Negotiations are in limbo as the clock is ticking toward an Aug. 2 deadline for raising the debt ceiling.
July 10, 2011
From left, House Minority Leader Nancy Pelosi, Speaker of the House John A. Boehner, President Obama and Senate Majority Leader Harry M. Reid sit before their meeting in the Cabinet Room of the White House. Talks between Obama and congressional leaders failed to break a partisan stalemate over how to raise the federal borrowing limit, leaving the politically charged negotiations in limbo with three weeks remaining before the administration says the country will begin to default.
Brendan Smialowski / Getty Images
There is something incredibly depressing, not to mention cynical, about the so-called Plan C
outlined by Senate Minority Leader Mitch McConnell (R-Ky.). The nation is staring default in the face, and he’s more interested in playing political games to save his party from blame than safeguarding the full faith and credit of the United States. Sure, President Obama would be given the authority to raise the debt ceiling. But then Democrats on Capitol Hill would be hammered on the campaign trail next year for casting votes to allow the president to raise the national borrowing limit.
Jennifer Rubin thinks what McConnell has proposed is “genius.”Politically speaking, she is right. But because the consequences of the game he’s playing are so dire, McConnell’s plan qualifies as evil genius. The United States is galloping at full speed toward a cliff. And we could start slipping off that cliff, not on Aug. 2, when the Treasury loses its legal ability to borrow money, but most likely around July 22 or 24.
That’s when the White House says a deal needs to be done to allow for the bill to be drafted and voted on in time for Aug. 2. As a result, the first sign of calamity could come from the ratings agencies. Remember, S&P,Fitch and Moody’s have already warned that the AAA bond rating of the United States is at risk of being downgraded. In fact, last month, Moody’s flat-out warned, “Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July,such a rating action is likely.” The minimum rating action any one of them could take is to downgrade the U.S. to double-A, which Moody’s announced two weeks ago “would be the most likely outcome” in a debt-ceiling rated default. And that’s when a world of hurt from inaction would be unleashed on the American economy and the American people.
Rob Nichols, president and CEO of Financial Services Forum, explained on Fox News yesterday and at an economic gathering last night what this would mean.
Nichols says that if the U.S. bond rating drops to AA that “interest rates would climb maybe 100 basis points.” For the uninitiated, 100 basis points equal 1 percent. That seemingly small increase, Nichols said, “would create a huge drag on economic growth,” citing a Federal Reserve report suggesting that a 100 basis point increase would lead to a nearly 1 percent decrease in gross domestic product (GDP). This is also featured in a report from JP Morgan Chase on “The Domino Effect of a US Treasury Technical Default.” Nichols then brought it home: a 1 percent drop in GDP is equal to approximately 1 million jobs. A nation with 9.2 percent unemployment and a struggling economic recovery literally cannot afford to let this happen. And, remember, this is the minimum that could happen.
Groups, such as Financial Services Forum, the Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers, have been making additional points in Capitol Hill meetings over the past several weeks. Not only would economic growth and job creation be stunted, but the global financial system itself would be under threat as Treasuries lose their value and banks face insolvency. The ensuing chaos would accelerate calls for a new non-dollar global reserve currency.
Closer to home, the implications for government operations would be immediate. In the month of August, the federal government will have $306 billion in expenses. But it is estimated that it will bring in only $172 billion. To come up with the remaining $134 billion, the government would basically have to rob Peter to pay Paul. This explains why Obama told CBS Evening News anchor Scott Pelley yesterday that Social Security checks and military pay might not go out on Aug. 3. Check out the chilling report from the Bipartisan Policy Center that shows why what the president said is no idle threat.
The situation is so alarming that a vast coalition of Wall Street and Main Street business leaders sent a letter to the president and every member of Congress yesterday demanding action. They want the debt ceiling raised and they want a plan that at least stabilizes the debt as a percentage of GDP. But most important, they want leadership.
Now is the time for our political leaders to put aside partisan differences and act in the nation’s best interests. We believe that our nation’s economic future is reliant upon their actions and urge them to reach an agreement. It is time to pull together rather than pull apart.
McConnell’s plan doesn’t meet that definition of leadership. Doesn’t even come close.
McConnell offered a "last-choice" option for meeting the Aug. 2 deadline for raising the debt limit.
Melina Mara / The Washington PostMcConnell outlines new proposal on debt ceiling
By Lori Montgomery and Paul Kane,
Senate Minority Leader Mitch McConnell moved Tuesday to head off a potentially disastrous U.S. default by offering President Obama new authority to raise the federal debt limit without cutting government spending.With debt-reduction talks between the White House and GOP leaders stalled, McConnell (R-Ky.) said his proposal offers a “last-choice option” for meeting an Aug. 2 deadline to raise the legal limit on the national debt. Senior Democrats privately embraced the idea, saying it could offer a detour around the looming crisis.
The proposal would transform the political dynamics of the debate, placing the entire burden for raising the $14.3 trillion debt limit on Obama. Republican lawmakers would be spared from voting to raise the limit and could shift their campaign for unprecedented spending cuts to the congressional appropriations process, where the risk of stalemate is shutting down the government instead of capsizing the U.S. economy. However, they would lose the approaching deadline as leverage to pursue their cost-cutting agenda.
The proposal is “not my first choice,” McConnell told reporters. But with a bipartisan agreement looking increasingly doubtful, he said, “we’re certainly not going to send a signal to the markets and to the American people that default is an option.”
McConnell’s proposal came as Obama warned that Social Security and disability checks could be delayed next month if the two sides fail to reach an agreement, piling fresh hardship on millions of families and putting new pressure on the sputtering recovery.
“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue, because there may simply not be the money in the coffers to do it,” Obama said in an interview with CBS News.
The White House reacted cautiously to the McConnell plan. Press secretary Jay Carney said in a statement that Obama is still committed to “seizing this unique opportunity to come to agreement on significant, balanced deficit reduction.”
Publicly, Senate Majority Leader Harry M. Reid (D-Nev.) left the door open to the idea. “I’m willing to look at this,” he told reporters. Privately, Reid has consulted with McConnell about making the proposal more palatable to reluctant Republicans by creating a joint committee to draft an enforceable debt-reduction plan, according to senior sources in both parties. Details are still being worked out, but the new committee would be stocked with Democratic and Republican lawmakers, and their budget-cutting plan could be fast-tracked to a vote in each chamber.
House Minority Leader Nancy Pelosi (D-Calif.) thanked McConnell for offering the plan as the leaders met at the White House on Tuesday afternoon for a third straight day of negotiations, according to a GOP source briefed on the meeting.
House Republicans were more openly skeptical. Aides said it would be extremely difficult to sell the plan to the rank and file, many of whom believe they were sent to Washington to radically reduce the size of government and have vowed for months to use the debt-limit debate to do it.
McConnell was quickly excoriated online by tea party bloggers, with Erick Erickson of the Web site RedState.com blasting the plan as “the Pontius Pilate Pass the Buck Act of 2011.”
Still, with less than three weeks left until the default deadline and no viable alternative in sight, House Speaker John A. Boehner (R-Ohio) declined to shoot it down. “I think everyone realizes there needs to be a backup plan if we can’t come to an agreement,” he told Fox News.
Little progress in meeting
By all accounts, negotiators made little headway during the two-hour session at the White House on Tuesday. Treasury Secretary Timothy F. Geithner opened with a sobering account of the consequences of default. With Ireland and Italy veering closer to their own debt crises, Geithner warned that this is the wrong time for the United States to be testing its luck with world markets, according to a Democratic official, speaking on the condition of anonymity to discuss the closed-door talks.
The two sides then sparred over the advantages of a mid-size deal that would reduce borrowing by roughly $2.4 trillion over the next decade vs. a grander, $4 trillion debt-reduction compromise Obama and Boehner had been trying to forge in private last week.
Since pulling the plug on the deal, Boehner has been largely silent in the meetings, leaving House Majority Leader Eric Cantor (R-Va.) to present details of the House’s position. On Tuesday, people in both parties said, Obama tried to reestablish Boehner’s primacy.
Cantor, who is advocating a smaller deal, at one point demanded that Obama offer the details of his vision for a “grand bargain.”
“Where’s your paper?” he asked angrily.
Obama snapped back: “Frankly, your speaker has it. Am I dealing with him, or am I dealing with you?”
Boehner spokesman Michael Steel later said that the White House has not supplied Boehner with a detailed plan.
Details of ‘backup plan’
McConnell also gave details of what he called his “backup plan” if the two sides fail to reach an agreement. Under the proposal, Congress would change the rules surrounding the debt limit for the remainder of Obama’s first term.
That measure would create a new legal structure authorizing the president to raise the debt limit by as much as $2.5 trillion in three installments. The first, an increase of $700 billion, would come immediately. The next two, worth $900 billion each, would come this fall and sometime next summer.
On each occasion, Obama would be required to submit to Congress an explicit request for an increase, along with a menu of proposed spending cuts equal to the requested increase. The submission of the president’s first request would automatically raise the debt limit by $100 billion to give the Treasury Department breathing room while Congress considers the request.
Lawmakers would then have 15 days to pass a resolution of disapproval, giving them an opportunity to go on record against raising the debt ceiling. But Obama could veto the resolution, and the debt limit would then rise, providing that at least 34 Democratic senators stood firm in upholding his veto.
McConnell’s strategy makes no provision for spending cuts to be enacted. Aides said lawmakers could pick and choose from the president’s list when they put together appropriations bills in a separate process.
Obama’s responsibility
Sen. Lamar Alexander (R-Tenn.) said the proposal would defuse the extreme tension surrounding the current debt-limit debate and restore its traditional contours.
“Throughout the history of the country when the president has asked for a debt limit, he’s gotten it. I believe the number is about 89 times. His party has given it to him,” Alexander said. “It gives the president 100 percent of the responsibility.”
But the measure’s failure to enforce spending cuts presents a major hurdle in the House, where rank-and-file Republicans on Tuesday threatened to reject even a $4 trillion debt-reduction plan that failed to conform to their demands.
Arriving back at the Capitol after the White House meeting, Cantor declined to comment on the McConnell plan. But, he said, “we are still at a point where nothing can pass the House.”
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