On Wednesday, House Minority Leader Nancy Pelosi sent a warning on the debt-ceiling hike. “Let’s get on with writing the bill,” she said. “I don’t need to see markets drop 400 points. But Republicans may need to see markets drop 400 points.” Pelosi remembers September 2008, when the House, then controlled by the Democrats, initially voted against the Troubled Asset Relief Program. Stocks plunged 778 points. Only after her caucus felt the visceral terror of an impending depression was Pelosi able to cobble together votes to counter Republican opposition.

If the House goes to the wire this time, there will be plenty to fear. A Treasury default would be worse than the financial crisis of 2008. The world economy is built on Treasury securities. Companies around the globe use them as collateral for overnight loans so that they have cash to pay workers as they wait for their own payments from other companies. Because this collateral is so safe, the lenders who make the overnight loans don’t have to worry about the borrowers. The key is that Treasury bonds are supposed to be risk-free.

But nothing is risk-free. If and when the market discovers this about Treasury bonds, the consequences will be dire. Companies short of cash would shed workers. Global asset selloffs could send the slow-brewing Eurozone crisis into multiple defaults, and European governments would struggle to protect their own financial institutions from panic. The fear of default could spur companies around the world to hoard more cash in anticipation, slowing the economy down. In the past week, a parade of leading financial figures has sounded the alarm—Federal Reserve chief Ben Bernanke, JPMorgan Chase honcho Jamie Dimon, Senate Minority Leader Mitch McConnell, Treasury secretary Timothy Geithner, and former Obama economic adviser Larry Summers among them.

And that’s precisely the problem. Tea Party freshmen and their supporters hold this establishment in contempt. Implicitly invoking TARP, as Pelosi did when she mentioned a stock-market crash, won’t scare them; it will only embolden them. It would be one thing if Tea Party adherents merely believed that a default wouldn’t spell disaster; in that event, the GOP freshmen would figure out the truth soon enough. The problem is that many Tea Partiers consider TARP such a terrible idea that they would have chosen to brave a worse financial disaster instead. Today, they think that a market cataclysm would be better than another “sellout” vote. House veteran and GOP presidential candidate Michele Bachmann set the pace in last month’s GOP presidential debate: “I fought behind closed doors against my own party on TARP. It was a wrong vote then. It’s continued to be a wrong vote since then.” As the defeat of Utah senator Bob Bennett in 2010 showed, party voters are unforgiving of Republicans who supported TARP. A debt-hike vote will follow Republican candidates in their primaries next year.

Whose fault is the trust deficit that the elites have racked up? After the initial TARP vote, the establishment spun the story, calling it not a bailout but a “rescue” and insisting that its purpose was to save jobs, not banks. What have Americans seen since? Financial firms whose bad decisions should have put them out of business have logged huge profits, while 7 million workers have gone missing from the economy. Such a stark disparity in outcome is absolutely the fault of establishment figures—from former Treasury secretary Hank Paulson through President Obama himself. No surprise that Americans digesting that experience now suspect that a debt-ceiling vote is another trick.

TARP and the debt-ceiling vote do resemble one another—but not in the way that the Tea Party thinks. By the time TARP came around, it was too late to do anything about a financial system spiraling out of control; the only sane way to have avoided TARP would have been to end the government’s too-big-to-fail approach to the financial world long before, and that approach dates all the way back to the 1980s. The problem with TARP was not the vote for it but what government failed to do afterward: force lenders to take their losses, albeit in a less panicky manner, thus liberating the economy from the bubble’s legacy. And government failed, too, to enact financial rules to ensure that it wouldn’t happen again.

We’re in the same situation today. It’s too late now to worry about debt that’s the legacy of past choices. If either party had wanted to avoid such a vote, it should have taken steps decades ago. Such steps would have included self-restraint on new entitlement programs—including the Medicare prescription-drug benefit—until we figured out a way to control growth in the old ones. And the steps would also have included putting the rules in place to avoid a financial crisis that has sent tax revenues plummeting and safety-net costs soaring.

Both parties should stop pretending that the debt-ceiling vote is an opportunity for big fixes or a test of principle. It isn’t, just as TARP wasn’t. Even if party leaders can convince enough public-spirited members of their caucuses to vote on modest, long-term budget “reforms” in return for a debt-ceiling hike, these concessions are likely to be window dressing. Long-term fixes to programs like Medicare won’t happen overnight. They’ll come after years of open-minded experimentation. Likewise, cleaning revenue-sucking holes out of the tax code will take months, not a few late nights. With the debt ceiling, as with TARP, what really matters is what happens after the vote.


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