The Debt Ceiling And The Liberal Brain

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I am conflicted about the debate over the debt ceiling. As an instinctive conservative who believes our country’s financial reputation should be managed prudently, any talk of default, even if only technical default, is deeply disturbing. A country’s reputation for being a good credit and honoring its obligations is a trust, one that Americans have traditionally held to be of the highest importance ever since Alexander Hamilton created a national credit system to cement the union among the newly United States.

Moreover, US government securities have played a pivotal role in the development of modern financial theory, one of whose key assumptions is the risk free rate, and those gradations of credit risk beyond it that go into the determination of interest rates. For all practical purposes, the dollar and Treasury securities are the anchor of the global financial system and the complex financial models that run it – not the Euro, the pound, the yen or the renminbi. Anyone who would upset the apple cart must be mindful of the law of unintended consequences.

But. (You knew there would be a but!). What if the government that created the reference currency and interest rate matrix is recklessly injecting risk into the system? Then the risk analysis changes. It may be LESS risky to reign in this behavior now. That is the shifting terrain on which the players in this battle will be conducting their battles.

I don’t know the answer, and will be following the experts very carefully as this debate unfolds. To decide wisely we must understand the liberal brain, a subject I have touched on in the past. Ever since the Democrats won back control of Congress in November 2006, they have embarked on a high stakes strategy of reckless, improvident spending to alter the balance of power in our economy, and to exalt the public sector at the expense of the private. They used the severe recession and traditions of stimulus spending as their fig leaf. But no one is being fooled. It has been a naked power grab, all the more infuriating because of its abysmal economic results.

There is a reason that the Founding Fathers put the control of the nation’s finances in the hands of Congress, and especially that branch of it that goes before the people every two years. The colonists who rebelled against the English crown cut their teeth in battling the royal governors and choking off their funding. The framers of the Constitution wanted to institutionalize this power over the purse to safeguard liberty.

Modern liberalism has pursued an ethos of wild spending beyond the wildest dreams of the New Deal, the Great Society and Clintonomics. Reasonable minds can differ about how fast we can change course, and those differences will surface in the debt ceiling debates. But change course we must, and we must be acutely sensitive to the distinction between compromise and capitulation to blackmail. And like a Supreme Court justice once famously observed about pornography, we’ll know it when we see it.

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streetwise
Career financial professional with 30+ years in treasury management. American Airlines retiree. Lifelong Republican with center-right views. Host of Italian Tomatoes radio show on Blog Talk Radio. Managing Editor- www.jetamore.com, a travel and aviation blog.

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bobmontgomery
June 21, 2011 11:35 pm

Whew! You say you don’t have the answer, SW – I’m not sure I even understand the problem. I just have more questions. I don’t know jack about finance, interest rate calculations, etc. When you say the idea of default is disturbing, I think back to the fall of 2008 when we were told we were in crisis mode. I have read a little bit about the background of it, not much, and didn’t understand what I read. But all the financial gurus, at least in Washington, we are told, agreed that we were about to go over a cliff… Read more »

cactusjack
cactusjack
June 22, 2011 8:49 am

Likewise Bob ‘me no finance guru here’ but I have questions too. All I know is how this all started. Back in 2008 Pres Bush was off on some foreign trip. Paulson made a phone call to him and said you had better get back here it’s bad. Bush came back & they had some kind of emergency summit and for a couple of days after that, Bush looked like he had seen a ghost. A little later Paulson off the top of his head, wrote “$700 billion” on a napkin and said “we gotta have it or it’s doomsday.”… Read more »

Brian Hibbert
Editor
June 24, 2011 10:49 am

Wow, “recklessly injecting risks”. Just wow. That phrase alone was worth the read on this article Streetwise. This phrase has so many connotations and can be used in a number of ways. You applied it to the government’s reckless spending spree, but I think it also applies to recent monetary policy with the QE series. I think even Bernanke is starting to see that he’s been “recklessly injecting risks” since he seems to be backing off talk of QE3. But back to the phrase, it’s one I think some of the prominent voices in our community could pick up and… Read more »