By Felix G. ROHATYN and PETER GOLDMARK
We have walked down the long, dark road that leads to default.
You don’t want to go there.
As major actors in the resolution of the New York City fiscal crisis of 1975, we looked at the consequences of default; along with millions of other New Yorkers we fought hard to avoid it, and together we succeeded.
The keys to success were strong executive leadership in the person of Gov. Hugh L. Carey, and the willingness of all involved — Democrats and Republicans, upstate and downstate, labor and business — to pull together to find financial solutions and political compromises that averted crippling disaster and put the city and state on a sound financial footing again.
Nothing like that potential coalition or sense of common purpose exists today as the U.S. government itself looks down that long dark road to the possibility of default, which emerges as the real threat following the relatively small “fiscal cliff” tax deal.
Damage defies prediction
You cannot tell in advance where the chaos of default would strike first. It’s like trying to forecast the impact of a high-voltage burst of electricity fired down a worn, fragile jumble of wires for which no one has the diagram. Will the initial shock occur when the federal government isn’t able to send out Social Security checks or Medicare reimbursements? Which will the government honor first — holders of U.S. Treasury notes seeking repayment, or bills from power utilities who need to pay their suppliers so they can generate electricity for transit systems and hospitals? The general chaos is foreseeable; the exact details of where it begins and how it spreads are not.
The stance of those Republicans in the House of Representatives who think not raising the debt ceiling is a smart way to force the federal government to cut spending is irrational and dangerous. It is irrational because the large increase in U.S. debt over the past two decades is a consequence of past actions — all authorized by the Congress of which those Republicans are a part — not a commitment to new spending. And it is dangerous because the consequences of default are widespread and unmanageable, and once you let the genie of destroyed confidence in America out of the bottle, it is not so easy to put it back again.
The role of the president is twofold: to start spelling out to the public exactly how reckless a decision not to raise the debt ceiling is, so that it becomes harder for elected representatives to even toy with that idea, and to start discussing a range of serious mechanisms for controlling costs and reducing debt over the long-term in practical, phased steps.
The world has vested a great deal of confidence in the soundness of the American government and in the value of its financial obligations. Once that confidence is shattered — and global financial markets are already — a variety of adverse forces would be unleashed. One example is that the world would move away from reliance on the dollar as the global reserve currency. Many Americans don’t understand that a measure of the relatively high standard of living they enjoy depends on the status of the dollar as the currency everyone needs to do business. Others around the globe will be quick to point out that the world cannot afford to rely upon a reserve currency whose issuer may default.
The clock is ticking
In writing bluntly about the danger we face, we have broken one of the oldest conventions of financial discourse, which holds that one should not talk about default for fear that highlighting its possibility may in itself make it more likely. But that’s a convention among those who already understand how disastrous default would be. In the present case we feel the danger is so great, public understanding so rudimentary, and the need for practical alternative methods for coming to grips with our spending problems so urgent, that it is time to speak bluntly with each other. And the clock is ticking.
In the military world, generals use the phrase “the fog of war” to describe the phenomenon of unpredictable adverse consequences once a war is launched. We will find ourselves in a similar “fog of default” if we don’t get our act together. As in the case of war, the results will be dangerous and unpredictable. But unlike with war, in the folly of financial threat and counterthreat on which we have embarked, the only enemy in sight is ourselves.
Peter Goldmark, a former budget director of New York State, is a member of the State Budget Crisis Task and a columnist for Newsday. Felix G. Rohatyn served as chair of the Municipal Assistance Corporation and was U.S. ambassador to France. Distributed by MCT Information Services.
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