WASHINGTON, May 15, 2011 -- (BEGIN VIDEO CLIP)
BOEHNER: We're not talking about billions here, we should be
talking about cuts in trillions, if we're serious about addressing
America's fiscal problems. With the exception of tax hikes, which in my
opinion will destroy American jobs, everything is on the table.
(END VIDEO CLIP)
AMANPOUR: House Speaker John Boehner throwing down the gauntlet in
negotiations over raising the federal debt ceiling. Here's that debt
clock again. We have got a live picture there in New York and it waits
for no one. Soon, the numbers will crash through the debt ceiling,
exceeding the amount the U.S. is legally allowed to borrow. The stakes
couldn't be higher, so what is the solution?
Joining me now, Doug Holtz-Eakin, who ran the Congressional Budget
Office and served as John McCain's chief economic adviser in 2008.
Nobel prize winning economist Paul Krugman of the New York Times.
Sheila Bair, who is wrapping up her term as chairman of the Federal
Deposit Insurance Corporation. And Roger Altman, a former deputy
treasury secretary in the Clinton administration. Thank you all for
This seems to be a never-ending conversation, but the limit we're
now hitting up against. How is President Obama to respond to the call
for trillions, not billions of dollars in cuts?
KRUGMAN: I think he cannot -- if he gives in on this, he's setting
himself up for repeated blackmail. He's basically saying that I care
about the economy more than the Republicans do, and therefore, every
time they threaten to blow it up -- even though it will hurt all of us
-- I am going to give in.
So I think Obama has got very, very little wiggle room, even though
it's a terrible thing.
AMANPOUR: Lots of economists are saying the Republicans are playing
with fire, that hitting the debt limit, exceeding it is not like
shutting down the government. It could cause a real cascading economic
HOLTZ-EAKIN: I don't think there is any great desire to hit the
debt limit. The key is to recognize the limit is a symptom and that the
fundamental problem is the underlying condition of the U.S. budget.
What you're seeing now are calls for, both from Speaker Boehner and from
the Senate minority leader, Mitch McConnell, for real solutions to the
real problems. It's not about the debt limit. It's making sure that in
the short term you get cuts, in medium term you have an enforceable
path, and that you take care of something in the long term. The
entitlements have to be on the table.
AMANPOUR: So, we do keep hearing this now. There obviously seems
to be the momentum for dealing with entitlements. But how? How does
one deal with Medicare, Medicaid? We already saw Paul Ryan and his plan
for Medicare. They seem to be running away from it now. So how does
one deal with this in a way that's real, rather than just ideological,
if that's possible?
BAIR: Right. Well, I'm a bank regulator, I'm not a budget expert,
as some of these other gentlemen are, but we have been following this
very closely because we are very concerned about the outcome and how it
could impact the financial sector. But I've also worked in Washington a
long time, and it seems to me that if the pain is evenly distributed and
the general population feels that there's fairness in whatever ultimate
outcome is agreed to, I hope, by the administration and the Congress,
then I think it can politically, it can sell.
I do think that both sides have a point. Last November, I published
an op-ed in the Washington Post, where I said if we didn't get these
deficits under control, I thought it would precipitate the next
financial crisis. I also agree with the administration, though, that
it's irresponsible even to entertain the idea of even a so-called
technical default on the public debt.
So I think both sides have a point, and I hope they come together.
And gentlemen, if you excuse me, I think maybe there's a little too much
testosterone in this debate. It's too much about winning and losing and
not enough of both sides are right, let's come together and have a
AMANPOUR: What would a default mean? What impact would it have?
ALTMAN: When I hear all this discussion about not voting to raise
the debt limit, absolutely not and so forth, as we just heard earlier on
the show, I have to roll my eyes a bit. Because, as Doug said, the debt
is a product of past budget decisions. And we have no alternative,
therefore, but to raise the debt limit. For example, we're running a
deficit this year between 1.4 and 1.5 trillion. Those amounts have to
be borrowed, just like a household which is spending more than it takes
in. It has to raise cash. So there is no alternative but to allow the
United States to continue to borrow. Therefore the debt limit has to be
raised. And should we somehow fail to do that and there be a default, I
agree with what the Fed chairman, Chairman Bernanke, said this past
this, which is that it would have severely destabilizing impacts.
In fact, he said it would probably bring back the severe chaos we
saw in the immediate aftermath of the collapse of Lehman Brothers in the
fall of '08.
KRUGMAN: If I can just weight in, that this is -- U.S. debt -- it's
not just that our credibility is on the line, that people could get
spooked by the fact that we start to look like a Banana Republic.
But it's also that U.S. debt plays a very special role in the world
A U.S. treasury bill is the gold standard of value, so much so that,
during the height of the financial crisis, there were intervals where
U.S. Treasury bills had negative interest rates, because that's what
people had to hold.
And if you're going to suddenly say, oh, that's not safe because the
U.S. government is -- is a bunch of squabbling children, that is a real
AMANPOUR: And even the -- the Chamber of Commerce leader is saying
that it's time to make this deal, raise the debt, and not even talk
about cuts right now.
KRUGMAN: That's right, because the cuts issue -- I'm sorry -- but
it's a huge thing, not to be settled in a few weeks of frantic yelling.
HOLTZ-EAKIN: So the U.S. is very unique in that it has a debt
limit. So imagine we didn't have one. We'd have an enormous problem.
We're on track to literally create a new financial crisis, given the
So dealing with the problem has to be the top priority. The
prospect of that financial crisis is anti-growth. It hurts the most
important job, which is jobs. And so I think the important thing is for
the Democrats who ultimately control this town and need to provide the
leadership on this to recognize that dealing with the problem, not the
debt limit symptom, is the key. And that's the route to real success.
ALTMAN: But you just made an important point, which is that the
business community and the financial community, which are largely
Republican, are entirely united in urging all of Washington, but
especially the Republican side, to pass the debt limit, don't trifle
with it and certainly don't trifle with default. And I think that's
HOLTZ-EAKIN: And the last thing I'd say -- and this is important to
recognize -- that nine out of 10 Americans oppose just a pure increase
in the debt limit.
So let's face it. This is a political exercise. They can't just
raise the debt limit. That's politically absolutely unacceptable. They
need to both raise it and fix the problem.
AMANPOUR: And you also heard Speaker Boehner saying that everything
is on the table except -- except taxes.
Has that battle basically, Sheila, been completely won now or
settled; it's just not going to happen?
BAIR: Well, I think that's a good question. I think probably
everything should be on the table.
I think there's a difference between tax -- raising tax rates and
tackling tax expenditures, and I think there is the potential for a very
broad bipartisan consensus on tackling, getting rid of most of these tax
expenditures which are very destroying for the economy and were -- some
of them were a driver of the crisis.
For instance, the mortgage interest deduction heavily subsidized
leverage, a lot of leverage with home borrowers. He favorable treatment
we give debt over equity financing also encouraged leverage with
There's a tremendous amount of potential revenue that could be
raised through tackling tax expenditures and it seems to me where the
most likely place for a bipartisan consensus is. But tax revenues do
need to go up. I think that needs to be part of the solution.
AMANPOUR: And this week, President Obama said to the Democrats,
don't draw any lines in the sand; be flexible on this.
AMANPOUR: On not particularly this issue, but in general.
KRUGMAN: Yeah, and there's a problem because, if you're playing the
responsible adult in the room and the other guy is willing to blow up
the room if he doesn't get exactly what he wants, that puts you in a bad
I think there has to be some lines in the sand. There have to be --
you know, we're not going to dismantle the New Deal and the Great
Society in a couple of weeks because the Republicans refuse to raise the
AMANPOUR: What would each one -- I want to go around the table and
ask you, what would each of you want to see coming out of these debt
ceiling talks that are going on right now?
What is the best-case scenario?
ALTMAN: Well, I think it will have to be, as Doug said, a serious
agreement to cut the deficit, or a downpayment, as the administration is
talking about, negotiated beforehand, and then pass the debt limit
increase in effect in exchange for that.
So there will have to be a serious budget agreement. It will just
be a downpayment. It won't solve the entire $4 trillion 10-year
problem. But if it's not serious and pretty large, then I don't think
it will get the votes to pass the debt limit.
BAIR: I guess I would like to see even more than that and have a
long-term plan. Four trillion over 10 years, I think, was a good
number. I think the Bowles-Simpson plan wasn't perfect, but it was a
good -- a good framework, a good example of how the pain could be evenly
But I agree, some short-term downpayment and some meaningful time
sequencing to get this done, I think, is necessary for credibility.
KRUGMAN: I actually -- I think it may be necessary to take this up
to the limit. Because the fact of the matter, we do not...
AMANPOUR: And default?
KRUGMAN: Possibly, if -- if we have complete -- if we have demands
for a large change in policy under threats of debt limit. This has to
be the point where you say, no, we don't believe in letting hostages be
AMANPOUR: Do you -- I mean, do you agree with that?
ALTMAN: No, I don't. I respect Paul, but I don't. I think default
would be a profound and hugely negative step. I think it would be
terribly destabilizing. I think it would reduce the amount of
institutions around the world that would, in the future, buy Treasury
debt and be...
KRUGMAN: But let me make my case here. We...
OK, but let me just say, we have an enormous budget dispute. We
have vastly opposed poles of policy. That's not something we should
resolve with a, you know, with a bomb hanging over our head. It's not
something we should try and change. And so Democrats have to make clear
that they're not going to let themselves be blackmailed in that way.
HOLTZ-EAKIN: The first choice is real solutions, so real cuts in
the near term, real targets over the medium term and real changes in the
It has to be -- the most convincing thing for markets is the actual
changes in the policy. It's what Americans know has to be done and it's
what would be best for the country. The backup is just a framework; we
promise to hit this target or that target with enforcement -- that's
less compelling. It might be easier to say, but less compelling.
AMANPOUR: An article -- a story that's in The Washington Post
today, talking about the negotiations between Vice President Biden and
congressional leaders, talking about federal pensions and what would
amount to about a 5 percent cut in salary. Does that -- is that a goer?
HOLTZ-EAKIN: I believe, as a matter of politics, the federal
government employees can't be exempt from whatever the deal is. The
perception that somehow everything has to change for Americans, but that
the sheltered few in D.C. are exempt -- nah, it's not going to fly.
BAIR: Can I just say I really -- I'm sorry, but I'm truly
frightened by even suggestions that we could default on Treasury debt.
I think the knock on impact on that would be tremendous. We would lose,
I assume, our AAA credit rating. A lot of institutions who currently
hold Treasuries would no longer be able to hold them. They would have
to liquidate them. That would create tremendous down-pressure on bond
The fact that interest rates would spike in terms of what Treasury
has to pay -- those yields all consumer and business credit price off of
Treasury yields, so borrowing costs for the real economy would go up.
Both consumers and businesses now are very hesitant and uncertain,
so they're not committing capital. If their borrowing costs go up, it
will -- it will be very detrimental to the economic recovery.
So I'm sorry, but I think -- it truly frightens me.
KRUGMAN: No, I'm terrified...
BAIR: I don't think we should be talking about it.
KRUGMAN: But I'm also terrified by a blackmail political system.
AMANPOUR: On that note -- on that terrifying note...
... we're going to have to pick this up another time.