Won't a US default be way worse than 2008?

It has often been said that in the event of a US default, the

economy would be as bad as in 2008. I don't really understand that much about economics and finance, but from what little I do know, it seems to me that a US default would actually be far, far worse than what we saw in 2008.

In 2008, falling housing prices revealed that the world financial system had configured itself into something of a house of cards: huge institutions had placed leveraged bets on the idea that housing prices would not fall, and other huge institutions had in turn placed leveraged bets on the idea that those other institutions wouldn't lose money on their investments. When the prices did fall, the institutions found that that the "assets" side of their ledgers dropped lower than the "liabilities" side, and all simultaneously began to sell off their assets to reduce their liabilities. But since everyone was selling at the same time, it flooded the market and prices of those assets dropped further--which made everyone's balance sheets look even worse.

The dynamics of a classic financial panic had set in--but the thing that eventually ended it, and prevented the Great Recession from becoming a second Great Depression, was the US federal government--or more accurately, the world's faith in the US federal government to be solvent and responsible. The panic had caused investors to want to move their money to a "safe" investment--and the safest one they could find was US dollars, or US debt. When the US government eventually bailed out the financial system it did so with borrowed dollars that were extraordinarily cheap to borrow--the interest rate was close to zero (in fact if you factored in inflation, the real interest rate was negative). The US being able to borrow large sums of money so cheaply and easily contributed to the confidence of the financial world that the system could be saved, and so in a self-fulfilling prophecy, the system was saved. The downward spiral of assets losing their value and being sold off was interrupted and though the world economy was in terrible recession, at least the financial system was once again sound.

If Congress does not raise the debt ceiling, the US will default on its debt obligations, which means that all those investors who have placed their money in US Treasuries will be stiffed when it comes time for the US to pay the interest on them. The real damage, however, isn't so much that the investors will miss out on a few payments--it's that such an event would shatter confidence in the US Treasury as a safe investment. Everyone will suddenly want to get rid of their US debt, and--just like in 2008--the mass, simultaneous selling off of US debt will cause the value of US debt to plummet, suddenly throwing everyone's balance sheets into the red. Just like in 2008, the revelation that something widely held to be safe and valuable is, in fact, not safe and not valuable, will trigger a panic and a downward spiral of sell-offs and insolvency.

Only this time, if it's the US federal government itself that has triggered the crisis, who then will play the role of the savior and rescue the financial system? When a panic occurs, the only way to stop it is to get a player big enough to interrupt the positive-feedback loop of sell-offs and insolvency. The player needs to be in a position to amass an overwhelming amount of money to do this. By consensus, the financial system had with its loans anointed the US to play this role. But do we know who the backup will be if the US fails? Will it be the EU? Will everyone sell out of their position in US debt and buy German debt instead? Or will there be no bottom to it, like the Great Depression?

The other thing is that it seems to me that however critical those mortgages ended up being to the financial system in 2008, US Treasuries are far more critical. They seem to be the cornerstone of the world financial system: governments back their currencies with US dollars and debt, financial institutions stay solvent with them. I don't understand what would happen if those assets suddenly plummet in value. I'm morbidly curious to find out, but, honestly, I really don't want to live in that world.

I hope the Republicans come to their senses soon...

Why the Democrats cannot negotiate over the shutdown

It's a simple point: if Democrats make concessions to Republicans on health care, then they will set the precedent that a party that controls just one house of Congress can nullify the duly passed signature legislation of the party in power--and it can do so without making any policy concessions of its own. I don't understand how such a system can be sustainable over time.

Of course it's perfectly legitimate for Republicans to be opposed to Obamacare and to desire its repeal, but the proper method to achieve this goal is to win elections and pass a law. That is the way that Democrats got Obamacare enacted; that is the way that Republicans will have to get Obamacare repealed.

If the Republicans truly believed their own arguments--that Obamacare is a disaster--then they would do well to take steps now to increase the democratic accountability of Congress by striking a deal to abolish or reform the filibuster and return the Senate to majority rule, rather than the current practice of requiring 60 votes to get anything passed. This will make it easier for them to pass a repeal or reform of Obamacare in the coming years.

Of course, it would also make it easier for Democrats to pass legislation that strengthens Obamacare or any one of a number of scary liberal things. But that's how it should be: elections should matter. And as a liberal I would be more than willing to defend Obamacare in a fair fight at the ballot box.

Principles are a tool to help us moralize

The point of making principle the master of morality rather than, say, intuition or tradition, is that we can guard against our own cognitive frailties. Whereas our intuitive sense of morality is malleable and easily influenced by our own interests, biases, and psychological needs, rule-like objective principles are outside of us and not subject to these pressures. Principles therefore act as an outside point of reference that we can use to navigate the murky swamps of our own minds.

When we find that we support a position that cannot be satisfactorily justified by principles, it is a clue that we have succumbed to one cognitive frailty or another, and that we need to step back and reassess our position. Though we like to think that an unprincipled position is one that is automatically and necessarily wrong, in practice an unprincipled position is one that is merely highly suspect and invites further reflection.

Note that on this view it is not the case that morality is intrinsically rational. Principles--rational thought--is something separate, a tool that helps us moralize by allowing us to overcome various cognitive biases and blindnesses. Metaphorically, principles are a scaffolding we build for ourselves to give us a view on the moral landscape that we otherwise would not be able to attain.

But the use of rational thought to aid our moralizing can fool us into thinking that morality has properties of rational thought that it doesn't necessarily have. We tend to think, for example, that morality provides an answer for every moral question, and that it is merely a function of wisdom that determines if we find that answer or not. We also tend to think that morality is consistent, and that if properly applied it will tell us that a moral proposition is either true or false, but not both.

But I don't think that morality need be consistent, nor does it necessarily provide an answer for every moral question. Moral dilemmas are not difficult problems with a correct solution, like some kind of mathematical postulation, but rather instances where morality cannot yield an answer. In the same way that our limbs are limited in their movement and cannot bend certain ways, our morality is limited in its application and cannot answer certain questions.

If morality is not intrinsically rational--a set of objective rule-like guidelines that determine right and wrong--then it begs the question of what morality is, exactly. I think the best way to look at it is that morality is something humans do that is a part of their essential nature, like how we eat and love and sing. And like those other idiosyncratic activities, morality is irregular and organic and naturally resistant to logical codification and reductive rules. We can try to create such principles and rules so as to reflect our morality as closely as possible, but we can never abandon our morality to the rules--people make moral decisions, not rules.

In the same way that holding a position not supported by principle is a clue that there is something wrong with the position, relying exclusively upon principle to arrive at a decision is a clue that something has gone wrong with one's moralizing capacity. To be doctrinaire is to be in denial of the moral consequences of one's position: it is a retreat, a willing blindness. An exclusively principled stance means nothing if it is not accompanied by charity, empathy, kindness, and true understanding. Principles are a tool, but to apply principles blindly is like using a tool absent some larger goal. It's like hammering nails into a board for no reason.