July 20th, 2011
08:02 AM ET

What default would mean for America

As of Wednesday there were 13 days until the United States begins to default on its debt, barring a deal in Congress. Such a deal, sadly, continues to be elusive, as it has been for many weeks and months. Our politicians can't seem to muster the courage of their convictions to compromise for the sake of the country.

To help us put all this in perspective and to talk about much more, I invited the former President of Harvard, the former Treasury Secretary, and the former Director of the National Economic Council, Larry Summers, onto the show. Below is an edited transcript of our discussion. To listen to our complete conversation, be sure to check out this week’s podcast.

The meaning of a default

Fareed Zakaria: You were Treasury Secretary. Walk us through what happens if there is an actual default.

Larry Summers: With an actual default, that the United States does not pay back money, principal and interest on its debt. At that point, the country is declared to be in default. Financial instruments that people hold that have been regarded as safe cease to be regarded as safe. A panic begins on money market funds and many other parts of the financial system, and a cascade that makes Lehman Brothers look like a very small event unfolds.

It seems to me that it is an unthinkable financial risk to take. And it seems to me also important to remember that once that threshold has been crossed, there is an uncertainty premium that will continue for a very long time to come.

Fareed Zakaria: In other words, it would take people a long time to get comfortable again.

Larry Summers: A long, long, long – a long, long, long time, and that means that the question cannot be how we will have a default, how we will manage a default, how we will prioritize payments. The question has to be what's the formula going to be for avoiding such a catastrophe.

Fareed Zakaria: If there were a default, some people have said, you can imagine the borrowing costs for the United States would go up by one percentage point, 100 basis points, which would add $150 billion to the deficit every year. Does that strike you as in the range?

Larry Summers: That's a number you could imagine. I am less worried about the borrowing costs and more worried about the disruption, as there were runs on banks, runs on money market funds, exchanges face the prospect of collapse. Institutions that have been built over decades were swept away, and, as they were swept away, the ability to carry on routine financial business, to clear checks, to pay bills, to meet obligations would be – would be lost. It would be a cataclysm, and it would be a totally self-inflicted cataclysm.

There are countries in the world where there's an issue of whether they can meet their obligations. There's no question the United States can meet its obligations. The question is whether we will.

You know, Fareed, the way I liked to say it is, my daughters are in college. We can argue about how much they should spend, we can argue about how much I should pay, we should argue about how much they can pay. The only thing that you can't really argue about is that we do have to pay the Visa bill. Our family does.

And this idea that somehow that we can not pay because we're having a political fight over how to handle the spending and taxing really is an example of democracy functioning in the worst possible way.

The politics behind the budget deal

Fareed Zakaria: So take me through what you think the calculation is, because you were there in the White House. Many of the same characters in the Republican Party you know, let's talk about what they think.

Eric Cantor, John Boehner, Mitch McConnell say, here's the problem. We always get these deals, and the spending cuts never materialize and the tax raises do, and so we don't want a deal that sort of promises cuts in the future. We want something that is rock solid now.

Larry Summers: Well, let's begin with the fact that when a Democrat left the White House, Bill Clinton in 2001, and the Treasury Secretary, me, left the White House, the country was in surplus and was paying back its debt. And then, a set of proposals put forward by a Republican president, enthusiastically supported by a Republican majority in both the Senate and the House were passed, and, as a result –

Fareed Zakaria: These are the tax cuts?

Larry Summers: The tax cuts, the Iraq War, the prescription drug benefits, huge increases in discretionary spending, much larger than anything that took place during the Clinton years. And, as a consequence, the economy was in substantial deficit. And then, the economy was, because of other problems, poised with a bubble for a crash, and it then crashed.

So they're in no position, I would argue, to lecture others about fiscal responsibility.

Where are we in this debate? The president's health care bill contained very substantial cuts in Medicare. The president has even raised the prospect of pushing upwards on the Medicare age, something that was unthinkable to many Democrats. The president has indicated a willingness to consider changes in social security.

A Republican like Alan Simpson, who is of the Budget Commission, has said that it is not the president who is to be faulted for an unwillingness to compromise. There is plenty of movement to entertain spending cuts. The question is whether it's going to be 100 percent spending cuts of one type or whether there's going to be any balance.

It's not that the president and his colleagues have talked about the prospect of raising taxes on middle class families. It's not that they've even talked about raising income tax rates. They've talked about eliminating a special tax break for the owners of corporate jets.

Fareed Zakaria: But those are trivial numbers. You'd have to do a lot more than that.

Larry Summers: Even though you would ultimately have to do more, but even corporate jets and hedge fund special treatment is too much revenue increase for the congressional majority.

So I don't think there should be any confusion here about who's willing to walk a mile to compromise so far. The president has shown that in any of a variety of ways, and the president has never said that it's my way or default. The president would be happy to see an agreement to move us past the prospect of default on almost any terms.

It is the House majority, the Republican House majority, that has indicated that they want to use the credit worthiness of the country as a hostage to pursue a particular agenda and to pursue it without compromise. I don't think that's the right way to advance the interests of the country.

Post by:
Topics: Economy • GPS Show • Politics

soundoff (147 Responses)
  1. joao

    Zacaria has a small penis

    July 20, 2011 at 8:44 am |
    • pat carr

      What a stupid troll. why can't you STFU?

      July 20, 2011 at 10:07 am |
    • Charly

      In a time of potential national crisis, you make a comment about a man's penis size indicates one of two things or both. You are either Gay or a total moron. My guess is both.

      July 20, 2011 at 10:16 am |
      • Alex

        Joao is Charly one more thing – human garbage......

        July 20, 2011 at 3:58 pm |
      • Marine5484

        I second that notion....now lets all have a vote I say eye! Now come on Congress it's time that you voted on something as well.

        July 21, 2011 at 12:14 am |
    • MrsMcJoynt8480

      HAHAHAHA! Best comment ever.

      July 20, 2011 at 11:21 am |
    • Ralph in Orange Park, FL

      @joao: Tell us exactly how you know that.

      July 20, 2011 at 11:24 am |
    • ThePreacher2

      maybe, but his balls are bigger than your whole house

      July 20, 2011 at 1:50 pm |
    • Zakaria

      And you, sir, have a very large one, and it sits atop your shoulders.

      July 20, 2011 at 2:25 pm |
    • Alex

      Joao, you are stupid moron. Fareed is intelligent man and great journalist. Your comment is inappropriate, but it is clearly showing your level of intelligence. I think you are the one with small penis, full of complexes. Get a life LOOOSEERRR.

      July 20, 2011 at 3:55 pm |
    • BeBop

      No. It just seems that way because the space between your teeth is so huge.

      July 20, 2011 at 4:13 pm |
    • Ron

      Why doesn't Summers admit they have the cash flow to pay the interest in the debt and they can issue new debt as old debt matures. Instead he tells bs stories that we will default in August. Another lie.

      July 20, 2011 at 10:57 pm |
    • Marcos Franco

      QUANDO FALAR DO CORINTHIANS, VÊ SE FALA CERTO! #ChupaCnn #CorinthiansBiggerThanCNN #CorinthiansBiggerThanAll @cnn

      July 21, 2011 at 12:40 am |
  2. joao

    The only small thing around is Zacaria's penis...VAI CORINTHIANS

    July 20, 2011 at 8:45 am |
  3. joao

    I never seen Zacaria's penis, I can't see small things....VAI CORINTHIANS

    July 20, 2011 at 8:47 am |
    • Jim

      What were you doing in Zakaria's pants?

      July 20, 2011 at 1:52 pm |
  4. kleftis1966

    Two idiots talking an Arab and a loser. CNN has nothing better besides that Queen Bill Maher

    July 20, 2011 at 8:55 am |
    • Daarshanik

      Zakaria is an American Muslim, originally from India. Just because he is Muslim, he is not Arab. Now, who is the idiot here?

      July 20, 2011 at 10:24 am |
    • systems

      You are so STUPID!!!

      July 20, 2011 at 11:03 am |
  5. Emperor Has no Clothes

    One can borrow long to buy long – say a car paid over 5 years that lasts at least 5 years. Or a house. One can borrow short and buy long – buy the car that lasts 5 years, and pay for it in two years. One should not borrow long to spend short. For example, charge ever larger balances on Visa to eat today. That's what the US is doing – borrowing long term bonds to pay today's bills. Not smart. Not smart at all. And a pox on both parties and their finger pointing. Stop spending, and start paying down the debt !

    July 20, 2011 at 9:02 am |
    • Doug

      Well said, Emporor Has no Clothes! WE need more intelligent posters like you, up here.

      July 20, 2011 at 10:26 am |
      • WhatWhat

        Because we all know that more intelligent posts on CNN will help our debt crisis

        July 20, 2011 at 12:42 pm |
    • Jason K

      @ Whatwhat

      No, intelligent posts here are made in the hopes that someone ignorant of the facts displayed will thus be enlightened. The more people enlightened to the facts on a particular issue will begin to affect that issue is perceived, and may even change how it is dealt with.

      Change is not instant when you talk, that's why there is war. Change comes faster looking down the barrel of a gun. And even if there is to be a revolution, doing so with uneducated or ignorant people would be folly as people many times flock to change...without understanding what it will bring. Look at the 2008 and 2010 elections.

      People unfortunately still believe that there is hope in this oligharical two party system. People are fighting over coke and pepsi when what this country really needs is an enema.

      So, if you don't like the status quo either start educating people or start stockpiling ammo. The way things are going, we're probably going to need both.

      Good thing we had that article not long back on eating squirrels as most people won't be able to afford a trip to the grocery store soon enough.

      July 20, 2011 at 4:27 pm |
  6. [(S3kShuN8)]

    _OMG_ ; {}_WTTF_{} ; {?}"_RE: ALL_OF_THE_Above_"{?}

    I believe that NOW is the time for the UNITED STATES SUPREME COURT to conduct an EMERGENCY hearing regarding the current Fiscal Situation in Washington, DC due to the fact that the other two branches of the federal gov't are at each others throats. "We the People" have come to accept 'BIG GOVERNMENT' but hereby REJECT all SPECIAL-INTEREST-GROUPS as belonging to 'Bloated GOVERNMENT' which 'we' CAN NO LONGER AFFORD TO TOLERATE !

    ('An Anonymous PATRIOT' (S3kShuN8)) - note: __NOT__ affiliated with the hacker group "Anonymous"

    (However, I will say this: Instead of Jailing the really good hackers, put them on the payroll ! )
    ( BOTTOM LINE: if a person is capable of hacking the DOMAIN __.gov__ that person is under-appreciated. )

    July 20, 2011 at 9:15 am |
    • markodavid

      The supreme court is a 5/4 political body.When they installed G.bush ll THAT was all I needed to see to vow I will NEVER spend 1 minute on any political effort again in this life.If you vote you make the government ligit. and as we all now should know it is a gov. of the corps.,by the corps and for the LLC corps.As QE III is poised to ruin your saving big money will slither out the end of this tunnel wealth intact to continue control.BRING ON DEFAULT! Let the second revolution begin!

      July 20, 2011 at 1:07 pm |
    • TTJones

      So, please identify those other two branches of goverment at each other's throats? Because I was not aware the federal judiciary and legislature were? You know there are three branches and the senate and house are not two separate branches, please say yes you know that.

      July 20, 2011 at 1:52 pm |
    • urnotaspecialsnowflake

      the problem with hack3r5 is that they have a skill that they believe turns them into superheros and ninjas, if not gods. Power corrupts, deludes, gets them discharged with a section 8, but never helps them tame their ego, letting them go on in the belief they have the answers to all things everywhere.
      When we default, and the power goes out, you will lose your super powers.

      July 21, 2011 at 10:00 am |
  7. j. von hettlingen

    "they (the Republicans) want to use the credit worthiness of the country as a hostage to pursue a particular agenda and to pursue it without compromise." I think the Congress should set up an independent body that has the prerogative power to counteract, if the House majority reaches a consensus that obliterates the country.

    July 20, 2011 at 9:21 am |
    • Scott

      It's been around for a long time. It's called the President's Veto.

      July 20, 2011 at 12:03 pm |
  8. jack

    to Joao
    you can suck his penis on regular bases. that will make his penis BIG and your dreams come throuhg. The best home remedy

    July 20, 2011 at 9:37 am |
  9. [(S3kShuN8)]

    /\_CONTAINMENT_OVERRIDE_ !!!!:!!!!

    July 20, 2011 at 9:43 am |
  10. [(S3kShuN8)]

    /\_CONTAINMENT_OVERRIDE_ !!!!:!!!!

    July 20, 2011 at 9:45 am |
  11. Paul J. Weighell

    "There's no question the United States can meet its obligations. The question is whether we will."

    Whilst the US can no doubt meet its short-term interest repayments there are now real questions in the global market about whether it can meet its longer-term capital repayments as US productivity and balance of payments continues to fall year on year whilst its debts continue to rise.

    Raising its own internal legal debt ceiling does not solve the root problem as the outstanding capital owed grows apace yet the means of repaying that capital shrinks due to the US unwillingness to raise sufficient new taxes or make sufficient public spending cuts to reduce that long term capital debt burden.

    China will not bankroll the gap for ever and who else can or wishes to?

    July 20, 2011 at 9:47 am |
    • Chettahe

      Paul, you seem to understand the long term predicament of our country.
      It is obvious that people want to get their benefits now, to be able to survive because the economy has been brought to its knees by Wall Street and their cronies in government.
      We have a very large trade deficit and a very large budget deficit and they are somehow related.
      Outsourcing and the free trade policies of all the recent administrations have created close to 25million unemployed workers (Barrons-July 11) . Basically we cannot compete with the five dollar/day oversees labor.
      We have people who are unemployed or unemployable because of what has happened and what is happening to our industry, and we have to give all these citizens benefits (welfare, food stamps, unemployment insurance, housing subsidies etc) to survive.
      How do we solve the root cause of our problems, needs leadership by the Congress and the Presidency that we somehow lack at this time. Mr. Summers is one of the creators of the mess we are in and he has no credibility to talk about the effects of the deficit in our economy, when he is just looking at the short term effects of a default and not of what is going to happen later if we continue the present economic course.
      As we say; he is another one of those wise people who keep on kicking the can down the road until they and the can go down the cliff.

      July 20, 2011 at 1:21 pm |
      • Janet

        You hit one of the nails on the head – Outsourcing has caused a lot of our problems in this country. Unemployment in this country is a disgrace and shame on all of the US companies that have taken food out of the American mouths by outsourcing OUR JOBS. But you still want tax breaks & loop holes and anything else your greedy hands can get from this country. Your nothing by greedy little enigmas ! Americans must take care of Americans !! Too much goes out of this country and deprives Americans. This country should take care of their own FIRST ! No other country will take care of us. Trillions go out and I sit here a nervous wreck wondering if I'll get my next Social Security check ! This is Not Right !

        July 20, 2011 at 7:00 pm |
  12. [(S3kShuN8)]

    amarCNN (or "To Whom It May Concern")

    I have a post in the clipboard which will NOT post despite NOT violating Terms of Service ...


    July 20, 2011 at 9:48 am |
  13. Johnmac

    There should be s special election called to VOTE OUT EVERY ONE of these idiot living on our nickel inside the beltway

    July 20, 2011 at 9:52 am |
  14. [(S3kShuN8)]

    ... AS it SITS now, Congress has TOO MUCH Authority .
    ... It's time for the SUPREME COURT to act SWIFTLY to mitigate between the Executive AND Legislative branches .
    /\_CONTAINMENT_OVERRIDE_ !!!!:!!!!

    July 20, 2011 at 9:53 am |
  15. [(S3kShuN8)]

    re: issues with posting

    It would be extremely helpful to me to provide a list of words which I must refrain from using in order to successfully post on this BLOG site. Apparently the word beginning with "Con" plus "sti" plus "tution" is a BAD WORD ?!?!?

    July 20, 2011 at 9:57 am |
  16. [(S3kShuN8)]

    EVERYONE DUST OFF YOUR HISTORY BOOKS and open to page 1938 !

    July 20, 2011 at 9:58 am |
    • Scott

      Mine doesn't go that high 🙁 I had to cut back due to the recession.

      July 20, 2011 at 12:05 pm |
  17. [(S3kShuN8)]

    time to re-read the 'Verfassung'

    July 20, 2011 at 10:03 am |
  18. Iggy

    Why do none of these politicians talk about not raising the debt ceiling? For that matter why is the media sold on the idea of raising it?

    July 20, 2011 at 10:05 am |
    • Iggy

      I do not think you will be able to understand if someone explained it to you. Every article on this has explained it but you could not understand. I do not think you ever will. Fortunately, there are smarter in this country and I hope they are the majority.

      July 20, 2011 at 11:41 am |
    • dude

      Duh! because the media is bought and paid for by the folks who have stolen from us all. Banks make loans that they know can't be repaid, but 'since they are 'too big to fail' the US 'pays' the loans with digital money. Then they create bundled securities and sell them at leveraged margins of 1:50. Then they insure their own bogus securities and voila, we are where we are now. No value + more currency = diminished monetary value.

      July 20, 2011 at 9:38 pm |
  19. GOPisGreedOverPeople

    And Corinthians ARE small. Deal with it.

    July 20, 2011 at 10:05 am |
  20. FranticRed

    Actually, it is Dr. Zakaria, and he is Indian-American, and not, as you baselessly claim, an Arab. The two of you (joao and kleftis1966) smack of the sort of uneducated rubbish pushing economic collapse on the extreme right wing for no other purpose than to see the left wing fail. I find someone posting blatantly inaccurate information about someone and then referring to them as an idiot extremely ironic, as well.

    As for Larry summers, who also holds a Ph.D., was president of Harvard college, is from an economically-savvy family (two uncles who are nobel laureates in economics), and is himself considered an economic prodigy in his own right. He also served as US Secretary of the Treasury under President Clinton – which if you have any knowledge of recent history you will know left a budget surplus as opposed to the massive deficits we have had since.

    If you have any interest whatsoever in contributing intellectually to the argument you might try making a sensible counterpoint to any of the opinions presented in the article – although judging from penis comments and other crude insults from the both of you I have serious doubts as to your capabilities in that regard.

    July 20, 2011 at 10:08 am |
    • ckelley

      I love you.

      July 20, 2011 at 10:16 am |
    • systems

      I love your answer, but those two fools should be on fix/tea party (fox) news.

      July 20, 2011 at 11:11 am |
    • ApplestoOranges

      This is the most biased left wing article I have ever read. Summer should be ashamed of himself for pointing fingers. Did you know that the .com bubble burst during the Clinton Administration and its because Clinton himself allowed large Corporations like Worldcom and Enron to fleece millions of dollars from hard working American citizens. Clinotn also failed to take out Bin Laden when he the chance to do so, which could have prevented 9-11. He was also a boorish womanizer, who should have been kicked out of office. The Bush's Tax Cuts, by the way, had bi-partisan support. So shut rhetoric down and pay attention. This is not a hostage negotiiation. The republicans will make a deal and are all ready to compromise if it means for the good of the country. But, the point of all of this is to make sure it's right for the country.

      July 20, 2011 at 1:02 pm |
      • Poseidon

        Hear hear, common sense is prevailing. Everyone seems to completely forget the dotcom crash and the fact that our core was shaken by two planes flying into large buildings.

        July 20, 2011 at 4:33 pm |
  21. [(S3kShuN8)]

    Let's say, just for the sake of argument, that it is already 2012 and the RACE is ON.
    With that having been said, the previously proposed alterations to the 'Verfassung' (GERMAN) which are located elsewhere in this BLOGspace would have the effect of curtailing the FEDERAL Gov't in AUTHORITY by rebalancing the equation to FORMALLY include "We the People" into the permanent equaTION __AND__ by rebalancing the scope of Authority available to the THREE-BRANCH-FRAMEWORK supplied presently.

    July 20, 2011 at 10:10 am |
  22. [(S3kShuN8)]

    AS A concerned Citizen, I find it deeply disturbing that I am unable to use the word "Con" plus "sti" plus "tut" plus "ion" without first breaking the word into four separate segments just to get around a "Gremlin".

    [.SEE?.(.how to process a pentagonal bogey.AND.how to sink an Albatross 'every time'.).]

    July 20, 2011 at 10:20 am |
  23. [(S3kShuN8)]

    "Do I need to come out of Retirement?"

    July 20, 2011 at 10:23 am |
  24. kme

    I don't believe the story. I doubt that more than a hand full of all congressmen has the right stuff to manage the country's finances properly and that goes for Obama too.

    July 20, 2011 at 10:34 am |
  25. to obama

    Thanks for destroying America, maybe allah will take you, because God and the American public shall never forgive you.

    July 20, 2011 at 10:53 am |
    • systems

      What!, you must be on crack. The was set on a part for destruction by Reagan and Bush.

      July 20, 2011 at 11:19 am |
    • teepee

      stupid is as stupid comments...

      July 20, 2011 at 4:08 pm |
  26. [(S3kShuN8)]

    NEVER have I seen a divide as wide as that between Tea/Repubs and Dems. I say let the SUPREME COURT invoke Chapter Eleven AND hammer out an acceptable compromise between the other two Branches. No need to bump up to ~1.50~ for THAT to happen...

    July 20, 2011 at 10:58 am |
  27. Silent Hunter


    July 20, 2011 at 11:00 am |
  28. Silent Hunter


    July 20, 2011 at 11:02 am |
    • systems

      Go to Fix (fox) news.

      July 20, 2011 at 11:13 am |
  29. Sean T

    As far as I am concerned EVERYONE in CONGRESS should be Fired every single person Democrat, Republican, and Tea Party person.

    Not one single person in congress is here to help the normal American the men and woman of congress are all influenced by who has a bigger pocket book and what corporation or group can do for them. I am sick and tired of these bone heads taking this country down a path of financial disaster.

    What do these people who were elected in congress say to the 14 million hard working Americans without work Sorry we cannot help you what about the people who are were on unemployment and have lost that life saving check what happened about creating jobs, what happened to helping those who make this county run what happens when everyone on unemployment run out of the checks and cannot find a job what do you say to them.

    It’s time for Congress to step up look in the mirror and say “We have failed the American Public” we have failed to do what we vowed to do and fix the sinking ship we agreed to help rebuild.

    July 20, 2011 at 11:03 am |
  30. Mustang95

    The CNN site has more trolls than a Tolkien novel. Illustrates how we ended up with a cousin-marryin' House of Reps that is now being run by the Clampetts. America has had it. Maybe it's for the best...

    July 20, 2011 at 11:11 am |
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