You have a friend named Old Wang, who spends lavishly, spending more than he earns every year. If a normal person did this, the bank would have stopped lending him money long ago, or would charge very high interest rates.

But Old Wang is different. His father runs a mint.

Every time Old Wang issues bonds to borrow money, no one on the market buys them, so his father steps in and takes them all. Because his mint-running dad provides unlimited backing, Old Wang's borrowing costs have always been low—after all, creditors know "his dad will take the losses."

So Old Wang has no scruples, borrowing more and more, with the hole growing bigger and bigger. He doesn't care that his deficit has reached 5.8% of his income. After all, as long as his dad is around, borrowing is no worry.

Now, what Warsh means is: it's time for his dad to stop.

If his dad no longer buys, Old Wang will have to go to the market and borrow based on his true credit. The market will take one look—good grief, you have such a big hole every year? Interest rates will double.

Old Wang will be forced to face the real consequences: either spend less, or earn more.