Will the U.S. Default? Negotiating Away the Threat

In DealBook, Andrew Ross Sorkin explains why default can’t occur–and then why it may:

“As political theater,” he said, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”

Mr. Reinhart’s view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.”

Nobody believes the country will actually exceed the debt limit — which is exactly why it might.

via No Way U.S. Would Allow Debt Default? Don’t Bet on It – NYTimes.com.

So, let’s get back to the negotiation side of this:  what can be done to solve the problem?  Now Wharton’s experts are weighing in on how to craft a deal that will work–and avoid the U.S. self-imposed crash:

Wharton legal studies and business ethics professor G. Richard Shell:

  • Ask Presidents Clinton and Bush to co-mediate the dispute.

  • Devise an “unacceptable penalty” that would kick in if the two sides fail to reach an agreement by a set date. For example, begin permanently closing all national parks.

  • Change the negotiators: i.e., replace Obama and Boehner with a new representative from each party – people who still trust one another.

  • Invite participation by an authoritative and neutral third party that would structure a process for resolving the dispute. The government would return to work and the default would be delayed for three months while this process took place.

  • Ask the mayor of a small U.S. town – a political Independent from a swing state — to invite Obama and Boehner for a “backyard beer” to discuss the situation and come up with a solution.

  • Punt the issue down the road again by making an agreement that lasts only three months and then work on one of the other options on this list.


5 thoughts on “Will the U.S. Default? Negotiating Away the Threat”

  1. I can’t believe that the shutdown is still going on. There is really no excuse for this. I know that both sides believe they are right and that the other is wrong, but the honest truth is that they are both wrong. The proof for that is that the Government is shut down, and will be completely out of money in a week or so. If America truly is exceptional, why is there not a solution to the problem?

    I like the negotiation options given in this post. I especially liked the one that says that neither Obama or Boehner should take part in the negotiations. I think Obama is too invested in Obamacare and that Boehner is too invested in destroying it. If each side continues to take this hard stance, we are in for trouble. There has to be a deal made where certain elements of Obamacare are removed in exchange for certain concessions by the Republican party. I also thought it was really interesting where the Wharton experts suggested that an “unacceptable penalty” should be set should Congress not make a deal. The public would be furious if the members of Congress caused the permanent shutdown of National Parks. Maybe a better penalty would be that they would be removed from office after a short amount of time if they don’t make a deal? How to do that, I don’t know, but I’m sure they are even more concerned with their own jobs than they are with the American economy.

  2. I agree with the above post. The fact that neither one of these sides is even willing to do anything that looks like a compromise is outrageous. That’s one of the many reasons I thought Mitt Romney would have been a better president, but that’s a post for another day.

    I think each one of the options given in this post are viable and more likely to be successful than our current “attempts” at negotiation. The fact that a compromise has not been reached thus far signifies that something is not working in Washington. There needs to be a consequence or some other way to resolve the issue. Using a third party to negotiate in Syria looks as if it will be successful; why would something similar not work here? A government shutdown is fine in the short-term, but I’m concerned about the long-term consequences of Washington’s stubbornness. It’s time to end this.

  3. Out of Richard Shell’s suggestions, I think that inviting a third party to mediate the negotiations is the best option. The negotiations seem to be going nowhere, and both Obama and Boehner have taken a concrete stance on their opinions. A third party would balance out the equation and in the end someone would lose but all for the greater good. The debt ceiling is also a troubling issue, particularly for the world economy in general due to the US’ involvement in so many markets. Good for America but not so much for the rest of us.

  4. I agree with the theory of a third party negotiator. The two sides have too much at stake both politically and emotionally, and negotiation is always far more difficult when it’s emotional. When you can enlist the help of someone whose political career and reputation will continue on unchanged regardless of the outcome, yet who is motivated enough to push for a solution, things will move forward. Childhood backyard disputes rarely ended in peace before mom got involved.

  5. According to economists, the effects of a default are far more detrimental to the economy than the government shutdown. The United States has finally reached the limit on its credit card. With 16.7 trillion dollars of debt, the government may not be able to pay some of its obligations due on October 17- such as 12 billion dollars of medicare expenditures and 6 billion dollars of interest on treasury bills. The government has never defaulted on its loans. And if T-bills lose their “triple A” ratings, the global economy is in trouble. T-bills are the benchmark against which all other financial assets are measured. If the the government loses its reputation of paying its loans, then the cost of borrowing will go up, the overall number of transactions will decrease and the economy will screech to a halt. Countries from all over the world are pleading with America to figure things out. Let’s hope our government can come up with a solution quick, or we may see some serious problems with the global economy.

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