was approved as vice chair overwhelmingly, a very small number of people that objected to her appointment back then. And I'd be very surprised that there was much more opposition today, so a very good pick on President Obama's part.
REHMObviously the most immediate question may be the timetable for the Fed's aggressive bond-buying operation. How do you see that going, Kevin?
HASSETTRight. So the Fed has been doing this quantitative easing stuff where they increase reserves -- or maybe you could almost call it printing money -- and hand it to banks in exchange for assets, mortgage-backed securities and treasuries. They've been doing this for quite a long time, and they're probably going to run into a limit on it next year when they'll have bought so much of the market that they'll have to sort of slow down what they're doing.
HASSETTA lot of people thought at the last meeting that the Fed would begin what they call the taper, but the Fed decided not to do it, I think, in part because of the big crises going on in Washington right now. I think the last time that we got very close to not lifting the debt limit, there was a lot of market turmoil.
HASSETTAnd I think given the relatively weak economy and the risk that Washington would send negative influences all across the economy was probably enough to get the Fed to hold off . My guess is that the Fed is going to have to begin to stop the current round of quantitative easing or to taper, at least by early next year, because they're going to run out of stuff to buy.
REHMAnd that is the voice of Kevin Hassett. He's director of the economic policy studies at the American Enterprise Institute. I must say I'm having a little difficulty with our phone call from Sheila Bair. Let's hope that we can hear a little more of her voice in just a moment. But for the time being we'll concentrate on our two guests here in the studio. Yesterday, President Obama offered to negotiate with House Republicans if Congress first agrees to end the partial shutdown and raise the debt ceiling, even if it's only a short term arrangement. How do you see that, Kevin?
HASSETTI think that politics is broken out in Washington, is the first thing. I wrote a piece in the Wall Street Journal last week, where I looked at the debt limit increases of the past and found that it actually kind of reminded me a little bit of that famous line of Captain Kirk in the old original Star Trek where he's saying, well, it's not chess, Mr. Spock, it's poker.
HASSETTAnd what's going on right now is both sides are playing poker. And when you play poker, you know, there are all sorts of things that go on. You don't necessarily have to be honest about what your intentions are. If you have a very strong bluff, maybe you can come away with the pot even if you have bad cards. And that's what's going on right now in Washington, is that there's a rough game of poker going on.
HASSETTAnd it's a game that's been going on for a long, long time in Washington. The debt limit is one of those things that has to be voted on. And since it has to be voted on, then it's a vehicle for legislation. If it's a vehicle for legislation, then people will try to stick their own candy in it. There have been times where, for example, the Democrats tried to use it to end the Iraq War. It's a pretty common thing. It's often ugly political theater, and that's what we're experiencing right now.
REHMWhat do you think, Dean Baker?
BAKERWell, I agree a little with what Kevin's saying. Obviously there's politics here, but I think it's important to be clear what sort of politics. The immediate issue that prompted this was that the Republicans wanted to basically gut the Affordable Care Act. And, you know, you could argue whether that's legitimate, illegitimate.
BAKERBasically, it's how you feel about the Affordable Care Act. It's a very, very strong measure to say we're prepared to shut down the government over that. Now, Kevin referred back to 2007 when the Democrats came close. They backed away from it, but there were many Democrats who wanted to shut down the government over the Iraq War. Well, that's a very strong move. The idea was the Iraq War was important enough to the people who were arguing for that, that they were prepared to say, we should shut down the government over that.
BAKERNow, they didn't get the whole Democratic caucus to go along, which is why that didn't happen. In this case, the whole Republican caucus did go along, so we've shut down the government over the Affordable Care Act -- very strong move, very extraordinary move. Is that illegitimate? Well, if you think that the Affordable Care Act is a horrible, horrible bill that's going to do enormous damage to the country, then I guess it's legitimate. I'm personally not in that camp. But, in any case, if I were, I'd probably be arguing for it.
REHMBut now we seem to have moved on from the Affordable Care Act. There seems to be some acceptance that it's finally law. Nothing is going to happen to take it down completely, at least right now. So they've moved on to the budget ceiling and the debt ceiling. Kevin Hassett, is this a sensible way for Republicans to go?
HASSETTWell, I think that there's no question that everybody knew that the Affordable Care Act was, you know, a first play in the game. And that it wasn't going to go anywhere because there was no chance that President Obama was going to sign anything that modified pretty much anything material in the Affordable Care Act.
HASSETTBut I think there are a lot of Republicans who have constituents that are stressed and unhappy about the Affordable Care Act, that felt that they had to have a vote so that they could go home in their primaries next year and say, see, I tried to defeat, but they wouldn't let me. Give me more power. We'll defeat it next time. It was political theater, it was a first move, and I think everybody knew that it wasn't going anywhere.
HASSETTAnd so then the question is, what's the backup plan? And I think right now nobody really knows because, you know, there's going to be something they all agree to that will get us past this, if, you know, history is a guide. But what they agree to could be anything because it has to be outside of the Affordable Care Act, probably needs to involve spending in some way. It could be anything. And I've heard a million ideas, but I wouldn't say that one has a higher chance than any other.
REHMLet me ask you specifically, Kevin Hassett, what happens if we don't meet the deadline for raising the debt ceiling?
HASSETTYeah, that's a very important thing for our listeners to understand. The way to think about it is that the U.S. Treasury -- which is, say, the government that cuts the checks and pays salaries for soldiers and everything -- has something like a checking account at the Federal Reserve that's called the Treasury's general account. And if the money comes in because a lot of people pay taxes, then maybe a lot of money goes up in the account.
HASSETTBut if the Treasury has to make a lot of payments, say they're mailing a lot of Social Security payments, which they'll do at the beginning of November, then there'll be a lot of outflows. The Fed cashes the checks that the Treasury writes, so long as there's money in the account. And if the money in the account starts to get low, then the Treasury might go to New York and borrow some money from the Chinese and put that money in the Treasury's general account, and then they can write checks for that month again.
HASSETTAnd so when we hit the debt limit, what happens is they're not allowed to borrow from the Chinese to put money in the account, but they will have some money in the account. And so Secretary Lew said around the 17th, maybe that's when we're going to stop borrowing from the Chinese, but there'll be money in the account.
HASSETTThe question is, at what point do they start bouncing checks? And that's really anybody's guess. My best estimate of it -- and I think this is pretty close -- is that it's about a week later that the Treasury can run for maybe up until around the 24th or 25th, after they hit the limit, which is going to really scare everybody if we go past the 17th because I think a lot of people think the 17th is the real deadline.
REHMKevin Hassett of the American Enterprise Institute. We'll hear from Dean Baker and Sheila Bair after a short break. Stay with us.
REHMAnd welcome back. We're talking about the debt limit. We're talking about what's happening here in Washington. And as many of you know, that debt ceiling limit does hit on Oct. 17, just eight days from now. You just heard Kevin Hassett say that the real crunch won't come until several days later when we can no longer borrow money from the Chinese. Sheila Bair, I'd like to hear your view on how serious an issue the debt ceiling actually is.
BAIRWell, it's a very serious issue. And I would agree with Kevin. I think there's a lot of poker playing going on. But, you know, I don't think gambling with a debt limit is the right place to do it, particularly with the financial system instability we saw in 2008. It increased the importance of the dollar as a world reserve currency. There is a heavier reliance on it today than I think ever. And just that the psychological scores of the financial crisis to even talk about creating -- kind of gratuitously creating a new system -- a new source of massive instability by not raising the debt limit, I think, is just problematic.
BAIRAnd I would say I'm with the Republicans on a lot of these problems. We are totally on an unsustainable fiscal path. There will be a fiscal crisis down the road if we don't get our house in order. But to accelerate that by even suggesting that, you know, we'd have some kind of selective default, I think, is very troublesome. And I think -- I wish the rhetoric would cool down and people start talking calmly and rationally.
BAIRAnd Mr. Boehner last week made some very reassuring statements about not permitting a default. But now we're hearing somewhat of a confused message. And I think that's harmful. I think it's harmful to the reputation of the country. And it could well -- even if we do raise the debt limit, which I still think we will do, it could in any event raise borrowing costs just because our world partners -- all those non, you know, U.S. countries that buy our debt will start wondering how creditworthy we are.
BAIRAnd that won't just impact the borrowing costs of the U.S. government. That's going to impact business borrowing costs as well because business borrowing costs are generally tied to government borrowing costs. So I think it's really unhealthful. As sympathetic as I am to concerns about our fiscal problems, I think the debt limit is the wrong place to make the stand.
REHMDean Baker, how do you see it?
BAKERWell, a couple points. First off, I'm a little, well, bothered by the reference to Chinese borrowing. I mean, the vast majority of our borrowing is not from the Chinese. And, you know, whatever qualms we might have about the Chinese, they're not our main lenders. So that's (unintelligible)...
REHMWho is our main lender?
BAKERWell, I believe it's still -- I think it's either Japan -- certainly European countries collectively much more than China.
BAKERSo relative -- and if we're concerned about borrowing from China, let's just be clear, we borrow from China because we have a large trade deficit, which again we have this issue I like to joke about, the which-way-is-up problem in Washington, because we have trade deficit because we have an overvalued dollar.
BAKERIf we somehow lost our status as the world's preeminent reserve currency, well, guess what, that would bring down the value of the dollar, bring down our trade deficit with China. And we would be borrowing less from them. So if that's our big concern, we should probably be applauding the possibility that we might end -- stop being the world's preeminent reserve currency.
REHMThat we might default?
BAKERNot that we would default, but just that we would stop being the world's reserve currency. I would separate those two. Now, as a practical matter...
REHMBut how do you separate those two?
BAKEROh, because we could very well default and not end our status as the world's reserve currency 'cause the practical question -- I think people have overplayed the issue of default. And I don't mean to trivialize it, but it doesn't necessarily mean that everyone's going to dump all their dollars. Because from the standpoint of foreign central banks, they're going to be saying, what assets should we hold?
BAKERSo are they all going to dump their dollars and decide they want to buy euros? I don't think so. Well, if we're talking about long term fiscal crises are they going to buy yen, a country that has a debt to GDP ratio about three times the debt to GDP ratio of the United States? Not clear where they go.
REHMSheila Bair, how do you respond?
BAIRWell, I think, you know, it's been said we're the best looking horse in the glue factory, and I think there's some truth to that, that the reason we maintain -- the dollar maintains the status as the world reserve currency is because there aren't any good alternatives. But over time that could change. And the more we have this repeated dysfunctionality in Washington, being unable to do things as basic as meet our legal obligations, fund our government, I think that creates a very substantial incentive for the world markets to look elsewhere for safe havens.
BAIRSo I think over time this is going to increase our borrowing costs. I'm not sure -- you know, we've been able to fund our government very cheaply because we are the world reserve currency. That would change significantly. If we're able to put a package together of more fiscal sustainable budget process than maybe overtime that wouldn't be a problem. There might be some advantages, but I think, in a short term, we don't want to go there.
BAIRAnd, again, I think, you know, this is just being unable to do the basic job of governance, you know, if Congress has authorized all these obligations to pay. And you can't be selective about, well we're going to pay our bondholders but not our Social Security recipients. You know, legal obligations are legal obligations. And if we've overextended, then change those legal obligations. But just to default is irresponsible. I think it makes us look very bad. Even the suggestion that we would do it, I think, suggests a level of unappreciation about just what kind of a profound event that would be.
REHMProfound event, Kevin Hassett.
HASSETTYou know, it sure would be a profound event if we were to, say, go over the cliff. But I think that something that we've lost sight of or a lot of the coverage has lost sight of is that this is a very normal thing, that there have been -- by my count, I think it's about 53 debt limit increases going back to 1978.
HASSETTIncreases or, you know, sometimes they added months, you know...
REHMCome to the edge?
HASSETTRight. But sometimes they come to the edge. One time back in the '90s, it was five minutes before midnight or something when they increased it. And the majority of the debt limit increase is just the barren majority. It's, like, 27 versus 26 where what you might call a dirty debt limit increase that included some other condition that the opposition party wanted to include.
HASSETTAnd the reason why I think that's an important point to make is that it's wrong while people are playing poker than to sort of say, well, what you're doing is unprecedented and awful, it's a very useful political maneuver to say that. But it's just not true. This is something that's gone on forever, and we've stayed the world's reserve currency. You know, the odds are 99.99 percent that they'll work this thing out, and it will still be the reserve currency and that interest rates aren't going to skyrocket because of this Kabuki Theater.
REHMKevin, explain to me what the Republican objectives are at this point.
HASSETTYou know, I don't know. And it goes back to -- there's this famous economist Ken Arrow who had this thing called the Arrow and possibility theorem which more or less proved that governments are irrational. There's no way to take a bunch of rational people and aggregate their preferences into an aggregate preference that is rational.
HASSETTAnd, right now, if you look at all the different factions, I really don't know what the Republicans' ultimate objective is in this negotiation. And my guess is that they don't know either. What they want to do is get out of this somehow with some concession for the president, and they don't know what it is yet -- or they don't all agree about it.
REHMSheila Bair, what would you speculate the Republican objectives are right now?
BAIRWell, I think they are confused, which I guess is why it's even more problematic to me to be turning around (word?) about defaulting, even selective default, when the end game is not clear. Look, I am not -- Kevin's right. Debt limits have been debated in the past. Pieces of legislation have been attached to them.
BAIRBut I don't think, as I recall, that it's ever reached this level of brinkmanship, especially -- and I repeat -- when we are still in a timeframe coming off of a financial crisis, when financial markets, I think, are still skittish. And I think it's highly problematic to be playing around with this. If they could come to an agreement -- I think Paul Ryan had some great suggestions in the Wall Street Journal this morning, you know, corporate tax reform, increasing Medicare premiums for wealthier people.
BAIRThere seems to be some areas where there's broad agreement. If they could attach those to the debt limit, I'd be all for it. But again, this brinkmanship in saying if we don't get something, we're going to force a selective default, I think that does not make our country look good. And I think it does make the markets nervous, and I don't think we need that right now.
REHMVery good or not making our country look good. You say House Republican willingness to threaten a default demonstrates a fundamental misunderstanding of our financial systems. Explain in what ways.
BAIRWell, I just think it's just -- you know, it's like, you know, playing around with a nuclear bomb, saying, you know, I might explode this if I don't get X, Y or Z. And we're not even sure what the X, Y or Z is. I think that is problematic. Look, we have serious fiscal problems. I don't discount that. I think one of the reasons we have this acrimony now is that it's on both sides. Republicans and Democrats have not been able to come together in a bipartisan way to deal with these fiscal problems.
BAIRSo I understand their frustration. But default or selective default or even hint of default, I think, will raise interest rates which will make, in the short term, make the problem worse because it will increase the cost of funding our government. And we are still running at substantial deficits, and it could hurt the economy. Again, business borrowing costs are tagged to treasury costs.
BAIRSo if you increase government borrowing costs, you're going to be -- it's going to be another hit to the business sector as well, which is an important Republican constituency. And I think financial markets understand that. I think business leadership understands that. So even with regard to the Republicans' own constituency, I don't think this makes them look good.
BAIRAnd they're hurting their broader point which is a valid one and which is we are on an unsustainable fiscal path. We are loading up our kids with terrible debt burdens which need to be corrected. But the issues now have been whether, you know, Washington could actually flirt with default as opposed to the issue we should be focusing on, which is our unsustainable fiscal situation.
BAKERI'd have to disagree with a lot of that. First off, Kevin, it's news to me that everyone knew that this wasn't about the Affordable Care Act. I sort of thought it was. We had all the Republicans saying it was. Ted Cruz spoke for 21 hours in the Senate. They convinced me, so he knew something I didn't know.
REHMThey convinced you that that's what it was about from their point...
BAKERYeah, that's what I thought. They wanted to stop the Affordable Care Act.
BAKERThey were saying that, and I was gullible enough to believe that, I guess. But a couple other things I think are very important. First off, we are operating with the government shutdown. We are paying real costs for that, and I think it's unfortunate that a lot of people blame the Democrats partly and, say, overplay this. The way you see the costs of a government shutdown is not today, not tomorrow. It's over a long term.
BAKERImagine we had Jonas Salk working on the polio vaccine and we told him, you can't work this month because the government's shut down. Well, suppose that would delay the vaccine for a month? Well, we wouldn't see that that month. We would see that down the road, and maybe no one would realize, oh, it was delayed a month because we told Jonas Salk he couldn't work.
BAKERThat's what's going on with the government being shut down. I think it's unfortunate that a lot of people portrayed this that, oh, we're going to have this horrible crisis. Come Oct. 1 the government will be shut down. It will be a prolonged effect that we'll see over time. So that's the story there. And of course government workers are going without paychecks for now.
BAKERBut the other thing the -- I just don't see us being on this unsustainable path in fiscal policy. It's important to remember, the reason we have large deficits is because the economy collapsed following the collapse of the housing bubble. It's that simple. If you go back to projections from 2007, Congressional Budget Office projections, they didn't show us with huge deficits. They showed us with very small deficits.
BAKERIt wasn't that we went on a big spending spree or tax-cutting orgy. What happened was the economy collapsed. That means tax revenues fall off, countercyclical spending, things like unemployment benefits, that's the story of our current deficits. It's long term. It's health care. We have to fix that. That's what we should be talking about.
REHMDean Baker, he's co-director of the Center for Economic and Policy Research. He's the author of "The End of Loser Liberalism: Making Markets Progressive." And you're listening to "The Diane Rehm Show." We're going to open the phones, 800-433-8850. Send us your email to email@example.com. Let's go first to Bill in Wayland, Mich. You're on the air.
BILLThank you very much. Why is it that you never talk about the court decision that took away mortgage regulation from the states and gave it to the federal government who didn't do it?
REHMSheila Bair, would you like to comment on that?
BAIRWell, I'm not sure I'm familiar with a court decision, but clearly the government had the authority to set mortgage lending standards leading up to the crisis. That authority was given to the Federal Reserve for all mortgage originators. Regulated banks as well as non-bank mortgage originators, they did not do it. And I think Ben Bernanke, to his credit, has acknowledged that it was a mistake.
BAIRWe do have mortgage lending standards now with the new Consumer Bureau. The FCIC said that was a mistake. So it was. And we now have mortgage-lending standards, but it was a key failure on the part of government. That's not to rationalize all the irresponsible lending that was going on. The private sector deserves the lion's share of the responsibility there, but (unintelligible)...
BAKERI think the court decision -- I couldn't give you the exact name of the decision, but it was back in, I think, it was 2003. Georgia had been making some efforts to regulate mortgages, and it was taking the (word?) argued that that was federal authority, not state authority. And that interfered with some efforts in other states as well. So how far that might've gone, had that court decision not gone that way, is hard to say.
REHMOK. Let me ask you this, Dean Baker. You say the threats of what would happen if we miss the October deadline may be being exaggerated. You say we are not facing the equivalent of a Lehman Brothers' collapse. How come?
BAKERWell, first off, let me be clear. I'm not advocating going off the cliff here.
BAKERIt's not a good story, but my point, if you go back to Lehman, what was going on there was we had hundreds of billions, in fact, trillions of dollars of mortgages, mortgage-backed securities that were worth a fraction, sometimes 30 cents on the dollar, sometimes less of what they were on their books at. No one knew who held those mortgages. No one knew how much. So everyone had to be suspect of everyone else. Today the (word?) question is U.S. government bonds.
BAKERAnd the issue is, OK, I own a government bond, and I was supposed to get a payment Oct. 17 -- or Kevin's probably right. We're talking about the 23rd, 25th -- and that doesn't come. So the question is, how much am I willing to discount that bond? It's worth $10,000. Am I willing to sell it for, you know, $9,900, just $9,000? How much of a discount am I willing to sell that bond for because this money didn't come? Now, in almost all cases, everyone's going to say, well look, it's going to come. I'm going to get the money. I'm going to get the interest...
BAKER...eventually. So to say that that will lead to sort of collapse we had with Lehman, I just don't think that makes any sense. Will it disrupt financial markets? Absolutely. Will we see a fall in the stock market? Absolutely. Will it be the sort of plunge we had after Lehman's? I just don't see that.
REHMAnd what do you make of Republicans now saying this is no big deal?
BAKERWell, I think it's wrong to say it's no big deal. Again, I don't mean to trivialize it. I won't want to go there. I won't want to do, it but I don't want to overstate it either. And from the standpoint of the Democrats, I think -- you know, I'm hoping we don't get to that date. But let's say we do get to that date. I'd hate to have that happen and then have the Republicans go, hey, we're still standing.
HASSETTRight. I think the no big deal point would be similar to what Dean said, but also that, remember, we had this checking account example that we used earlier. There's money coming into the account every day. So people are paying taxes, and we're collecting revenues from things like the gas tax.
REHMSo are you saying it's no big deal either?
HASSETTNo. I think it's a bigger deal than Dean does, but my point is just that, in terms of paying the interest on treasuries, there's probably enough money coming in every day to make those interest payments. You know, there might be a couple of days where it doesn't quite line up, but interest payments are small enough relative to revenues that they could probably keep the bonds alive.
REHMKevin Hassett, director of economic policy studies at the American Enterprise Institute. Short break here, more of your calls, comment when we come back.
REHMAnd welcome back as we talk about what could happen if Republicans and the White House fail to reach agreement on the debt limit. I'm going to read you an email, Sheila Bair, and I'd be interested in your reaction. Linda in Kerrville, Texas says, "The president says we need to pay our bills. I agree," she says. "However, he spent money that was never approved. This standoff is because of our lack of budget and the government overspending too many entitlements." What's your reaction?
BAIRWell, I think, all of these bills that the executive branch is paying are legally obligated through congressional actions. I'm unaware that the president has made any payments beyond what has been authorized by Congress. Entitlement programs in particular are clearly authorized by Congress and benefit levels through legislative action. So I would have to disagree, I guess, with the premise of that question.
BAIRBut I would sympathize with the notion that this -- our inability to put together budgets that are within our means is part of the problem. But it can deal with the underlying legislation. Don't default on obligations that have already been committed.
REHMAnd here's another email from Marian in Grand Rapids, Mich. "What are your thoughts that on -- that some on the extreme right as well as their constituents do not want to raise the debt limit, as they see it as a way to cut the deficit and limit government?" Sheila Bair.
BAIRWell, not raising the debt limit will make the deficit much worse because our interest costs on our debt will skyrocket. I do think it will have adverse ramifications for the economy as well. We could have another downturn which is going to hit tax revenues. So really a default, I think, would be quite problematic. It would certainly make our nation's finances worse and probably hurt our economy as well.
REHMKevin, Hassett, you disagree.
HASSETTIn the sense that, again, thinking back to the checking account example, it could be -- I don't know anyone who thinks this. But if we're thinking extreme right, then if you don't lift the debt limit, then it's kind of like immediately passing a balanced budget amendment that the government can spend the money that comes in taxes and that's it.
HASSETTAnd so you'd have to radically cut government spending and entitlement spending and everything so that the money going out matched the money coming in. And so maybe -- probably not, but maybe there's someone out there that so wants government to shrink that they're willing to take this sort of radical measure because it would be like passing an instantaneous balanced budget amendment if we didn't lift the debt limit.
BAKERWell, it's that, but I'd even go a step further that, in effect, the people -- the first caller or emailer who was upset that President Obama had spent money that he wasn't authorized to spend, which of course did not happen. He hasn't spent a penny that I know of that he wasn't authorized to spend by Congress. But in this case, he would get to pick and choose because there -- you know, Congress had told him to spend money that he's not able to spend because he can't borrow to spend it all.
BAKERSo what choice does he have? He would have to pick and choose. So that would be extraordinary. One other point though in terms of the overspending, we've had massive cuts in our deficit over the last couple years. And that's a big reason the economy has been growing less rapidly than would otherwise be the case. So people who say we're overspending, I don't think they're looking at the numbers.
REHMAll right. To Matt in Jacksonville, Fla. You're on the air.
MATTThanks, Diane. I just wanted to make, like, a simple side analogy of what I think is going on with the stopping of the debt limit -- or raising the debt limit. It's like if you were to pull up to a McDonald's and order a McDouble and then get to the first window and tell them that you're not going to pay and go to the second window and still expect to get your sandwich. It's just...
REHMSheila Bair, how do you react to...
BAIRI think that's right, you know. And if you're a consumer, you know, if we want to get a new loan from a bank and you've been paying your mortgage but not your credit card, you're probably not going to get a loan or going to get a loan at a pretty high interest rate. You can't be selective about your obligations.
BAIRAnd as a Republican, I have to sometimes remind people of that, but as a traditional Republican, I think we're all about traditional values and making good on your legal obligations. So if we're overextended, change those legal obligations, but don't default on them. It's really just -- it's not a good way to do business for anyone and (unintelligible)...
REHMKevin, has -- do you think it's a good way to be doing business right now?
HASSETTSo here's the way in which you could make the argument. And so, you know, whether I really think this argument's true, I don't know. But the fact is that it's really popular to, say, vote for tax cuts. It's really popular to vote for spending increases. Congressmen love to do that. They hate to lift the debt limit. Every time there's a debt limit increase, which happens periodically -- again, there's, you know, 50-something since 1978 -- then it's always a painful vote for them.
HASSETTAnd a lot of them will vote no because they don't want to look like they're voting to expand the government debt. And so I think that, you know, from a big picture perspective, the debt limit process that we have makes congressmen take tough votes that are difficult to defend to increase the government debt that they wouldn't have to take if just every time they said, well let's do this thing, let's cut taxes, and, you know, that would be very, very popular.
HASSETTAnd then they would never actually have to fess up to the fact that if they're being fiscally irresponsible, then they're racking up a big debt. And so I think that this process probably, in the fullness of time, has put some negative pressure on deficits. And so that would be the argument in favor of those processes.
BAKERWell, again, I think the deficit's very, very far from our biggest problem. We're losing roughly a trillion dollars in output a year because the economy's so far below full employment. We still have somewhere -- we're down 9 million jobs from our trend growth pathway. We have somewhere around 9 million people working part-time who would like full-time employment. In that context, I find it a little hard to worry about deficits that actually our debt to GDP ratio's falling right now. So I don't think that's been the major problem the country's faced.
REHMAll right. Here's an email from Donna, and perhaps this will help lots of people. She says, "Please explain what the debt ceiling is. Too many people think it's going more into debt. Instead, it is all the spending that Congress has already passed, and we have to pay for it. It's the same as buying on credit and paying our credit card. If we don't, we will be penalized. They should change the name and call it what it is, our budget for all our expenses." Sheila Bair is that a fair statement?
BAIRWell, yeah, I think that's roughly accurate. If we spend more than we bring in in revenues, we have a deficit, and we have to borrow to make up for the shortfall. And every year that you do that, you have to keep racking up more debt, and you keep reaching the debt ceiling unless it is raised. So I think that is an accurate statement of the basics of what's going on.
REHMAll right. To Melissa in Cincinnati, Ohio. Hi there.
MELISSAHi. Thank you so much for taking my call.
MELISSAI think my question is similar to some that have just been asked. But basically I'm thinking that so much attention is played to the political game of will the ceiling go up or will it not go up. And as just a person living at home with kids in a family trying to balance a budget, I'm always shocked that no one seems to mention the $17 trillion deficit and the plan -- like, I would really like to know why we have the deficit. How will some pressure be applied to the government to address the fact that the direction is climbing up, and wouldn't we like it to go level or down a bit?
BAKERWell, a couple things. First off, just to be clear, $17 trillion debt that's accumulated borrowing -- just to be clear on that. But, again, it's important to understand the government is not like a family. If you want to get a little closer, government's at least like a corporation. And if you think of a major corporation like General Electric or Verizon, they're borrowing all the time.
BAKERAnd if you're the CEO of Verizon or General Electric and you come in and go, you know, we lost a lot of money last quarter but we paid off our debt, I don't think your Board of Directors would be very happy because that's not what they're about. They're about profits. They're about building up a bigger company. It's similar, but not the exact same thing with the U.S. General Electric supposed to be around forever. We expect the U.S. government to be around forever. That means we never do have to pay off the debt.
BAKERBut, more importantly, unlike General Electric or Verizon, U.S. government has the responsibility for supporting the economy. And as much as we might like the private sector to just jump up and spend a lot of money and employ all those people who are unemployed right now, it's not going to do that. So if the government doesn't create the demand -- and that means deficits, I'm sorry, that's what that means, that's the only way you're going to do it -- you are going to see more people unemployed.
BAKERWe're going to see weaker economic growth, possibly even another recession if we were to go to the balance budget route tomorrow as, you know -- and not raising the debt ceiling, whatever we do. That's not a good story. So when we talk about debt, most of the debt is owed to us. So when we talk about horrible things we're doing with our kids, while we're giving them debt we're also giving them the bonds. So, I don't know, you give a kid $17 trillion in bonds, I don't feel we've done them a horrible wrong.
REHMAs you look at what could happen after the 17th of October, Sheila Bair, what could happen if this impasse continues say several weeks, not just to the 23rd, but several weeks?
BAIRWell, in that case we would be out of money, and I think the president would need to start deciding -- picking winners and losers. And I assume that...
REHMWhat do you mean by winners and losers?
BAIRWell, he'll have to decide all the legal obligations that we have committed to -- need to -- how will we pay them? It's like a bankruptcy, right? So not everybody who's got a claim on the corporation is going to get paid in full. So they will have to decide, are you going to pay bondholders, you going to pay Social Security recipients, are you going to pay Department of Defense employees, you going to pay Medicare?
BAIRYou're going to have -- he's going to have to make some decisions, which I think are going to be quite ugly. And this idea that we can just pay the bondholders to keep our credit rating and our status as a safe haven and a world reserve currency, I just don't think that holds muster. A default is a default. A legal obligation is a legal obligation.
BAIRAnd politically with how it would be acceptable to pay large bondholders in full but start imposing losses on Social Security recipients, retirees, Medicare, Medicaid recipients, I think that would be very, very hard to do. So I hope the government never goes there because, again, meet your obligations. If you've overextended, then change those obligations, but don't force a default and cutbacks in a way that would be quite disruptive and harmful to our economy.
HASSETTI think the one question is that Congress historically going all the way back to the founding has been extraordinarily reluctant to allow the president to decide to pay this and not that. When Congress authorizes, you know, a mortgage and a car payment, then the president has to instruct the Treasury to pay the mortgage and the car payment. And he's not allowed to say, pay the mortgage and not the car payment. And...
REHMBut couldn't he be forced into...
HASSETTThe problem here is that there are competing laws that he's going to have to break one. And my guess is that if we went past, though, that Congress would try to pick the ones that we pay and the ones that we don't. The president might not want to sign those bills, but I think that it's basically very close to becoming a constitutional crisis if we get to that point past the 23rd or the 24th because it will be totally in terrain we've never explored.
REHMA constitutional crisis, Dean?
BAKERI think so. You know, both the points Kevin and Ms. Bair raised are exactly right, that, you know, he's required under law to spend a certain rate. He's supposed to pay those Social Security payments, pay the debt payments, pay Medicaid, veterans payments. All these payments he's required by Congress to make.
BAKEROn the other hand, he can't possibly do it because we have this debt ceiling (unintelligible). He can't borrow the money to make those payments. So how does the president respond to that? He could pick and choose but then Congress could say, hey, wait, we told you to spend that money. You didn't do it. So it's not clear what direction you're supposed to go in.
REHMAnd you're listening to "The Diane Rehm Show. Now to Bob in Townsend, Vt., you're on the air.
BOBDiane, thanks for taking my call.
BOBGot a wonderful program.
BOBA question earlier about Republican objectives, I just want to point out, I think it's twofold. First is star of the beast. And for anyone who doesn't know what that phrase means, Google it. Ten years ago when an attorney explained it to me, that's part of the Republican strategy today. And let me point out I'm a lifelong conservative, and I've got virtually nothing in common with the current iteration of Republicans in Washington.
BOBThe second thing is, Republicans today are doing everything they can to see that this administration fails. When your guest earlier mentioned the word demand, that's why the economy is having problems today is because there's a lack of demand. And that's because people don't have money in their pockets.
REHMSheila Bair, do you want to comment?
BAIRWell, I would agree with him on the latter point, a lack of demand. And I think, too, the point Dean made earlier about corporations borrowing money all the time, I think it's OK to borrow money if you're getting some bang for your buck. But the stimulus programs we've done have not been successful at stimulating demand. They've been very short term in their focus. Our budget resources are increasingly skewed because of demographics to older Americans. We're not investing in our young people. We're not investing in our infrastructure.
BAIRThose kinds of things would increase a demand. We're not making our nation more competitive in the world market, which we can do by lowering energy costs, by improving infrastructure, by improving training of our workforce. We need to spend money in a smart way to increase demand because that is a key challenge for our economy. But I think we do need to -- you know, that type of spending, I think, where you know you're getting some long term bang for your buck would make some sense. But that's not the way we've been spending our resources so far.
REHMDean Baker, what about the first part of his comment that there is a group of Republicans who simply want this president to fail?
BAKERWell, I would say it certainly looks that way. Again, they don't discuss this with me, but, I mean, outwardly, it certainly looks that way, and it sort of jokes, well they oppose pretty much everything President Obama does or does not do. So with the Affordable Care Act, I mean, they've really -- we've had many people draw the line. I mean, again, Kevin's saying that wasn't the big issue, but they certainly publicly presented that as the big issue, that we had to stop the Affordable Care Act.
BAKERNow, just important to remember, Affordable Care Act was basically a proposal from conservative Republicans. The Heritage Foundation came up with that back in 1993 in the Clinton era health care debate. So do jump down -- to throw down the gauntlet that this is socialism, you know, it's going to be the end of the country, well, that's a little hard to see.
REHMKevin Hassett, what do you say to...
HASSETTRight. Look, in politics, first, the fact that it's a conservative idea, that's just a lark. I mean, there's this Heritage proposal...
REHMWhy do you say that's just a lark?
HASSETTOh, because having the federal government require everybody to purchase health insurance...
REHMWhat about Massachusetts -- hold on. What about the Massachusetts law?
HASSETTGov. Romney, when he was in Massachusetts, when he was governor was -- spoke at an AEI conference about this. And he was just ripped to shreds by every conservative in the room. They didn't think it was a good idea. So...
REHMBut it was a Republican idea.
HASSETTHe -- well, there are people in every party that have lots of different ideas. But to say that this is an animating idea for the Republican Party is just false. It's not.
BAKERIt did come from Heritage though.
HASSETTNo. The Heritage...
REHMIt came from Heritage Foundation.
HASSETTDo I have to agree with everything that Heritage says? Is that what the two of you are saying?
REHMBut, I mean, to deny that it came from Republicans seems to me way off from...
HASSETTIt wasn't invented by Heritage. It was just -- he was -- if you go back and read the paper, he was referencing a literature about how you make health insurance markets work. You know, I don't think that it was originated at Heritage at all.
REHMAll right. I think that's going to have to be the last word. Kevin Hassett of the American Enterprise Institute, Dean Baker of the Center for Economic and Policy Research, Sheila Bair, senior advisor at the Pew Charitable Trust, former chair of the Federal Deposit Insurance Corporation, thank you all for your agreements and disagreements.
REHMAnd thanks for listening. I'm Diane Rehm.
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