The World Maybe Won't End If We Hit The Debt Ceiling—As Long as Congress Flip-Flops Fast

Moneybox
A blog about business and economics.
Jan. 18 2013 8:00 AM

The World Maybe Won't End If We Hit The Debt Ceiling—As Long as Congress Flip-Flops Fast

I heard a smart contrarian take on the debt ceiling last night from a guy in the markets who said that unlike the Lehman Brothers bankruptcy, a US sovereign default induced by congress failing to raise the debt ceiling wouldn't necessarily be the end of the world. His reasoning is that in a default or a bankruptcy, the claimants still usually get some money. The question is how much will be recovered? And uncertainty about the answer can fuel a crisis. But in the case of the US the answer is obvious—everyone will be paid back in full—so you'd have a couple of days of panic smoothed over by extraordinary Federal Reserve lending of last resort activities and then congress would flip-flop, raise the limit, and things would go back to mostly normal.

That's totally reasonable. The reason I painted a much darker portrait in a column earlier this week is that I was assuming a protracted standoff, where Republicans convince themselves that payment prioritization or Treasury juggling makes it okay to try to shut the government down indefinitely.

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But I think the point that the global economy doesn't suddenly turn into a pumpkin at midnight is important. Delays in raising the debt ceiling are probably doing some harm already just by unsettling people. Further delays make things worse. But the hit is probably survivable as long as congress immediately reverses itself the way it did on TARP. I'd say the important issue here is that as far as an optimist's case goes that's pretty pessimistic.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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