Imagine you have a financially irresponsible brother-in-law. He's not a ne'er-do-well, as he and your sister make good money, but he spends more than he makes. He's been doing it for years, and he's deeply in debt to you and your other siblings. You've been loaning him about five or ten percent of his annual income each year to maintain his life style.
He's superficially responsible about it, signing a note for each new loan, making interest payments every six months on the notes and paying off the older notes when they come due after one year, or five years, or ten years, but every year he's back asking for enough to pay off the interest and debt that's coming due, and borrowing more to increase the total loan. His debt has mounted up over the years to 70% of his annual income.
He's recently come on hard times and his income has been reduced 20% a year. Even in the face of that, he plans to increase his spending by 20% a year, so now he needs an annual loan of 40% of his previous annual income, and you can see his debt to income ratio going to 100% and beyond.
Then, in a meeting with him, you, and your other siblings, his wife puts her foot down. She's not going to let him increase their debt one single dollar more. She asks you to extend their loans until they can get back on their feet and begin making payment of interest and principal. She says he must change his profligate ways immediately, or she won't co-sign any note that would allow you to loan him another dollar for any purpose other than extending the loans already in place.
He turns red and stamps his feet. He storms out of the room, and then he returns. He blusters threateningly, "I won't cut back on spending! I won't! In fact, I'll keep spending all that comes in and I'll stop making interest payments on the notes. I will destroy our credit rating if we can't borrow more and more!"
What's your reaction as a creditor to your sister's proposal?
Most likely, you think, "Well! About time."
What's your reaction, as creditor again, to your brother-in-law's counter argument and his threat to destroy their credit rating?
You are probably thinking "Everyone in town, and especially in the family knows how deep in debt they are. Her proposal to stop digging the debt hole deeper is sound. He and she are a lot more likely to be able to pay us off if she's in charge of family finances than if he is. He is effectively saying 'I'll make sure you won't want to loan to me any more,' while she is saying 'I won't let you loan us any more than we already owe.' It's not difficult to see who is being most helpful."
Some of you are way ahead of me, and I am sure I don't need to spell out this little allegory for you, but I'm posting this on the Internet, so I will take the time to explain it to other readers.
First, your fiscally irresponsible brother-in-law is Uncle Sam, the United States of America, including Republican Congresses and the Bush Administrations during the run up of the debt and the Obama administration since the collapse of the economy. You and your other siblings are the holders and buyers of the US debt in the form of Treasury securities.
Your sister in the family meeting is the Republican majority in the House of Representatives in the 112th Congress led by John Boehner and Eric Cantor.
Your brother-in-law during his tantrum is Treasury Secretary Tim Geithner today on NBC's Meet the Press and on CBS's Face the Nation.
Your sister's refusal to allow her husband to increase their indebtedness is the same as the House Republicans willingness to leave the debt ceiling in place.
Your brother-in-law's willingness to spoil the family's credit rating is the same as the Obama Administration and Treasury Secretary Tim Geithner's threat to not pay the interest on the debt or roll over the debt but rather to spend the tax revenues on high speed rail, unemployment extensions, and other social programs on the assumption that those "obligations" exceed the obligation to pay the interest owed on the debt.
And your notion that things will be better if the management of the problem is handed over to your sister? That's the US security holders figuring out that having the debt ceiling stay in place doesn't have to be a bad deal for them.
Or maybe it's the electorate coming to its senses in 2012.
