The Risk Wall Street Doesn't Want to Think About

○ The consequences of not raising the debt ceiling are so awful that Congress is sure to do it in time—right?

- Pat Regnier

Conventional wisdom says the US will avoid a devastating federal payments default later this year. But conventional wisdom has proved spectacularly wrong preceding shocks that upended the world in recent years: the failure of Lehman Brothers, the 2016 US election, the global spread of Covid-19.

The source of the potential shock is a procedural quirk of the US government that’s intersected with soaring partisan hostility. The federal debt has hit a legal limit imposed by Congress, and Republicans in the House of Representatives say they want concessions from Democrats and the White House before raising it. Such standoffs aren’t new. But lawmakers have never failed to pass an increase or suspension of the debt ceiling before the Department of the Treasury ran out of cash to make good on US obligations.

“If something has not happened for a long period of time, most people simply forget about it,” says Tyler Cowen, an economist at George Mason University. He trained under Thomas Schelling, a pioneer in game theory—the study of how people vie for advantage or decide to cooperate. “We simply start assuming: ‘Can’t happen; it won’t happen.’ It’s not even within the set of our consciousness,” says Cowen, who’s also a Bloomberg Opinion columnist.