Oct 21, 2013

    US Congress, hostage-taker

    The Business Times

    IF I was your high-school teacher, I would give all of you a D-minus," wrote one commentator in a New York Times blog post, addressing the United States Congress, whose Republican wing came close to forcing a US debt default.

    Well said. The shenanigans by a cabal of politicians in Washington over the last 17 days - which held not just the US but the global economy to ransom - were an economically reckless and politically stupid outrage.

    Not just Americans, but anybody with any connection to the world economy (which means just about everybody) should be relieved that it didn't happen in the end; that, at the last moment, the Republicans stepped back from the abyss and agreed to reopen the federal government and raise the debt ceiling - without which the US would have been forced into defaulting on its obligations, sending a financial tsunami across the world.

    But the relief being felt is something akin to that of a hostage released by a terrorist who had for two weeks threatened to blow him up - the hostage in this case being the global economy. It was straight blackmail: "We demand that you roll back your health-care plan, President Obama - or we'll blow up the world economy!"

    Even though the worst didn't happen, damage has been done. According to Standard and Poor's, the government shutdown alone shaved 0.3 percentage point off US GDP per week - and it's been more than two weeks.

    US consumer confidence, which looked to be recovering this year, has sunk to its lowest level since the worst of the global financial crisis in 2008.

    Perhaps more serious is what the episode has done to international confidence in US creditworthiness; it's no longer spotless. There is now political risk attached to owning US Treasuries that wasn't there before - which means yields are higher than they should be.

    Yields did indeed spike up as the debt-ceiling drama played out. Hundreds of billions of dollars were moved out of Treasuries into cash by investors who didn't want to take a chance.

    As Treasuries are a benchmark for several other interest rates elsewhere, higher-than-otherwise borrowing costs are being felt across the world, hitting businesses, consumers, homeowners and other governments.

    But the relief we feel about the debt deal in Washington may be short-lived. The standoff in the US Congress has not ended; there is more political theatre to come.

    The US government will be funded only until mid-January next year and the debt ceiling will be raised only till Feb 7. So, within a few months, we are likely to witness a rerun of the hostage situation.

    In a sane world, this would not be allowed to happen. Nobody in the US, or anywhere else - no person, politician or organisation - would be permitted to hold the global economy hostage.

    Business groups, the International Monetary Fund, the World Bank, the Group of 20 and other governments should say to the US Congress: "You cannot do this!"

    They will most likely have the support of sensible US lawmakers, most Americans and Mr Obama.

    One of the more sensible, even if radical, proposals (put forth by Martin Wolf of the Financial Times, besides others) is to simply abolish the US debt ceiling - which investor Warren Buffett describes, accurately, as a "political weapon of mass destruction".

    There is a legal provision for doing so in the US Constitution. Section 4 of the 14th Amendment states that: "The validity of the public debt of the United States, authorised by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

    In 2011, former president Bill Clinton said that if faced with a debt-ceiling impasse that threatens a US default, he would go ahead and invoke this provision "and force the courts to stop me".

    House Minority leader Nancy Pelosi, among several Democratic politicians, has also advocated invoking the 14th Amendment.

    Mr Obama has been reluctant to take the constitutional route to put an end to the insanity of the sort we have just witnessed.

    In January this year, White House press secretary Jay Carney said: "Our position on the 14th Amendment has not changed...Congress has the responsibility and the sole authority to raise the debt ceiling. And Congress must do its job."

    After the events of the past 17 days, this much is clear: Congress is not doing its job and cannot be relied upon to do it. In the bargain, it is putting the global economy at risk.

    Whoever Mr Obama listens to should remind him: "Mr President, this is unacceptable."

    This commentary first appeared in The Business Times on Friday.