Is Peter Orszag Going Rogue on the Debt Ceiling?

Former OMB director Peter Orszag left the Obama administration last year for Citigroup. But his opinions about what's going on in Washington are highly sought after by Citigroup clients. Part of his job is to advise institutional clients like hedge funds and mutual funds, which are growing nervous about the looming possibility of a debt default, like everybody else. Orszag recently gave such a briefing that left at least some in his audience convinced that the situation is less dire than Treasury is indicating. Ike Brannon, an economist and former John McCain adviser at the American Action Forum, who writes a popular email note that circulates among conservatives, recently described the Orszag presentation based on feedback he'd been given by some participants (Brannon himself did not attend):

[O]ur favorite ex-OMB director has been quietly making the rounds at the various investment houses, assuring them that the August 2 deadline is a soft one and that despite Tim Geithner's protestations to the contrary, he does indeed have the ability to prioritize spending should the debt ceiling bind and make sure the bondholders get paid, so they should all just chill.

A popular talking point among some Republicans right now (and a suspicion among a larger group of them) is that the August 2nd deadline is a scare tactic, ginned up by Treasury to give the administration leverage in debt negotiations. Orszag is a debt hawk and also has a bit of a history of saying things that run counter to the administration line. So I was curious. I managed to speak to one participant in this briefing who confirmed Brannon's description of it.

Is Orzsag going rogue? I called him to ask. He was perturbed by the suggestion. "A very small part of my job involves interacting with a variety of clients," he told me. "I have said we face urgency in dealing with the problem, that the Treasury estimate is probably the best guess, but [that] the actual drop-dead date is subject to fluctuations in incoming revenue. It's an estimate, and reality always differs from estimates."

I read him the note, to which he responded with the ultimate wonk putdown: "There is zero probability that what he heard or what he thinks he heard is what I said. Zero point zero-zero."

But wait -- hadn't he just said that the August 2nd date was subject to fluctuation? "The only piece that has a shred of accuracy," he said, "is that the precise date on which things bind--that is, the date on which you'd have to prioritize payments--is undoubtedly, in reality, uncertain, because experience will vary from that best guess. But that's a footnote curiosity. It really doesn't matter." The issue of whether Treasury can prioritize spending and prevent a default by, for instance, continuing to pay interest to bondholders was "ambiguous." But he stressed that it was a legal question. "There's no special Orszag Legal Analysis of Prioritizing Payments," he said. "The point is that in early August we blow up if we don't do anything."

Update: For a fuller elaboration of Orszag's view that a debt default would cause an "economic catastrophe," here's his Bloomberg View column.