Timothy Geithner and Barack Obama

It would seem the Obama administration is hinting that they will (or at least want the market to think they will) prioritize bondholders over everyone else if the debt limit is reached.

In order to increase the pressure on House Republicans over the debt ceiling, the Obama administration has begun very publicly talking about all the terrible things that will happen if the limit is reached. At yesterday’s press conference, Obama implied that Social Security and veterans’ benefits may not get paid.  And in a letter to Speaker John Boehner, Treasury Secretary Tim Geithner went into further detail. What is extremely notable is what is absent from these lists.

From Obama Press Conference:

If congressional Republicans refuse to pay America’s bills on time, Social Security checks, and veterans benefits will be delayed.

We might not be able to pay our troops, or honor our contracts with small business owners. Food inspectors, air traffic controllers, specialist who track down loose nuclear materials wouldn’t get their paychecks. Investors around the world will ask if the United States of America is in fact a safe bet. Markets could go haywire, interest rates would spike for anybody who borrows money. Every homeowner with a mortgage, every student with a college loan, every small business owner who wants to grow and hire.

From Geithner’s letter:

The U.S. government makes approximately 80 million separate payments per month.  These include payments for Social Security; Supplemental Security Income; Medicare; Medicaid; national security needs, including military salaries, military retirement, veterans’ benefits, and defense contractors; income tax refunds; federal employee salaries and retirement; law enforcement and operation of the justice system; unemployment insurance; disaster relief; goods and services sold to the government under contracts with small and large businesses; and many others.  If Congress does not act to extend borrowing authority, all of these payments would be at risk.  This would impose severe economic hardship on millions of individuals and businesses across the country.

Conspicuously absent are interest payments to bondholders. While some economists have made the argument for why prioritizing bondholders is the best policy, I’ve yet to hear a real solid legal justification for why debt owed to bond holders can be allowed to supercede, for example, debts owed to contractors for services rendered. Of course we would be in a strange legal situation where the President was forced by conflicting laws to break at least some of them, so the idea of what is “legal” becomes relative.

It could be over reading these statements, but it strongly seems the administration wants to up the pressure from regular voters while also not overly spooking the market.

The Obama administration acted in a similar manner during the last debt limit fight, trying to downplay the idea of “prioritization” without completely rejecting it. There were even unnamed officials telling Bloomberg News that this was the contingency plan.