In an Uncertain World (24 page)

   

THE LARGER ISSUES and principles at stake in the Clinton-Gingrich conflict were brought dramatically to the fore in the debt limit crisis that exploded in the autumn of 1995 and got woven into the budget battle and the two government shutdowns that took place over the winter. On the surface, this conflict involved a barely comprehensible dispute about technicalities of federal debt management. But the real stakes in this fight, as intense as any I had to face in Washington, were two fundamental principles. One was the obligation to pay debt. The other permeated the larger budget battle that enveloped the debt limit crisis: What are the responsibilities and role of the federal government? As this drama unfolded in late 1995 and early 1996, I experienced what it meant not just to be criticized harshly on the basis of policy but, even more than during the Mexican crisis, what it was like to be personally vilified.

Increasing the debt limit is a technical issue. I'll explain the background in brief. Throughout nearly all of American history, the federal government has carried a national debt, financed by issuing Treasury bonds. This debt has risen over time. Until the First World War, Congress directly approved each new issuance of debt. But that became impractical as a way to finance the war, giving rise in 1917 to the practice of authorizing an overall “debt ceiling.” The advent of annual budgeting made the debt limit anachronistic, because now Congress would control federal spending directly through the budget process. However, the practice was never eliminated.

Over the many decades since, congressional approval of increased ceilings—which is necessary to finance the operations of the federal government—had sometimes involved fairly contentious disputes over budgetary issues, but never to the degree of the 1995 conflict or with an expressed willingness to default. But in the spring of 1995, while we at Treasury were busy dealing with the Mexican crisis, conservatives were looking for a way to force Bill Clinton to sign their budget, with deep cuts in programs he cared about and large tax reductions favoring the most affluent. The debt limit became a lever. By attaching an increase in the debt ceiling to their bills for the 1996 budget—and refusing to authorize an increase in the debt ceiling otherwise—the President's antagonists in Congress thought that Clinton could be forced to accept the minimalist view of government built into their proposed budget.

The Speaker of the House, Newt Gingrich, began publicly to bring up the possibility of refusing to raise the debt limit in April 1995. He went on the ABC program
This Week with David Brinkley
and suggested that he and his allies might use the debt limit as a way of getting the President to sign a Republican budget bill. If the President refused and Gingrich held firm, this course of action would prevent the Treasury Department from borrowing and thus could lead to the government's failure to meet its obligations for the first time in the country's history. Gingrich was suggesting a deliberate financial default by the government of the United States, which could mean the cessation not only of payment on debt instruments but also of some operations of government—from sending out Social Security checks to paying doctors at veterans' hospitals. Clinton, Gingrich said, would then have to “decide how big a crisis he wants.”

At the time, I didn't think that this threat was serious. Coming from Wall Street, I thought the notion that the government of the United States would choose,
as a political act,
not to meet its financial obligations was outside the realm of possibility. Publicly, I said that such a default was “unthinkable.” The obligation to pay debt underlies our entire financial system and had to be maintained as a practical and moral imperative.

For the United States to choose not to pay obligations for political reasons would undermine that imperative. Such a message was especially troubling in the context of developing countries that were making enormous sacrifices to pay their debts in order to avoid the damage to living standards that could flow from default. During the not-yet-resolved peso crisis, we were essentially saying to Mexico what we would subsequently say to a number of other countries: debt default risks creating chaotic financial conditions and loss of access to capital markets for a long time. Instead, you need to implement reforms in conjunction with IMF assistance. How could we square that message with defaulting on our own debt for political reasons?

Moreover, a default would likely have harmed the perception of our country's reliability as a debtor, raising the interest rates the United States would have to pay on its debt, even if only slightly—not only in the short term, but for years to come. And this damage to our credit standing could be extremely damaging when we needed it most: if we ever faced real financial duress. Moreover, diminished confidence in our society's commitment to the moral imperative to repay debt might also raise borrowing costs for the private sector. I thought that defaulting on United States government debt, even for a brief time, would be a monumentally unwise and consequential act—so I didn't believe Gingrich could be serious.

My view was substantively right but seemed to be politically wrong. Gingrich and some members of his party claimed to be quite ready to court the unthinkable—default—to get Clinton to accept what he viewed as the unacceptable: their budget proposals. I underestimated the resolve of the President's antagonists, who, over the next several months, certainly seemed to be entirely willing to use this weapon. I was even more surprised when they found a few well-known figures from Wall Street who would support the idea. One was Stanley Druckenmiller, a hedge fund manager, who took the position that the markets would ignore a default if it helped to produce a balanced budget. In September, Gingrich gave a speech to a trade group called the Public Securities Association, in which he said that his side would not back down. “I don't care what the price is,” Gingrich said. “I don't care if we have no executive offices and no bonds for sixty days.”

Without an increase, the federal government would hit the debt ceiling before the end of 1995, possibly as early as October. Default and the President being forced to sign an unacceptable budget were both untenable. We needed to find a way out, rather than simply waiting and hoping that at the last minute the opposition would blink and increase the debt limit. We also faced a conundrum similar to one we had just experienced with Mexico. We had to avoid causing alarm in financial markets; but without raising an alarm, creating pressure on the President's opponents in Congress to abandon these tactics would be difficult.

But if default was unthinkable—something akin to nuclear war—and the Republican budget was merely horrible, shouldn't we accept the horrible to avoid the unthinkable? I never found an entirely persuasive answer to that question. When the issue would arise in media interviews, I would deflect it by saying that this wasn't how the legislative process was supposed to work. Something as important as the debt limit shouldn't be held hostage to another piece of legislation or be used to coerce a President into signing something else—especially not a major policy measure such as the budget. Hostage taking is frequently practiced in legislation, but my point was that it should not extend to such fundamental matters as default. Fortunately for me, no one in the media ever persisted beyond this discussion of legislative principles to force me to explain why I would risk the unthinkable just to avoid the horrible.

But the showdown did not unfold as our opponents expected. At first this was due to a simple misunderstanding. Republicans originally thought I had said that the debt ceiling would be reached in mid-November. In mid-October, we sent a letter to the Hill saying that the debt ceiling would be hit on October 31. The Republicans felt that I had intentionally misled them earlier. In fact, they had simply misunderstood a technical distinction about the dates that I had testified about several times. Although the debt ceiling would be hit on October 31, there was enough cash on hand for us to keep meeting obligations through mid-November.

This misunderstanding about the timing was the first of several events that fall that undermined their legislative strategy. As a result, attacks on me that fall and winter were angry and vicious—much more than during the Mexico crisis. I had never experienced anything like this before. This began when Newt Gingrich said on TV that I was playing games and was untrustworthy. “We have no belief that the Treasury has accurate figures,” he said. “We have no belief that Rubin's advice is anything other than politics.” Senate Majority Leader Bob Dole told reporters on Capitol Hill, “He doesn't have a lot of credibility up here.”

Meanwhile, we still faced the prospect of running out of cash in mid-November. It was Ed Knight, our savvy chief Treasury counsel, who suggested borrowing from federal trust funds on an unprecedented scale to postpone default. Accounting for certain government obligations—such as pension benefits for government employees, highway construction, and Social Security—is separate from the rest of the federal budget. Ed argued that we had the legal authority to borrow from these funds in order to meet other pending obligations. By doing so, we could hold off default for a few months without a debt limit increase.

On November 12, three days before what would have been the first default by the American government in its history, we decided to borrow from the trust funds. We drew from two funds, the Civil Service Retirement Fund and a federal savings plan. We did not borrow from Social Security, in part for technical reasons and in part because it would be hard to persuade retirees that borrowing Social Security funds would not endanger their benefits. I think many on the other side were hoping that we would use Social Security funds, which would give them a chance to provoke outrage against us.

I never viewed our actions as an attempt to protect the President, though they certainly had that effect. I was simply trying to fulfill my statutory responsibility to pay the government's debts without causing some other unacceptable outcome. But Clinton's opponents were infuriated, because what we did to forestall default freed the President from the vise they thought they had him in. Using the debt limit to coerce his capitulation was their strategy. Our finding a way to get cash even though we were at the debt limit pushed them into a new, more explicit strategy of closing down the government to force Clinton's hand on the budget.

That strategy was highly damaging to them. Antigovernment feeling was not as deeply imbedded as some conservatives thought. The American public, for the most part, did not think that shutting down the federal government, even temporarily, was a good idea. And for a variety of reasons, most people blamed Congress and not the White House for the shutdown, driving the Republican Congress's popularity down and the President's up.

After we announced our decision to borrow from the trust funds, freeing the President from the threat of default as pressure to reach an agreement, some of his opponents became even more upset. James Baker, one of my predecessors as Secretary of the Treasury, was cited in the press as saying that I could be held personally liable for the amounts borrowed from the trust funds. (I'd done well on Wall Street, but not well enough to keep the federal government running for more than a few seconds.) Bill Archer (R-TX), the chairman of the House Ways and Means Committee, said that I was provoking a “constitutional and legal crisis” and introduced a bill to stop me from using the trust funds. Congressman John Mica (R-FL) testified that our use of the trust funds' cash made me a thief. Around that time, I remember Hillary telling me that she drew strength from seeing how I handled being vilified.

One morning, I woke up to a Robert Novak column in
The Washington Post
saying that Gingrich no longer “trusted” me and would not take my phone calls. Another report quoted Gerry Solomon (R-NY), the chairman of the House Rules Committee, as saying he was interested in trying to impeach me if I borrowed any more money. In a meeting I had on Capitol Hill, a Republican congressman mentioned talk about impeachment to my face. I was concerned about the totally unjustified attacks on my integrity, but in conversations with colleagues and friends—or even in off-the-record interviews—I treated it lightly, saying that Judy wanted me back in New York and that when she heard the threat of impeachment, she called to ask me how she could testify for them.

This harshness and personal vilification—which Washington too often resorts to when conflicts develop—can be hazardous to sensible choices. Decision makers can readily become excessively risk averse. In this environment, minor mistakes can have vast, distorting consequences. I was keenly aware that some insignificant, good-faith error that didn't matter in any substantive way could derail our entire effort. The pursuit of fewer errors is sensible; the insistence on none at all, counterproductive. Unrelenting criticism of people in public service—and the same is true on Wall Street trading desks or in any business—may well reduce the frequency of mistakes. But it does so at a great cost—chilling the willingness of individuals to act and to take worthwhile risks.

And you can never eliminate errors, even among the best-intentioned, most capable people. Due simply to oversight in the midst of managing complex matters, we discovered at one point that we had miscalculated some numbers. The difference wasn't substantively significant, but the political effect could have been immense. In another instance, we said that the Federal Reserve, which acts as agent for the Treasury in sending out checks, could not distinguish among different types of government payments. This would have meant that in the case of default, the government would have no ability to, say, withhold payments to defense contractors while continuing to send Social Security checks. But then we found out that may not have been entirely accurate.

I remember going out to dinner with Judy in Washington and agonizing over our quandary about whether we could send out Social Security checks in case of default. I thought the issue could blow up, and I told Judy that I might have to step down: “We made this assertion that we now realize may have been wrong.” After talking it over with Judy, I went to Leon and told him about what had happened. “I don't know how we screwed this up,” I told him, “but we did.”