Six former Treasury secretaries urge Congress to 'move swiftly' on debt ceiling

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CNBC 23 September, 2021 - 09:26am 37 views

Why is there a debt ceiling?

To provide more flexibility to finance the United States' involvement in World War I, Congress modified the method by which it authorized debt in the Second Liberty Bond Act of 1917. Under this Act, Congress established an aggregate limit, or "ceiling," on the total amount of new bonds that could be issued. wikipedia.orgUnited States debt ceiling - Wikipedia

Six former Treasury secretaries on Wednesday urged Congress to take quick action to raise or suspend the U.S. debt ceiling or else risk "serious economic and national security harm."

The warning from some of the nation's top economists joins a growing chorus of public and private sector voices that say failure to address the borrowing limit could push the fragile American economy into another economic downturn.

The Treasury Department estimates it will likely have enough cash on hand to pay for the government's bills through some point in October, but has yet to offer a specific "drop-dead" date.

Former Treasury Secretaries Henry Paulson, Timothy Geithner, Larry Summers, Jack Lew, Robert Rubin and Michael Blumenthal told House Speaker Nancy Pelosi, D-Calif., that even flirting with a first ever U.S. default could spook markets.

"As former Treasury secretaries, we write to express our deep sense of urgency that Congressional leadership, working with the Administration and the President, move swiftly to initiate and complete a viable legislative process necessary to raise the debt limit," they wrote.

"Even a short-lived default could threaten economic growth," the group added. "It creates the risk of roiling markets, and of sapping economic confidence, and it would prevent Americans from receiving vital services. It would be very damaging to undermine trust in the full faith and credit of the United States, and this damage would be hard to repair."

Though the former secretaries addressed the House speaker, they sent copies to House GOP leader Kevin McCarthy, R-Calif., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, Republican of Kentucky.

Former Treasury Secretary Steven Mnuchin, who served under former President Donald Trump and did not sign the letter, did not immediately respond to CNBC's request for comment. The Treasury Department declined to offer comment on the secretaries' letter.

Read more of CNBC's politics coverage:

"Now, as Minority Leaders McCarthy and McConnell welcome a disaster they both know is coming, Republican luminaries, former Treasury Secretaries, business groups, and top economists are joining the growing chorus of Americans demanding that they stop putting politics over the health of the U.S. economy," Pelosi's office said Wednesday.

Raising or suspending the debt ceiling does not authorize new spending. Instead, it's more like increasing the credit limit on a credit card and allows the Treasury Department to pay off the country's debts from prior legislation.

"Even if the Biden administration hadn't authorized any spending, we would still need to address the debt ceiling now," current Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed over the weekend.

"There is no valid reason to invite such an outcome, certainly not fiscal responsibility, the most commonly stated reason," she wrote. A default would "likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil."

Yellen has also sent multiple letters to congressional leadership imploring lawmakers to pass a suspension or increase as soon as possible.

Outside of government officials, economists on Wall Street have warned for weeks that a default, or the specter of default, could hurt everyday Americans through steeper borrowing costs and a pullback in economic activity.

Goldman Sachs economists told clients in a note published last week that the current debt ceiling gridlock seems as risky as the 2011 standoff that led Standard & Poor's to lower its rating on U.S. sovereign debt.

Despite the dire warnings, lawmakers do not yet appear close to a solution on how to raise the nation's borrowing limit.

House Democrats on Tuesday passed a bill that would both prevent a government shutdown at the end of the month as well as suspend the debt limit. But Republicans have vowed they won't help Democrats lift the borrowing limit as a sort-of protest over the trillions of dollars in new spending the Biden administration has proposed.

The House approved the bill in a 220-211 vote. All Democrats voted for it and all Republicans opposed it. That legislation is expected to meet stiff resistance from the GOP in the Senate, where the party has the power to block the measure.

In that case, Democrats would be left to scramble to find another way to avoid a federal funding lapse and a historic default. Investors blamed the increasing fears of a default for a market sell-off on Monday, when the Dow Jones Industrial Average fell more than 600 points.

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Debt default: US risks defaulting its debts, which would set of dire consequences if Congress doesn't act

KABC-TV 23 September, 2021 - 10:20am

WASHINGTON — America could plunge into an immediate recession if Congress fails to raise the debt ceiling and the U.S. defaults on its payment obligations this fall, according to one analysis set to be released Tuesday.

Mark Zandi, chief economist at Moody’s Analytics, found that a prolonged impasse over the debt ceiling would cost the U.S. economy up to 6 million jobs, wipe out as much as $15 trillion in household wealth, and send the unemployment rate surging to roughly 9% from around 5%.

Lawmakers in both parties agree that the debt ceiling must be raised to avoid economic calamity, but their standoff over how to do so has intensified. Despite increasing the national debt by close to $8 trillion under former President Donald Trump, Republicans have been adamant that they will refuse to help Democrats increase the debt ceiling in opposition to President Joe Biden’s spending plans. The Department of Treasury has said it will exhaust its “extraordinary measures” to pay the U.S. obligations sometime in October, giving lawmakers little time to act to head off calamity.

“This economic scenario is cataclysmic. … The downturn would be comparable to that suffered during the financial crisis” of 2008, said the report, written by Zandi and Bernard Yaros, assistant director and economist at Moody’s Analytics.

The debt limit is the maximum amount of debt that the Treasury can issue to pay its bills. It was suspended from 2019 through last month under a deal reached under the Trump administration. If Congress fails to increase the debt limit, Treasury would be unable to pay debts as they come due. Treasury Secretary Janet Yellen said earlier this week such a default would be unprecedented in U.S. history. Moody’s “best estimate” is that this date is Oct. 20, although Treasury has not given a more precise day.

At that point, Treasury officials would face excruciating choices, such as whether to fail to pay $20 billion owed to seniors on Social Security, or to fail to pay bondholders of U.S. debt — a decision that could undermine faith in U.S. credit and permanently drive federal borrowing costs higher.

Failure to raise the debt limit would have catastrophic impacts on global financial markets. Interest rates would spike as investors demand a higher rate of return for the risk of taking on U.S. debt given uncertainty about repayment. An increase in interest rates would ripple through the economy, raising costs not only for taxpayers but for consumers and other borrowers as well. The value of the U.S. dollar would also decline in the long-term as investors questioned the security of purchasing U.S. treasuries. The cost of auto and home loans would rise.

“Stock prices would be cut almost in one-third at the worst of the sell-off, wiping out $15 trillion in household wealth,” the Moody’s report finds. The market would rebound once the impasse is resolved, but some amount of the losses would be permanent. “Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume.”

Both parties remain confident a debt ceiling breach will be avoided. Both White House officials and GOP lawmakers have insisted in recent days that the debt ceiling will be raised or suspended. But they are sharply divided over how that will occur.

Republicans have insisted that Democrats should increase the debt limit on their own, because they are pushing trillions of dollars in new spending priorities. But Democrats have rejected that approach, because current national debt levels, which require raising the debt ceiling, are due to an array policy priorities from both parties. The debt ceiling would have to be raised or suspended regardless of the spending package being pursued by the Biden administration.

The path forward is unclear. Congressional Democrats on Monday unveiled a plan to package the debt ceiling suspension with funding the federal government — which is set to shutdown at the end of this month — along with emergency funding for disaster relief and Afghanistan resettlement funds. Republicans are expected to block the measure, with even moderate GOP Senators saying they will vote against that package as long as it includes raising the debt ceiling. Democrats will then face a choice about their next steps.

Even resolving the matter before the debt ceiling is breached could hurt U.S. taxpayers and the American economy in the long-term. The budget battles over the debt ceiling of 2011 and 2013 under the Obama administration created financial uncertainty and deflated business investment, costing the U.S. economy as much as $180 billion and 1.2 million jobs by 2015, according to Zandi and Yaros.

Historically, both parties have come together to ensure the debt ceiling gets raised. Turning it into a political pawn would jeopardize international faith in the U.S. government, driving the cost of borrowing higher even if it is not breached.

“Brinkmanship around this whole process will be reflected in higher cost to taxpayers,” Zandi said in an interview. “There is a cost to doing this in a way that is not at least somewhat bipartisan.”

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Analysis | Fauci says this is 'worst time in the world' for a government shutdown

The Washington Post 23 September, 2021 - 10:20am

Congress has mere weeks to avoid that, and progress so far has been slow.

Democrats are pushing forward with their own bill to suspend the debt limit, allowing the government to keep borrowing cash and paying off its bills. But GOP lawmakers have made it clear they won't support such legislation. And Democrats' slim majority in the Senate means any dissent within their ranks could kill the effort.

Treasury Secretary Janet Yellen has warned that the government will hit the ceiling in mid-October. If the limit isn't lifted by then, the country faces "cataclysmic" economic fallout, economists led by Mark Zandi said. The team's simulations show a default on US debt powering a downturn similar to that seen during the Great Recession . Gross domestic product would slide by nearly 4%. The country would lose almost 6 million jobs. The unemployment rate would surge to 9% from 5.2%.

And stock prices would crash by one-third during the worst of the selloff. The market nosedive would swiftly wipe out $15 trillion in household wealth.

"If lawmakers are unable to increase or suspend the debt limit ... the resulting chaos in global financial markets will be difficult to bear," the Moody's economists said, adding the US and global economies "still have a long way to go to recover" from the COVID recession.

The Tuesday report sheds more light on just how dangerous a government default would be. It also joins several warnings already made by the Biden administration and other economists.

The White House told state and local governments on Friday that failure to lift the debt ceiling would force stark cuts to federal support. Programs ranging from free school lunches to Medicaid would face a funding freeze. Disaster relief from FEMA would be dramatically scaled back. And the country would likely slide into recession as governments are forced to balance their budgets and slash jobs.

David Kelly, chief global strategist at JPMorgan, used more colorful terms to describe the fallout. Congress's last-minute negotiations over the debt ceiling are similar to kids playing with a "box of dynamite," he said in a September 13 note. Each generation of lawmakers has been "just a little more reckless and irresponsible than the last," and it may be time to retire the debt limit entirely before it forces a government default, he added.

To be sure, Democrats and Republicans are both confident the government will avoid a debt-ceiling downturn. After all, this debate has happened 57 times in the last 50 years, and solutions were reached each of those times. Lawmakers are just split on how to solve the problem today.

The easiest solution requires 10 Senate Republicans to join Democrats in voting to lift or suspend the limit. Yet Senate Minority Leader Mitch McConnell has been adamant that GOP members won't support such action.

Democrats, however, have slammed Republicans for failing to undertake the historically bipartisan action. The GOP is pursuing a "dine-and-dash of historic proportions," as they racked up trillions of dollars in debt with their 2017 tax cuts and last year's stimulus spending, Senate Majority Leader Chuck Schumer tweeted Tuesday.

Democrats will need all 50 Senate members to back the House's last-ditch fix if they're to sidestep Republicans and go it alone. With members already disagreeing over other legislation, the "political brinkmanship ... is thus painful to watch," Moody's said.

Six former Treasury secretaries urge Congress to 'move swiftly' on debt ceiling

CNN 22 September, 2021 - 11:42am

Six former Treasury secretaries on Wednesday urged Congress to take quick action to raise or suspend the U.S. debt ceiling or else risk "serious economic and national security harm."

The warning from some of the nation's top economists joins a growing chorus of public and private sector voices that say failure to address the borrowing limit could push the fragile American economy into another economic downturn.

The Treasury Department estimates it will likely have enough cash on hand to pay for the government's bills through some point in October, but has yet to offer a specific "drop-dead" date.

Former Treasury Secretaries Henry Paulson, Timothy Geithner, Larry Summers, Jack Lew, Robert Rubin and Michael Blumenthal told House Speaker Nancy Pelosi, D-Calif., that even flirting with a first ever U.S. default could spook markets.

"As former Treasury secretaries, we write to express our deep sense of urgency that Congressional leadership, working with the Administration and the President, move swiftly to initiate and complete a viable legislative process necessary to raise the debt limit," they wrote.

"Even a short-lived default could threaten economic growth," the group added. "It creates the risk of roiling markets, and of sapping economic confidence, and it would prevent Americans from receiving vital services. It would be very damaging to undermine trust in the full faith and credit of the United States, and this damage would be hard to repair."

Though the former secretaries addressed the House speaker, they sent copies to House GOP leader Kevin McCarthy, R-Calif., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, Republican of Kentucky.

Former Treasury Secretary Steven Mnuchin, who served under former President Donald Trump and did not sign the letter, did not immediately respond to CNBC's request for comment. The Treasury Department declined to offer comment on the secretaries' letter.

Read more of CNBC's politics coverage:

"Now, as Minority Leaders McCarthy and McConnell welcome a disaster they both know is coming, Republican luminaries, former Treasury Secretaries, business groups, and top economists are joining the growing chorus of Americans demanding that they stop putting politics over the health of the U.S. economy," Pelosi's office said Wednesday.

Raising or suspending the debt ceiling does not authorize new spending. Instead, it's more like increasing the credit limit on a credit card and allows the Treasury Department to pay off the country's debts from prior legislation.

"Even if the Biden administration hadn't authorized any spending, we would still need to address the debt ceiling now," current Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed over the weekend.

"There is no valid reason to invite such an outcome, certainly not fiscal responsibility, the most commonly stated reason," she wrote. A default would "likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil."

Yellen has also sent multiple letters to congressional leadership imploring lawmakers to pass a suspension or increase as soon as possible.

Outside of government officials, economists on Wall Street have warned for weeks that a default, or the specter of default, could hurt everyday Americans through steeper borrowing costs and a pullback in economic activity.

Goldman Sachs economists told clients in a note published last week that the current debt ceiling gridlock seems as risky as the 2011 standoff that led Standard & Poor's to lower its rating on U.S. sovereign debt.

Despite the dire warnings, lawmakers do not yet appear close to a solution on how to raise the nation's borrowing limit.

House Democrats on Tuesday passed a bill that would both prevent a government shutdown at the end of the month as well as suspend the debt limit. But Republicans have vowed they won't help Democrats lift the borrowing limit as a sort-of protest over the trillions of dollars in new spending the Biden administration has proposed.

The House approved the bill in a 220-211 vote. All Democrats voted for it and all Republicans opposed it. That legislation is expected to meet stiff resistance from the GOP in the Senate, where the party has the power to block the measure.

In that case, Democrats would be left to scramble to find another way to avoid a federal funding lapse and a historic default. Investors blamed the increasing fears of a default for a market sell-off on Monday, when the Dow Jones Industrial Average fell more than 600 points.

Got a confidential news tip? We want to hear from you.

Sign up for free newsletters and get more CNBC delivered to your inbox

Get this delivered to your inbox, and more info about our products and services. 

Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis.

Six former Treasury secretaries urge Congress to 'move swiftly' on debt ceiling

Bloomberg 22 September, 2021 - 11:42am

Six former Treasury secretaries on Wednesday urged Congress to take quick action to raise or suspend the U.S. debt ceiling or else risk "serious economic and national security harm."

The warning from some of the nation's top economists joins a growing chorus of public and private sector voices that say failure to address the borrowing limit could push the fragile American economy into another economic downturn.

The Treasury Department estimates it will likely have enough cash on hand to pay for the government's bills through some point in October, but has yet to offer a specific "drop-dead" date.

Former Treasury Secretaries Henry Paulson, Timothy Geithner, Larry Summers, Jack Lew, Robert Rubin and Michael Blumenthal told House Speaker Nancy Pelosi, D-Calif., that even flirting with a first ever U.S. default could spook markets.

"As former Treasury secretaries, we write to express our deep sense of urgency that Congressional leadership, working with the Administration and the President, move swiftly to initiate and complete a viable legislative process necessary to raise the debt limit," they wrote.

"Even a short-lived default could threaten economic growth," the group added. "It creates the risk of roiling markets, and of sapping economic confidence, and it would prevent Americans from receiving vital services. It would be very damaging to undermine trust in the full faith and credit of the United States, and this damage would be hard to repair."

Though the former secretaries addressed the House speaker, they sent copies to House GOP leader Kevin McCarthy, R-Calif., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, Republican of Kentucky.

Former Treasury Secretary Steven Mnuchin, who served under former President Donald Trump and did not sign the letter, did not immediately respond to CNBC's request for comment. The Treasury Department declined to offer comment on the secretaries' letter.

Read more of CNBC's politics coverage:

"Now, as Minority Leaders McCarthy and McConnell welcome a disaster they both know is coming, Republican luminaries, former Treasury Secretaries, business groups, and top economists are joining the growing chorus of Americans demanding that they stop putting politics over the health of the U.S. economy," Pelosi's office said Wednesday.

Raising or suspending the debt ceiling does not authorize new spending. Instead, it's more like increasing the credit limit on a credit card and allows the Treasury Department to pay off the country's debts from prior legislation.

"Even if the Biden administration hadn't authorized any spending, we would still need to address the debt ceiling now," current Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed over the weekend.

"There is no valid reason to invite such an outcome, certainly not fiscal responsibility, the most commonly stated reason," she wrote. A default would "likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil."

Yellen has also sent multiple letters to congressional leadership imploring lawmakers to pass a suspension or increase as soon as possible.

Outside of government officials, economists on Wall Street have warned for weeks that a default, or the specter of default, could hurt everyday Americans through steeper borrowing costs and a pullback in economic activity.

Goldman Sachs economists told clients in a note published last week that the current debt ceiling gridlock seems as risky as the 2011 standoff that led Standard & Poor's to lower its rating on U.S. sovereign debt.

Despite the dire warnings, lawmakers do not yet appear close to a solution on how to raise the nation's borrowing limit.

House Democrats on Tuesday passed a bill that would both prevent a government shutdown at the end of the month as well as suspend the debt limit. But Republicans have vowed they won't help Democrats lift the borrowing limit as a sort-of protest over the trillions of dollars in new spending the Biden administration has proposed.

The House approved the bill in a 220-211 vote. All Democrats voted for it and all Republicans opposed it. That legislation is expected to meet stiff resistance from the GOP in the Senate, where the party has the power to block the measure.

In that case, Democrats would be left to scramble to find another way to avoid a federal funding lapse and a historic default. Investors blamed the increasing fears of a default for a market sell-off on Monday, when the Dow Jones Industrial Average fell more than 600 points.

Got a confidential news tip? We want to hear from you.

Sign up for free newsletters and get more CNBC delivered to your inbox

Get this delivered to your inbox, and more info about our products and services. 

Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis.

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