10/09/2013 04:25 pm ET Updated Jan 23, 2014

The Debt Default Could Really Happen

Wall Street and the punditry class seemly largely unconcerned about the Tea Party Republicans' threat to default on the national debt.

Yet, they should be concerned -- very concerned. Unlike in the past when threats to default were nothing more than a charade, the Tea Party radicals in Congress really do want to default on the national debt to both make a point about government spending and increase their political power. With astounding ignorance, many of these members are saying that a default will have little economic consequence. In fact, a default would make the 2008 Wall Street collapse look minuscule in comparison.

The risk of a U.S. default is heightened because the two principal players -- President Obama and House Speaker Boehner -- are weak men.

The president has repeatedly failed to stand up to the GOP's bullying and is not trusted by most Democrats in Congress to not collapse during any hard negotiations. Speaker Boehner has allowed the Tea Party Members to take control of the House, making him more of a spokesperson than a leader. The point is that both men have enormous powers, but repeatedly have chosen not to use them at critical moments.

By ineffective inaction, the president and speaker are allowing the debt crisis to reach a point of no return, which the Treasury Department says will be on October 17, 2013.

What goes unmentioned in most of these discussions is the fragility of the U.S. banking system. Five large banks now have outstanding obligations on more than $200 trillion of derivatives. Put into perspective, that is almost 13 times greater than the entire U.S. Gross Domestic Product and many times more than the capital these banks possess to honor these obligations.

Derivatives are bets. Supposedly, these bets are covered, but as we learned in 2008, trillions of dollars of these bets were uncovered, leading to financial collapse.

Because Wall Street has succeeded in keeping derivative trades unregulated, no one has an overview of the quality of the derivates that now hang over the world economy.

To the extent that any of these bets depend on the U.S. not defaulting on its debt, which many surely do, therein lies an enormous risk. As happened in 2008, once the dominoes begin to fall, stopping the collapse becomes very difficult.

And a debt default is likely to knock down some of the dominoes.

What both the president and the speaker seem not to grasp is that we are in a fiscal and Constitutional crisis. The fiscal crisis is obvious. Less so is the Constitutional clash.

The Tea Party Republicans are trying to legislatively veto a settled law -- the Affordable Care Act -- by holding hostage the funding for the entire rest of the U.S. government. This defies constitutional governance and borders on sedition. Speaker Boehner has joined in these acts which he should have stopped the moment he learned that such was even contemplated. But he did not because he feared losing his position.

The president unintentionally encouraged such hostage taking by negotiating and making deals with the House Tea Party Republicans in 2011. Thus, his proclamations of "never again" have a certain hollow ring.

But if he surrenders to such blackmail again, our constitutional democracy will be deeply damaged, for we can be certain that Senator Cruz, the most visible advocate of these extra constitutional actions, and his House followers will use the threat of national default again and again and again to thwart majority rule.

As for Speaker Boehner, he must now choose between a craven clinging onto his position or serving the best interests of the nation. All that he need do is allow a vote on a funding and debt limit bill that has no political strings attached. That bill would easily pass and both crises would immediately end.

Mr. Boehner's leadership role would surely be challenged, but he would have done his duty.

As for Barack Obama, this is the crisis moment of his presidency. He has three choices. First, succumb to the political blackmail as he did in 2011. Second, remain passive and allow the nation to slip into national bankruptcy on October 17th. Third, use his constitutional authority to pay the legal debts of the United States and avert a default.

Inevitably, paying the debt will lead to calls for impeachment by the radical House members. The benefit is that defaulting on the national debt would never again be a credible political threat.

In sum, the actions by the president and speaker over the next several days will largely determine their place in U.S. history.