To win the debt-ceiling showdown, the Republican House leadership must first do what all 47 Senate Republicans did when they voted for the Toomey-Vitter amendment — debunk the false assertion that failure to raise the debt limit is tantamount to a default on Treasury bonds. Buying into this scare story — as too many otherwise-thoughtful Republicans have done — gives away any real leverage because it makes not raising the debt ceiling unthinkable.
The Toomey-Vitter approach, also known as the Full Faith and Credit Act and championed in the House by Tom McClintock (R., Calif.) and Scott Garrett (R., N.J.), would take away from the administration the discretion to default on Treasury bonds. It would require bondholders and Social Security recipients to be paid first in the event the debt ceiling is reached. There is more than enough revenue on a cash-flow basis to take any default risk off the table.
Passing this legislation in the House — even though the Democrats already have
stopped it in the Senate — would help educate the public that default is not at stake. It would demonstrate that failure to raise the debt ceiling would cause a default only if President Obama and Treasury Secretary Geithner recklessly chose to put payments to vendors or other expenditures ahead of debt service.
By passing the Toomey-Vitter bill, the House can gain real leverage to demand that the administration make deep cuts in spending and fundamental reforms like the Medicaid block grants at the heart of the Ryan budget — or face the daunting prospect not of default, but of operating the government on a cash-flow basis.
— Phil Kerpen is vice president for policy at Americans for Prosperity.
Congress will raise the debt ceiling, something that the Federal Reserve as well as the White House wants (the Fed is worried about market panic). In return, Republicans — or somebody! — should insist that the nation’s financial regulators, including the Fed, do what they should have done starting nearly three years ago. That is, regulators should make the nation’s banks do their job of clearing out bad home-mortgage debt fast while respecting the rule of law.
Some numbers illustrate why our economy can’t grow — and remember, growth is a big part of tackling the future cost of servicing the national debt as well as paying for programs such as Medicare. Compared to its level in 2000, the U.S. population in 2010 was up 9.3 percent. Inflation was up 26.6 percent. Yet home-mortgage debt, at the end of 2010, was 110 percent higher than its 2000 level. That’s twice as high as it was a decade previously, even after three years’ worth of torturously slow defaults.
Every dollar that homeowners spend servicing the mistake of a home valuation circa 2005 or 2006 — valuations approved by lenders — is a dollar that they can’t invest in the capital markets, creating the jobs and growth that we need to stay ahead of our federal borrowing. As Morgan Stanley’s Stephen Roach said last week, the government’s policy of “foreclosure containment” is part of what’s impeding the creative destruction that the economy needs in order to recover.
America has no choice but to shed this debt. We can continue to bleed the debt out gruesomely slowly — as we have over the past three years. Unless we’ve enjoyed the past three years, though, we should do it faster.
To jump-start the process, regulators should force mortgage servicers to foreclose on long-defaulted homeowners — and to get each foreclosure done on a strict deadline and following the law. If the servicers can’t or won’t do that — or if they don’t think it’s economical — then they can write the principal of the debt down on each applicable mortgage, taking the home out of delinquency.
Would that mean more financial-industry distress and short-term turmoil? As Sarah Palin might put it, you betcha. But it would get us a step closer to putting our capital toward productive use, instead of throwing good hard-earned cash after bad debt. Growing fast, we’d be in a much better position to tackle entitlements — and the national debt, whose ceiling Congress is about to hike.
— Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal and author of After the Fall, just now released in paperback.