In a letter today to Treasury Secretary Tim Geithner, Pat Toomey answered some of the Democratic criticisms of his pitch to pay down debt should the U.S. not raise its debt limit. Here's one key graf:
I am sure that you fully appreciate the vital importance of avoiding a
default on U.S. Treasury securities. Therefore, I am equally confident
that, in the event that we reach the debt limit, you would use the ample
resources from ongoing tax revenue, just as your predecessors did, to
ensure that a default on our debt would not occur. But because several
members of this administration have raised questions about your
commitment to avoid such a default, I believe it would be reassuring to
the millions of Americans who hold U.S Treasury securities if you would
publicly confirm your commitment to avoid such a default and urge the
administration to support my legislation to codify this vital priority.
Full text after the jump:Dear Secretary Geithner:
I am deeply concerned about recent comments made by several administration officials stating or implying that failure to raise the nation's debt limit, prior to reaching it, would constitute a default on our debt and precipitate a financial crisis. Recently, some have gone so far as to say that proposals to prioritize payments on the national debt, in the event the debt limit is reached, are "unworkable" and "would not actually prevent default" on our Treasury Securities. Not only are these comments factually incorrect and disproven by historical events, but, most disturbingly, they could undermine investor confidence in the U.S. government's debt, thereby potentially precipitating some of the very reactions the Treasury Department should be preventing.
In a recent post on the Treasury Notes Blog, Deputy Secretary of the Treasury Neal Wolin writes that efforts to prioritize debt payments:
...would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments. It would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against, including sharp rises in mortgage interest rates and other borrowing costs for families; reductions in the value of homes, 401(k)s and other retirement savings; and negative effects on the dollar and the safe haven status of Treasury bonds and other Treasury securities (emphasis added).
This argument ignores the historical record. As you are well aware, the Treasury has had to manage the nation's finances on four separate occasions when the debt ceiling was reached. In each of these instances, in 1985, 1995-1996, 2002 and 2003, the Department prioritized certain payments – including debt service. And yet, none of these prioritizations resulted in default on our publicly held debt nor did they cause the "catastrophic economic consequences" Deputy Secretary Wolin now predicts.
In contrast to Mr. Wolin's current predictions, the market did not respond to reaching the debt ceiling in a significantly negative manner. During these prior debt limit episodes, interest rates on U.S. Treasury securities decreased in two instances (1985 and 2003), increased slightly in 2002 and essentially stayed the same in 1995-96. When the U.S. has reached the debt limit in the past, investors assumed that U.S. Treasury securities would be Treasury's top priority – and they were.
Yet members of the President's economic team have nevertheless raised the specter of default. Austan Goolsbee, Chairman of the Council of Economic Advisors, recently said: "If we get to the point where you've damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity. I don't see why anybody's talking about playing chicken with the debt ceiling."
Certainly, no one should damage the full faith and credit of the United States. In fact, Democrats and Republicans should all agree on at least one thing: Under no circumstances is it acceptable for the U.S. government to default on its debt. Not only are we morally obligated to honor our debts, but we benefit greatly from the nearly universal conviction that those who lend to us will always be repaid, on time and in full. We should never undermine that conviction. Unfortunately, the recent statements by Mr. Wolin and Mr. Goolsbee needlessly jeopardize investor confidence in our ability and willingness to service our debt.
That is why I have introduced, along with 20 of my colleagues, the Full Faith and Credit Act (S. 163). This bill would simply require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised. This legislation is designed to maintain orderly financial markets by reassuring investors in U.S. Treasury securities that their investments are perfectly safe even in the unlikely event that the debt limit is temporarily reached. This legislation would be unnecessary had administration officials not publicly raised the specter of a government default.
I am sure that you fully appreciate the vital importance of avoiding a default on U.S. Treasury securities. Therefore, I am equally confident that, in the event that we reach the debt limit, you would use the ample resources from ongoing tax revenue, just as your predecessors did, to ensure that a default on our debt would not occur. But because several members of this administration have raised questions about your commitment to avoid such a default, I believe it would be reassuring to the millions of Americans who hold U.S Treasury securities if you would publicly confirm your commitment to avoid such a default and urge the administration to support my legislation to codify this vital priority.
Every American has a stake in avoiding a default on the U.S. debt. Millions of Americans hold U.S. Treasury securities as part of their 401(k) plans, pension plans and retirement savings. Millions of senior citizens have saved their entire lives, investing their hard-earned money in U.S. notes and bonds with the expectation that they would be repaid in full. In addition, all kinds of interest rates are pegged to U.S. Treasury securities from home mortgages to auto loans to small business financing. Even the threat of a payment default on our debt could drive these consumer and small business borrowing costs through the roof. Americans deserve the assurance that the U.S. government will not jeopardize their trust, their savings and their access to affordable borrowings.
It is important that we send a united, bipartisan message to the market that defaulting on our debt is not an option and I hope you will join me and many of my Senate and House colleagues in doing so.
I look forward to your response.