10.22.2012 0

Debt limit shocker: Geithner had no plan to avoid default

Timothy Geithner

Photo Credit: U.S. House of Representatives

By Robert Romano — Don’t look now, but at $16.190 trillion, the national debt is just $204 billion away from reaching its statutory ceiling of $16.394 trillion — just one short year after the federal government increased the ceiling from $14.294 trillion last summer.

It was the largest increase of the government’s borrowing authority in history — some $2.1 trillion — and yet, underscoring how dire our fiscal emergency is, Washington, D.C. has burned through 90 percent of that in just 14 months.

Add that to the list of things Congress will be addressing in its lame duck session that already includes current tax rates increasing and sequestration taking effect at year’s end.

Now, Republican Senators Jeff Sessions and Orrin Hatch want to know what the Obama Administration plans to do about it.

In a letter to Treasury Secretary Timothy Geithner, they write, “Prior to the statutory debt limit increase of August 2, 2011, Senator Hatch requested information from Treasury and members of the Financial Stability Oversight Council regarding the amount of cash available at Treasury, projected cash inflows and outflows, and contingency plans for the possibility of Treasury running out of cash and defaulting on outstanding obligations.  The responses to this request were inadequate, and Congress was left to guess about the Treasury’s cash position and forecasts of cash positions or rely on guesses made by outside organizations.”

The letter continues, “Our understanding is that neither the administration nor the Treasury had any formal contingency plan for dealing with the consequences of the U.S. government defaulting on its obligations.  That is, there was no ‘plan B.’”

Further, a review by the Department of Treasury Inspector General examined options that were considered at the time: “Treasury considered asset sales; imposing across-the-board payment reductions; various ways of attempting to prioritize payments; and various ways of delaying payments.”

Critically, Treasury officials “organizationally they viewed the option of delaying payments as the least harmful among the options under review,” according to the report. Or in other words, “no payments would be made until they could all be made on a day-by-day basis.”

So, the apparent plan was to simply postpone payments to everyone in lieu of a resolution. In other words, to hold our creditors hostage and to effectively default until Congress caved in to the White House’s demands to increase the debt limit.

But why not prioritize payments? The only way default could have been avoided was to pay principal and interest out to creditors and to refinance existing debt up to the statutory limit.

Instead, according to the Inspector General’s report, “While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others. As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”

What? So, the Treasury could not distinguish between the necessity of paying our creditors and building bridges to nowhere? Really?

Any household knows that you pay the mortgage before you go out and buy a new car or big-screen televisions. Instead, the Treasury simply ignored common sense. Wouldn’t the “sensible” thing have been to pay our creditors first?

Ominously, the report noted, “the decision of how Treasury would have operated if the U.S. had exhausted its borrowing authority would have been made by the President in consultation with the Secretary of the Treasury.”

Apparently, despite having months of warning that a congressional fight over the debt ceiling was in the offing, “there was never a final plan that was presented to the President for approval,” according to the Inspector General.

Wow. Just wow. Geithner was really all over this problem, huh? The gross incompetence on display at Treasury while the government teetered on the brink of default is beyond belief. Especially since Congress was under no obligation to increase the debt ceiling.

This must never be allowed to happen again. Various versions of the “Full Faith and Credit Act” — legislation that prioritizes paying creditors first should the debt ceiling be reached — have been languishing in the House Ways and Means Committee, chaired by Rep. David Camp, for almost two years now.

There should never be any question that the U.S. will pay its debt obligations on time and in full. The debate over whether Congress should authorize additional borrowing for new spending is a political question, and not one the executive should ever have any leverage with which to coerce the legislative branch into accepting.

Robert Romano is the Senior Editor of Americans for Limited Government.

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