Why Congress should go for broke

But the members of today’s Congress are no founding fathers. Politicizing debt reduction has totally failed and always will. The last budget “deal” shaved $350 million off of spending this year, which is something like 0.2 percent of 2010’ projected deficit—not including Libya and a few other things that will overwhelm the GOP’s hard-fought phantom savings in a week. But the previous budget “compromise” was far worse. It resulted in over a trillion dollars of extra spending on unemployment benefits, tax cuts and stimulus. (Larger if the “temporary” tax cuts have actually become permanent, which we all know that they have.)

America must declare bankruptcy; only the judicial branch of the government is capable of doing what Congress and the president cannot. A panel of bankruptcy judges wouldn’t care whether an expense is technically on or off-budget; if it was projected to be higher or lower at some point in time; if it was made permanent or temporary in order to pull the wool over someone’s eyes or placate the CBO; or if semantics were used to make it sound more or less appealing, e.g. inheritance/death tax.

Nor, frankly, would a judge have to honor a horrible contract that was cut pre-bankruptcy, i.e. pensions based on manipulations of overtime or excessive benefits offered at a politically opportune moment or $100 million dollar bonuses to commodity traders, for that matter. The bankruptcy judge simply evaluates what can—and what cannot—be paid.

Which may explain the terrified look on the face of Timothy Geithner, who reminds me a bit of one of those dashing young dot.com CEOs back in the late nineties—the ones who didn’t want to show earnings because then their market capitalizations would have to return to earth as investors realized that there was, er, an actual ceiling. Make no mistake: Geithner is not arguing for a one-time increase in the ceiling but for a perpetual ceiling, which is no ceiling at all.

Meanwhile, Newt Gingrich is advocating bankruptcy for the states—a great idea—and Donald Trump, a man who has bankrupted his casinos in Atlantic City more times than anyone can count, is surging in the polls.

Geithner’s argument is simple: default would be the end of the dollar and the global financial system. But that’s what he said about Wall Street, which could have used a bankruptcy judge’s scalpel rather than the blank check they got instead. If we learned anything from the financial meltdown it was the more debt, ultimately the more financial chaos. As for the end of American hegemony, our creditworthiness is already declining rapidly—witness the appreciation of gold and the depreciation of the dollar, as well as the “negative outlook” that S&P just slapped on America this week.

Finally, Geihner & Co. say that America has never defaulted. Oh, really? When was the last time that the Social Security and Medicare Trust Funds received the interest due them? The reality is that we have already defaulted on ourselves. What Geithner is arguing is that if Americans really want what they’re told is owed them, they’ll have to borrow it. Is there any more convincing proof that we’re already broke than that?

James Scurlock is the author of “Maxed Out,” winner of the 2007 Ridenhour Book Prize and director of the film of the same name, which was named one of the year’s top ten films by The Washington Post. Maxed Out” is widely credited with predicting the financial crisis.