Sandy Levinson has posted interesting reflections on our tendency to “absolutize” the public debt. There is at least one good and one bad rationale for us to do so. The good rationale is straightforward: government is the ultimate risk manager. We rely on it to aid recovery after disasters, to defend US interests, and to provide for those who cannot survive using their own funds. In a world of advanced and expensive medical technology, that last category potentially includes nearly everyone, at some point in their lives. The debt ceiling debate is a wake-up call for us to choose more carefully between guns and butter. We need credit so that the government can borrow to, say, rebuild a city after a massive earthquake.
But there is also a bad reason for the rising stakes of US spending. To put it bluntly, the too-big-to-fail banks are the new Fannie Mae and Freddie Mac. The government must “keep its powder dry” in constant vigilance, ready to “re-TARP” the damage should any panic befall them. Consider, for instance, the current agonies of the Eurozone, as described by John Lanchester:
[Greek protesters] want the Greek government to default, and the banks to accept losses for loans they shouldn’t have made in the first place. It is that prospect which spooks everyone else in the EU, and the world economic order generally. . . . Who owns that Greek debt? [M]ainly French and German banks. Yes, but banks insure their debt via the use of complex financial instruments. Insure it with whom? Don’t know: some of it is insured with British banks as counter-parties to the risk, but that risk will be insured in its turn, so that the identity of the person holding the parcel when its last layer of wrapping comes off is a mystery. That mysteriousness was the thing that made Lehman’s collapse turn instantly into a systemic crisis.