With less than a week to go before America’s August second debt ceiling deadline,
negotiations have broken down. Nonetheless, a deal will almost certainly be done. The markets seem convinced, and it’s inconceivable to most observers that the US would arbitrarily
default on its obligations (whether to bondholders, pensioners, or employees).
Inconceivable, however, is not the same thing as impossible. As in August 1914, rational decisions by reasonable actors can combine to create an unexpected and unintentional disaster.
Even if both Republican and Democrat parties as a whole agree on the importance of raising the ceiling, individual members have every reason to vote against it. The last time economic crisis was nigh many Republicans were dragooned into voting for TARP and subsequently lost primary challenges for their heresy. American political parties aren’t as disciplined as parties in Parliament, and many individual Congressmen and Senators will consider voting against the bill in the hope that others take the bullet — a collective action problem.
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