When we think about what could happen on Aug. 3 if congressional Republicans refuse to raise the debt ceiling, we tend to think about a crisis at the federal level, a national economic disaster, Wall Street turmoil, and roiling international markets.
But it’s worth appreciating the ripple effect of a disaster like this one.
The U.S. Conference of Mayors is convening this week and the participants are pleading with Congress to do the right thing. ThinkProgress connected yesterday with the Republican mayor of Mesa, Arizona, who said failure on this at the federal level would severely affect local government.
And why is that? Ezra Klein had a good piece on this the other day.
The first to fall will be “directly linked” debt. These are bonds that rely on payments from the federal government. Naomi Richman, a managing director in Moody’s Public Finance division, puts it bluntly: “There are certain kinds of municipal bonds that are directly reliant on Treasury paying or some other direct payment,” she says. “If those bonds don’t receive their payment, they have no other source of revenue.” So down they go.
Then there’s the “indirectly linked” debt. That’s debt from state government, local governments, hospitals, universities and other institutions that rely, in some way or another, on payments from the federal government. If Medicaid stops paying its bills, all the hospitals that rely on Medicaid’s payments become less creditworthy. If we stop funding Pell grants, then all the universities that enroll students who pay using financial aid become less creditworthy. And since the federal government passes one-fifth of its revenues through to the states, and the states pass those revenues through to cities, if the federal government stops paying its bills, all states and all cities are suddenly in worse financial shape, which will make it harder for them to get loans.
And then there’s everything else. Mortgages. Credit cards. Loans that businesses take out to expand. Much of the debt in the American economy, and in fact globally, is “benchmarked” to Treasury debt.
The entire credit infrastructure is premised on the notion that U.S. Treasuries are the safest possible investment — the full and faith and credit of the United States is impervious, and the nation’s credit rating is the best bet on the planet.
Or it was, right up until Americans thought it was a good idea to give confused Republican extremists control of the U.S. House of Representatives.
As Ezra noted in his piece, “If America’s credit rating falls, it’s taking a lot more than just Treasury securities with it.”
If you’re wondering why someone hasn’t told congressional Republicans about this, many have tried. There have been countless briefings in which this has been explained in great detail, by all kinds of officials.
But it doesn’t seem to matter. As Time reported this week, “Democrats are clearly baffled by the challenge of persuading opponents who not only have a different set of priorities, but a different set of facts. ‘There’s a question about how much the facts matter to them,’ says a Democratic official. ‘And I don’t know what to do about that.’”