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Home Publications Blogs Beat the Press Debt Default, the End of the World and Timothy Geithner's Thoughts

Debt Default, the End of the World and Timothy Geithner's Thoughts

Sunday, 09 September 2012 07:55

Real reporters and newspapers don't try to tell audiences what political figures think because they don't know what they think. But Bob Woodward does not fit the description of the former and the Washington Post does not fit the description of the latter, hence we have a front page account of the battle over the debt ceiling that concludes with a section beginning:

"Geithner thought there was one other consideration. He did not mention it to anyone, not even the president, but he had thought about it a great deal. It was not just that Obama faced an economic choice or a political choice. He faced a moral choice."

The piece then goes on to explain how Geithner thought it would be horribly immoral to default on the debt because of the price the country would pay for generations.

There are two points to be made here. First, Woodward and the Post do not have direct access to Timothy Geithner's thoughts. Either Geithner conveyed his thoughts to Woodward, in which case this section should begin: "Geithner said there was one other consideration."

Alternatively, someone close to Geithner told Woodward what Geithner said, in which case the section would begin: "according to Person X (ideally a person with a name as opposed to "someone close to Secretary Geithner"), Geithner said there was one other consideration." Okay, but this is the Post.

Let's get to the substance. While we don't have any clue as to what Geithner really thought, it is worth saying a word about the likely consequences of a debt default. First, it would lead to a serious downturn and big-time financial crisis. If U.S. debt was no longer 100 percent solid, it would almost certainly lead to a financial freeze-up that made the post-Lehman crisis look like a Sunday picnic.

However, the plus side of this would be that it would almost certainly wipe out the Wall Street banks once and for all. We would eliminate this massive parasitic structure that is draining hundreds of billions of dollars a year from the productive economy and is the largest single source of inequality in the economy today.

The other point is that countries do bounce back from financial crises. The best example here is probably Argentina. It had a complete financial meltdown in December of 2001. This led to banks closing and people being unable to access their money. The economy was in free fall for three months. It stabilized in the next three months and began 7 years of robust growth in the fall of 2002. By the middle of 2003 the country had made up all the ground lost in the crisis. In the case of Argentina, the people of the country are almost certainly better off today from having to endure short-term pain for long-term gain.

While economic policy makers in the United States may not be as competent as those in Argentina, even if it took twice as long to regain the lost ground (i.e. three years), the country could still be much better off in the long-run as a result of eliminating the bloat in its financial sector. It would be appropriate for a lengthy discussion of the crisis like the Post's piece to consider this issue, even if Geithner claims that it would be immoral to allow Wall Street to go under.

Comments (10)Add Comment
written by Newton, September 09, 2012 8:37
Argentina jails people who report accurate inflation data, Argentina cooks the books, it's extremely irresponsible of you to praise Argentina.
written by Last Mover, September 09, 2012 8:44
Geithner is obviously channeling Hank Paulson who proclaimed during the financial crisis it was immoral for homeowners to default by walking away from the debt of underwater homes, despite it was the rational thing to do.

Who do homeowners think they are anyway, bankers?
written by AlanInAZ, September 09, 2012 10:24
As a retired person who relies on investment income I think the prescription by Dean Baker to freeze up the entire world financial system is crazy. Comparison with Argentina makes no sense given the much larger size of potential consequences if the US defaults. Dean Baker cannot possibly know the full scale of what would happen.
written by Slim Jim, September 09, 2012 11:15
DB: My brother in Argentina (30 years there) tells me that the current government is saturated with corruption with a steady revenue stream channeled to wealthy benefactors. The middle class is squeezed in new ways every month. Imports are blocked from entering the country. Pensions have been raided. Obtaining foreign currency is essentially prohibited. Inflation (over 30%) is rampant. Get the picture? Thanks.
No picture or point to your logic fail
written by Andrew Solarski, September 09, 2012 1:28
Today's government in 2012 is allegedly corrupt, therefore the response to the financial crisis in 2001 was somehow wrong? Had they not defaulted they would have honest politicians today?
Does does realize the US and Argentina aren't really comparable?
written by joe, September 09, 2012 3:03
Argentina had debts denominated in a foreign currency, and they had their currency pegged to the dollar. It was a real default because they wouldn't produce the US dollars because they didn't have them and they can't make them. There are no such issues with the US, the US can only default if it CHOOSES to. I know dean knows all this, so why the unnecessary comparison? Does dean really think congress will voluntarily choose to stop paying and let its wall street benefactors be wiped out. The earth could get hit be a huge meteor tonight and make us all extinct too...

Choosing to not honor treasuries in full would also remove interest income from the economy, like pension funds and stuff. Great idea.
written by david j michel jr,, September 09, 2012 5:01
sence when does tim geithner care about morales ,and if they dont agree on a budget,and we have a financial meltdown I hope PNC bank is the first to fail!
written by SS, September 10, 2012 10:07

Dean, the National Inquirer, oops the Post, continues today to 'report' on Woodward's idiotic book, if you believe what the Post says about it anyway, which is always doubtful. Here is the comment I shared with them on the piece:

"The absolute arrogance and stupidity of this article explains why I've halted 30 years of subscription to the Post. Woodward blames the rapist's aggression on the victim's attractiveness? A plan "B?" [the Post attributes to Woodward blaming the President for not having a plan"B." This more than idiotic comment served as a headline for the last several days.] I am an economist but can't imagine a single plan "B" to assuage not raising the debt limit. It is like jumping off a cliff, once the deed done, what is the plan "B," stationing an ambulance at the bottom of the cliff?"
written by Paul Heise, September 10, 2012 11:48
See Forbes "It is Impossible For The US To Default."
Dean Baker, Austrian Economist?
written by Andrew Burday, September 11, 2012 11:02
It just struck me how Austrian this sounds. A serious crisis and depression might not be a bad thing if it cleaned out an artificially bloated industry and allowed its resources to be put to more productive uses. This isn't really an argument and I fully agree with you that the financial sector is a bloated drag on our economy (and a terrible distorter of our politics). But it was surprising to make that connection, so I thought I'd comment.

BTW, are commenters like "Newton" bots or are there actually people who have so little to do with their lives that they can spend their time making sure the first comment on every post is a (spurious) refutation? If the latter, what a sad, dreary existence.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.