Three reasons why Obama and Reid want you to panic over a default

We keep hearing how we’re going to “default” on Thursday when we reach our debt limit. Sen. Harry Reid is still saying it on the Senate floor, warning that we need to “avert a catastrophic default on our nation’s bills.”

If that were true, wouldn’t the markets be crashing right now? A country default directly affects that country’s ability to borrow. It can cripple a country’s economy for decades. So why aren’t markets reacting? Because they know this is just political B.S.

The market has a very specific definition of a country default. In fact, we have a very specific example of that now happening in Argentina. Default is a conscious decision by a country’s leaders not to pay off its bond holders.


A default does NOT happen automatically when a country reaches its debt limit. It happens when the Treasury of that country decides that it would rather keep up all of its domestic spending at current levels and stiff holders of government debt.

More On This...

So why are the president and his minions in Congress and on the airwaves continuing to mischaracterize hitting our nation’s debt limit as an automatic default? For several reasons:

First, they want to make us all panic, because when folks panic, it makes it easier for those in power to take even more authority. And this is an administration that loves taking power and abhors sharing its power with other branches of Congress.

Second, they want markets to panic. Sen. Reid said on Tuesday that credit agencies were getting ready to downgrade the U.S. “as soon as tonight.” And indeed Fitch ratings service warned on Tuesday evening that if the U.S. doesn’t get its act together it might “consider” a downgrade in the future, but that decision would come six months from now.

Apparently Sen. Reid had some advance notice of the announcement.

But instead of trying to calm fears, he was stoking them, turning a consideration of a downgrade in the future into a downgrade “as soon as tonight.” Responsible politicians do not try to spook markets.

But Democrats appear to want some kind of market crash in order to strengthen their hand in forcing Republicans to capitulate on the budget. This a very dangerous game. It’s extremely callous to risk our savings and livelihoods to score political points.

Fortunately, the markets have not been panicking. The markets know better than to believe we will default on Thursday. They know what a real country default is. They’ve traded government bonds from countries that have defaulted. They know political posturing when they see it.

But there is a third possibility...and this one is kind of scary. That’s the possibility that the administration is laying the case for an extraordinary usurpation of power.

The 14th Amendment of the Constitution spells out the importance of honoring the public debt. In Section 4 of that Amendment the Constitution says, “The validity of the public debt of the United States…shall not be questioned.” Could the president invoke this section of the Constitution as an excuse to override Congress’s authority to approve of a higher debt limit?

Of course such a move would undoubtedly set off a Constitutional crisis. And Treasury Secretary Jack Lew told Fox Business two weeks ago that this wouldn’t happen. But the stakes have been pushed higher by both sides.

The president could suggest that this is the only way to avoid default, even though we’re not approaching default.

So it would be an extraordinary action set off by a miscalculation...a very dangerous precedent indeed. Let’s hope we don’t come to that.