Playing with fire: A manmade debt-limit crisis

When summer dries the pine needles of the West's great forests and roasts scrub brush to a tinder brown, Forest Service workers sometimes roam the canopy with fuel tanks strapped to their back, lighting the ground on fire. Firefighters call these exercises "controlled burns" or "prescribed fire." Essentially, it means burning a few dead trees to save the whole forest. When it works, as it often does, the practice thins the kindling on the forest floor and reduces the danger of a catastrophically large fire. But sometimes, the wind shifts unexpectedly and fans the flames, and the burn spreads wildly out of control. This is the risk congressional Republicans are taking as they negotiate with the White House over raising the nation's debt ceiling. They're subjecting the United States to a sort-of economic controlled burn-one that could dampen risks down the road, or spark the very conflagration they hope to avoid. By refusing to increase federal borrowing authority without major budget cuts, the GOP is trying to thin the possibility of a debt crisis raging through the domestic economy. America must act now, Republicans say, to avert a scenario where, faced with mounting public debt, investors quickly lose confidence in government securities, federal borrowing costs spike, and growth plummets. Republican staff members of the Senate Banking Committee warned in a white paper last week the economy "will suffer dearly if financial markets and our creditors lose faith in the federal government's commitment to paying off its obligations in full. Fearing default either explicitly or through inflationary policies, financial markets will demand ever-increasing compensation for the risk through higher and higher interest rates. The resulting increased interest payments will choke off the ability of government to operate and will choke off private, interest-sensitive spending. The economy will be harmed, perhaps precipitously." Financial markets show no signs of such fears at the moment: Yields on short- and long-term Treasury bonds remain near historic lows. U.S. credit-default-swap spreads, which measure investor worries about default, are the lowest of any wealthy nation. Still, many economists say market sentiment can flip with little warning. That's why Republicans say they're forcing the conversation about medium- and long-term debt reduction now, when the debt ceiling vote prods Democrats to the bargaining table. That's the GOP's preventative fire: Threaten not to raise the debt ceiling, which the federal government hit on Monday but won't trigger default until August, unless President Obama and Senate Democrats agree to trillions of dollars in spending cuts. The tactic infuriates Democrats. Failing to raise the ceiling in time would allow the "first default in history caused purely by insanity," Austan Goolsbee, the chairman of the White House Council of Economic Advisers, complained publicly early this year. On Monday, Senate Majority Leader Harry Reid said Republicans are "willing to risk the strength of our economy just to make a political point." It's more complicated than that. The debt-ceiling fight is the best leverage Republicans have had-or figure to have any time soon-to elevate the debt-reduction conversation, and with it, the long-standing GOP goal of reducing the size of the federal government. The risk, though, is that negotiations could break down, or political winds could shift. Tea party protests could overwhelm House Speaker John Boehner's push for GOP votes to raise the ceiling as part of a package of cuts acceptable to Obama and the Senate. Come August, a federal default could burn the fragile economic recovery to the ground. It's the nightmare scenario of the controlled burn. Nothing would cause financial markets and creditors to "lose faith in the federal government's commitment to paying off its obligations in full," as Senate Republicans put it, faster than an actual failure of the government to pay its debts.
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