[Updated January 18, 2013 in response to some incredibly stupid comments here and elsewhere. Look down at the bottom for the added information. I have also added one comment re my Wikipedia entry.]
Yes, Tamara Keith, that’s you I’m talking about. Today on “All Things Considered” Ms. Keith ran a story on the debt ceiling negotiations. Here’s a snippet:
But earlier this week in the speaker’s lobby — a bustling room just off the House floor — a very different narrative could be heard.
“There is not going to be a default unless the president of the United States chooses,” said Republican Rep. Tim Huelskamp of Kansas. “He is threatening folks with a very empty threat.”
And here’s how Rep. Pat Tiberi, an Ohio Republican, put it: “Nobody is talking default except for the president. He doesn’t need to default.”
Need a translation? When Huelskamp and Tiberi talk about default, what they mean is missing debt payments — failing to pay the nation’s creditors. What they’re arguing is that the president and Treasury will have to set priorities.
Tiberi says the top priority would have to be paying interest on the national debt.
“Defaulting is something that we can’t do,” he says. “So, it’s got to be a priority.”
Under this theory, Social Security recipients, veterans, government employees, contractors and all the rest would get lower priority; though Tiberi says seniors and veterans should get paid first with whatever is left after interest payments.
“Under this theory?” Oh, yeah, wait, let’s Google the word “default.” The very first result is from Wikipedia:
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.
Update Jan. 18: I have been criticized for using Wikipedia. But my point was simple. Even Wikipeda, defective as it is, still managed to get this definition correct.
If Ms. Keith had spent two minutes doing research instead of coming up with creative language to snipe at Republicans, she would not have embarrassed herself, her show, and NPR this way. Ms. Keith hereby wins the award for lazy NPR reporter can’t be bothered to check facts.
Several people have insisted that I must be wrong. Never mind that I’ve been teaching this stuff for 30+ years and reviewed many money and banking textbooks. Never mind the legal definition. They want to believe what they want to believe. Bad news, folks. The real world is not so forgiving. OK, folks, here it is, complete with full citations. Let me know if you have anything to say that uses actual facts.
http://www.nolo.com/dictionary/default-term.html (Nolo.com, formerly the Nolo PressZ)
“Failure to pay a debt or meet other obligations of a loan agreement. For example, a debtor may default on a car loan by failing to make required monthly payments or by failing to carry adequate insurance as required by the loan agreement.”
Money, Banking and Financial Markets, 2nd Edition
eText: ISBN-10 0-07-744594-5, ISBN-13 978-0-07-744594-2
Print: ISBN-10 0-07-337590-X, ISBN-13 978-0-07-337590-8
Author(s): Cecchetti, Stephen; Schoenholtz, Kermit
Publisher: McGraw-Hill Higher Education
Copyright year: © 2011 Pages: 704
“Default risk is the chance that the bond’s issuer may fail to make the promised payment.” (p. 142)
Money, Banking, and the Financial System, First Edition
R. Glenn Hubbard; Anthony Patrick O’Brien
Publisher: Prentice Hall
Copyright year: © 2012 Pages: 640
“For example, before mortgage loans were securitized, the risk that the borrower would default, or stop making payments on the loan, was borne by the bank or other lender. When a mortgage is bundled together with similar mortgages in mortgage-backed securities, the buyers of the securities jointly share the risk of a default. Because any individual mortgage represents only a small part of the value of the security in which it is included, the buyers of the securities will suffer only a small loss ifa borrower defaults on that individual mortgage.” (p. 14)
“In 2008 and early 2009 bond prices fell due to the fears of investors that the slumping U.S. economy raised the risk that some companies would default and cease to make interest payments on their bonds. As this chapter explained, one reason interest is charged on loans is to compensate for default risk. ” (p. 79)
Foundations of Financial Markets and Institutions, Fourth Edition
Frank J. Fabozzi; Franco Modigliani; Frank J. Jones
© 2010 Prentice Hall, 696 pages
0-13-613531-5, 978-0-13-613531-9, 0-13-611810-0, 978-0-13-611810-7
“The second is the risk that the issuer or borrower will default on the obligation. This is called credit risk, or default risk.” (p. 4)
“Credit risk, also called default risk, refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation. Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.” (p. 40)
The Economics of Money, Banking, and Financial Markets, Tenth Edition
Author(s): Frederic S. Mishkin
eText: ISBN-10 0-13-277097-0, ISBN-13 978-0-13-277097-2
Print: ISBN-10 0-13-277024-5, ISBN-13 978-0-13-277024-8
Publisher: Prentice Hall
Copyright year: © 2013 Pages: 720
“They are also the safest money market instrument because there is almost no possibility of default, a situation in which the party issuing the debt instrument ( the federal government in this case) is unable to make interest payments or pay off the amount owed when the instrument matures.” (p. 31)