The Price of Politics (46 page)

“You can’t veto,” Geithner said. “You cannot be responsible for default.” That would be a calamity, as they all knew. Anything had to be done to prevent it. Anything to preserve the global economy. They could not foreclose such an option, awful as it might be, if that was all that was left. Remember where they were: Europe burning, world economy very weak, young U.S. recovery.

“If he caves,” Plouffe said, “it will have long-lasting political repercussions that we may never get out of. If we draw a line in the sand on something this important”—as the president had done unsparingly—“and cross it, we may never be able to come back.” They all knew that Obama was under tremendous fire from Democrats. The view widely held by Democrats on the Hill was that the president caved to the Republicans. The evidence was his agreement to extend the Bush tax cuts the previous year. Those in the room might think it was an unfair description of what had happened, but Plouffe reminded them that they were not in a particularly good place politically.

So, accepting a two-step deal would not work, the senior White House political adviser said. “It’ll be potentially devastating. We will not get credit for doing anything. We’ll look like we got bullied by a bunch of very unpopular and irresponsible people.”

Nabors said he basically agreed. “We are paying a heavy price now,” he said, both politically and economically. “We will pay an even heavier
price later” if the president signed the House bill. They would be buying a little short-term stability for a lot more long-term instability.

Lew reminded them that in the battles at the beginning of the year for the routine funding of the government through stopgap continuing resolutions, the Republicans had demanded more spending cuts every two or three months.

Nabors called it “paying at the pump,” meaning the Republicans would insist on more and more cuts. Lew and Nabors had negotiated continuing resolutions for months. The president had held four Oval Office meetings with Boehner on them. The situation had been hell. “You can’t send us back into that room,” Nabors half joked. “I don’t know how we get out of that room alive.”

Pfeiffer saw the dilemma. On one hand the president could not cave, and on the other he could not knowingly trigger an economic disaster. “Here’s what we have to do,” Pfeiffer said. “We have to do everything we possibly can to make sure that this never gets to the president’s desk. He can never face this decision. We have to talk to every Senate Democrat, call everyone we can, hold as many press conferences as we can, we can never let this get to the president’s desk.”

Republicans, Geithner said, some in the Senate and many in the House, did not understand the risk of default. Some of these people talked openly and publicly about how a default was the only way to get Washington to change, and how a downgrade in the nation’s credit rating would be good. That wouldn’t matter if Boehner and McConnell were stronger leaders, willing to leave those guys behind. But the leaders were trying to have it both ways and extort changes from the president that he would never make. The Republicans thought there was some kind of parachute at the end.

Geithner had to deal with the possibility that the House bill could reach the president’s desk. “My recommendation to the president would be, we’ve got to sign this. If that’s what they offer us, we sign it.” Because there were no parachutes.

“What’s going on?” said Obama, appearing unexpectedly at Daley’s door. “What are you guys talking about?”

He knew, of course. They quickly reviewed where they were.

Could I actually veto it? Obama asked, adopting his law professor manner. What would actually happen the day of the veto? The day after?

“It would have massive effects,” Geithner said. Treasury had to conduct a bond auction in the open market in about five days, the regular Tuesday auction, with settlement on Thursday. That first auction could be a kind of trip wire, setting off a chain reaction. The federal government couldn’t pay its bills. “Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?”

Another possible outcome, he said, was perhaps worse. “Suppose we have an auction and no one shows up?”

The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse.

The reality was that if the debt limit wasn’t increased, Geithner would have to call off next week’s auction. That would surely start a panic.

As he had told them before, the world financial system rested on the foundation of a risk-free asset, and that asset came in only one form: U.S. Treasury securities. They were the only place of safety in a storm. The 2008 financial crisis had been manageable for the United States because the world’s confidence that we would solve the problem kept investors buying U.S Treasury debt.

“Every financial asset in the United States, every financial asset in the world, rests on that basic foundation,” Geithner said. It would not just be that Social Security checks would not go out, or that the government would not pay businesses on time. Bank deposits, homes, stocks, any investment—anything of monetary value—would be affected.

“So you put that in question, everything comes crashing down and you cannot rebuild it. It’s something that will be lasting for generations.” Default could trigger a worldwide economic depression worse than the 1930s.

Lew, the most experienced of the group, a veteran of decades of budget wars, had always thought this was scary. Now it was very scary.

The witching hour was much closer than many thought because of these auctions. Treasury would have to sell short-term notes worth about $51 billion next week. Even if signing a short-term debt extension got them past the auction, it was not as if the financial markets would be calm, several noted.

“So,” the president said, “if we give $1.2 trillion now in spending cuts”—the amount in the House bill to get the first increase in the debt ceiling for about six to nine months—“what happens next time?” The Republicans would then come back next year, in the middle of the presidential election, and impose more conditions on the next debt ceiling increase. “Are they going to demand the Ryan budget? Are they going to ask us to make massive cuts in Medicare just to fund the government? Just to keep the government from defaulting?” He could not give the Republicans that kind of leverage, that kind of weapon. It was hostage taking. It was blackmail. “This will forever change the relationship between the presidency and the Congress.

“Imagine if, when Nancy Pelosi had become speaker, she had said to George W. Bush, ‘End the Iraq War, or I’m going to cause a global financial crisis.’ This would forever change the president’s authority if Congress can hold a president hostage every time.”

So the president said they had to break the Republicans on this. Unless the administration broke them, they would be back whenever it suited them politically.

“We’ve lived through government shutdowns,” Geithner noted. Lew was budget director in 1995 when Newt Gingrich shut down the government during the Clinton presidency. The world had survived. “If you can’t get into a national park,” Geithner said, that was sad—a large inconvenience.

“It’s one thing to have a government shut down,” he said. “It’s another thing to have an economy shut down. We just don’t know what happens.” No one knew the mechanics. “No one has ever seen what the economic ramifications would be.” It was so far outside anyone’s thought process, he said, that the Congressional Budget Office had
never done an analysis of what might happen if the U.S. government defaulted. It was beyond the threshold of the conceivable. It was almost like trying to predict what would happen if aliens landed.

What about selling assets? someone asked. Selling government property?

“You can’t sell federal property that quickly,” Lew assured them.

What about gold? The U.S. government owned about $275 billion worth. Could they sell it? Would that buy time?

No, said Geithner. One reason, it doesn’t buy you very much time. The other reason, it’ll scare the shit out of everybody. Besides, dumping that much gold on the market would trigger a dramatic drop in price.

They were out of options, Geithner said. The only one might be accepting the House bill, loathsome as it might be, if it passed the Senate. “If the U.S. government can’t borrow money,” he said, “the 2008 financial crisis will be seen as a minor blip if we default.

“This is uncharted territory of a magnitude that none of us can even imagine,” Geithner added, making perhaps his strongest argument. The financial problems in Europe, most immediately in Greece, were much more severe than people realized. He and the president had been focusing on them intensely.

“We are single-handedly propping up the Western financial system right now,” he said. “Play with fire, and it might take you past the point of no return.”

Greece came up again.

It is one thing for Greece to be Greece, Geithner said. “It’s a different thing for us to be Greece. No one would be able to save us.”

What about next week? the president asked.

Tax collections only covered about two thirds of what the federal government spent, given the $1.3 trillion annual deficit on a $3.8 trillion budget, Geithner reminded them. That meant $25 billion a week more had to be borrowed; refinancing of the existing debt required another $100 billion a week for a total of $125 billion of new Treasury debt every week.

Some minor arrangements could be made with the Federal Reserve,
Geithner said, but they would not have any real impact. In theory, they would not default until Thursday, when the debt sales cleared, but as soon as it was obvious default was coming, the dam would burst.

“Tim,” Nabors chimed in, “is there any way that you can slip this to Friday? Because Congress works towards deadlines. Thursday is not a deadline. They won’t get done by Thursday. They’ll get done by Friday.”

Doesn’t this really boil down to two things? the president asked. “If the Republicans believe they can do this to us now, they’re going to believe they can do it to us later on. And where are we? Under any scenario we risk a default. That’s not my control. The Republicans are forcing the risk of a default on us. I can’t stop them from doing that. We can have the fight now, or we can have the fight later on, but the fight is coming to us.” What would be gained by delaying the fight until the next summer? And what might be lost?

Discussion turned to the Republicans. Are they really that crazy? The answer around the room was probably yes. Boehner himself understood the consequences, they agreed. But did he have enough control over the Republican conference to get his share of the 218 votes that would be needed for any deal? No. This could spin wildly out of control.

So, no, the president said, he was not going to cave. Period. He said good night, got up and left. He was very agitated.

The others talked some more, reviewed, weighed, but eventually they all went home. There was nothing more to do that night. Not only did they not have a deal, they did not have another option.

Geithner thought there was one other consideration. He did not mention it to anyone, not even the president, but he had thought about it a great deal. It was not just that the president faced an economic choice or a political choice. He faced a moral choice. That was the most difficult decision a leader ever faced. Suppose the Republicans and Democrats banded together and passed a bill so the White House could not keep it from the president’s desk? What then? Veto and start a global trauma?

The White House political people said a default would be blamed
on the Republicans. Oh, yeah, it would fall on those intransigent, crazy Republicans. But Geithner knew they couldn’t be sure. He certainly was not sure. And the president couldn’t be either.

The president should not put himself in the position of saying unequivocally that he would veto, Geithner concluded, for one simple reason. No one could be sure how to put the American or the global economy back together again. The impact would be calamitous.

“And the people who would bear the pain of that would be the people less prepared,” Geithner told others, “less able to absorb that cost. It would be something you could not cure. It is not something you can come back and say, a week later, oh, we fixed it. It would be indelible, incurable. It would last for generations.”

I
n several discussions with the president, the question was raised, Do you think Boehner was acting in bad faith?

“No,” Obama said. “He wouldn’t have exchanged paper with us.” The conclusion was that Boehner was just not strong enough or skilled enough to deliver. Perhaps his staff was too inexperienced. Or maybe Cantor, whom Obama said he did not have a feel for, was undermining the whole process.

As in the past, the president’s response to Boehner’s unwillingness to deal was, “I have some sympathy for him.”

• • •

Lew, Nabors, Sperling and Bruce Reed, Biden’s chief of staff, had finally decided to propose using language from the 1985 Gramm-Rudman-Hollings deficit reduction law as the model for the trigger. It seemed tough enough to apply to the current situation. It would require a sequester with half the cuts from Defense, and the other half from domestic programs. There would be no chance the Republicans would want to pull the trigger and allow the sequester to force massive cuts to Defense.