Economix: An Inconvenient Precedent for the Debt Crisis

CATHERINE RAMPELL

Dollars to doughnuts.

Last night, President Obama and the House speaker, John Boehner, gave dueling speeches on how to fix the deficit. One line from Mr. Boehner’s speech confused me:

Here’s what we got for that spending binge: a massive health care bill that most Americans never asked for. A ‘stimulus’ bill that was more effective in producing material for late-night comedians than it was in producing jobs. And a national debt that has gotten so out of hand it has sparked a crisis without precedent in my lifetime or yours.

The wording is a little ambiguous, but it appears that the “crisis without precedent in my lifetime or yours” refers to the current stalemate over the debt ceiling and the resulting threat of default.

With all due respect to Mr. Boehner, there is a precedent for this, and it was in his lifetime.

Mr. Boehner was born in 1949. In 1979 there was a showdown over raising the debt ceiling, and the country came within hours (not days) of defaulting on its obligations. In fact it actually did temporarily default on some of its obligations, although that seems to have been because of technical difficulties because discussions ran so close to the wire.

Brady Dennis of The Washington Post wrote a nice summary of this event earlier this month:

Congress had been playing a game of chicken with the debt limit, raising it to $830 billion — compared with today’s $14.3 trillion — only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear a lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode titled “The Day the United States Defaulted on Treasury Bills.”

Article source: http://feeds.nytimes.com/click.phdo?i=da61f2f5c0835c8d50fbf104078e884b