Economy
5:45 pm
Mon October 7, 2013

In A Debt Crisis, U.S. May Have To Decide Payment Priorities

Originally published on Wed October 9, 2013 12:02 pm

The government is just 10 days away from defaulting on its debt. Treasury Secretary Jack Lew has said that by Oct. 17, the department will likely have less money on hand than it needs to pay all its bills.

"The reality is that if we run out of cash to pay our bills, there is no option that permits us to pay all of our bills on time, which means that a failure of Congress to act would for the first time put us in a place where we're defaulting on our obligations as a government," Lew said on NBC's Meet The Press on Sunday.

House Republicans say there's a way to minimize the negative effects of a default. In May, the GOP-controlled House passed a bill that would have prioritized some of the payments the Treasury makes so the most important bills could get paid first.

The bill directed the U.S. Treasury to pay bondholders first if there wasn't enough money available to pay all the nation's debts. It didn't become law because it wasn't passed by the Senate.

House Speaker John Boehner defended the idea on Bloomberg TV. "I think doing a debt-prioritization bill makes it clear to our bondholders that we're going to meet our obligations," he said.

When asked if that means paying China before U.S. troops, Boehner said it's no different than "in any other court proceeding."

"The bondholders usually get paid first," he said. "Same thing here."

But Mark Patterson, the chief of staff at the U.S. Treasury from 2009 to last May, dismisses the idea.

"I think if you ask anybody who has been secretary of the Treasury of either party going back many years, they would tell you that is a god-awful idea," Patterson says.

Ultimately, says Patterson, making payments to bondholders but delaying checks for seniors on Social Security, for instance, still undermines confidence in the commitment by the United States to meet its obligations.

"If we go into an internal debt crisis, if you will, where we're not paying Social Security beneficiaries who've paid into the system over the years, many of whom live check to check, then we are going to appear as a country that is in a whole lot of trouble and the world is going to view us that way," Patterson says.

He says that Treasury departments in both Democratic and Republican administrations have concluded that paying all of the nation's bills "on time, in full" is what makes investors, whether they're individuals or other countries, willing to lend money to the U.S.

"I liken it to a household," Patterson says. "If you are a homeowner and you decided to pay only your mortgage payment, but you stopped paying your utility bill, your credit card bill, your student loan bill and your car payment, your credit rating would go down the tubes even though your mortgage was still current. And you'd find that from then on, [it would be] very hard to convince people to loan you money down the line."

Even if a president and Treasury secretary decided to prioritize payments, it would be a huge technical challenge, says Patterson, because the Treasury's system that makes 80 million payments a month is automated.

"It is designed only to make all payments on time and in full," he says. "There's no switch that says, 'Pay payment A, C, D and G today and tomorrow pay some other set of priorities that's not all payments.' "

Both sides in Washington say they don't want a default. But Patterson, who's now a senior fellow at the Center for American Progress, says he worries every time the nation tiptoes up to the abyss. He says he fears that one of these times, there won't be a last-minute solution.

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Transcript

ROBERT SIEGEL, HOST:

The U.S. government is just 10 days away from defaulting on its debt. Treasury Secretary Jack Lew has said that by October 17th, the Treasury will likely have less money on hand than it needs to pay all of its bills. Here he is on NBC's "Meet The Press" yesterday.

JACK LEW: The reality is that if we run out of cash to pay our bills, there is no option that permits us to pay all of our bills on time, which means that a failure of Congress to act would, for the first time, put us in a place where we're defaulting on our obligations as a government.

SIEGEL: The House Republicans say there is a way to minimize the negative effects of a default. Earlier this year, they passed a bill that would have prioritized some of the payments the Treasury makes so that the most important bills would get paid first. NPR's John Ydstie explains.

JOHN YDSTIE, BYLINE: The bill that passed the House in May directed the U.S. Treasury to pay bondholders first if there wasn't enough money available to pay all the nation's debts. It didn't become law because it wasn't passed by the Senate. Here's House Speaker John Boehner defending the idea on Bloomberg TV.

REPRESENTATIVE JOHN BOEHNER: I think doing a debt-prioritization bill makes it clear to our bondholders that we're going to meet our obligations.

UNIDENTIFIED MAN: Doesn't it mean, as Democrats have suggested, you're basically choosing to pay China before you pay U.S. troops?

BOEHNER: Listen, those who have loaned us money, like in any other proceeding, if you will, court proceeding, the bondholders usually get paid first. Same thing here.

YDSTIE: But Mark Patterson, the chief of staff at the U.S. Treasury from 2009 to last May, dismisses the idea.

MARK PATTERSON: I think if you ask anybody who has been secretary of the Treasury, you know, of either party, going back many years, they would tell you that is a god-awful idea.

YDSTIE: Ultimately, says Patterson, making payments to bondholders, but delaying checks for seniors on Social Security, for instance, still undermines confidence in the commitment of the United States to meet all its obligations.

PATTERSON: If we go into an internal debt crisis, if you will, where we're not paying Social Security beneficiaries who've paid into the system over the years, many of whom live check to check, then we are going to appear like a country that is in a whole lot of trouble and the world is going to view us that way.

YDSTIE: Patterson says that Treasury Departments in both Democratic and Republican administration have concluded that paying all of the nation's bills on time, in full, is what makes investors, whether they're individuals or other countries, willing to lend money to the U.S.

PATTERSON: I liken it to a household. If you are a homeowner and you decided to pay only your mortgage payment, but you stopped paying your utility bill, your credit card bill, your student loan bill and your car payment, your credit rating would go down the tubes, even though your mortgage was still current. And you'd find that from then on very hard to convince people to loan you money down the line.

YDSTIE: Even if a president and Treasury secretary decided to prioritize payments, it would be a huge technical challenge, says Patterson, because the Treasury's system that makes 80 million payments a month is automated.

PATTERSON: It is designed only to make all payments on time and in full. There's no switch that says pay payment A, C, D and G today and tomorrow, pay some other set of, you know, priorities that's not all payments.

YDSTIE: Both sides in Washington say they don't want to default, but Patterson, who is now a senior fellow at the Center for American Progress, says he worries every time the nation tiptoes up to the abyss. He says he fears that one of these times, there won't be a last-minute solution. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.