Will it take market crash for Congress to raise debt limit?

Mar 11, 2023, 5:13 AM
(File Photo)...
(File Photo)
(File Photo)

WASHINGTON (AP) — There’s one way to force President Joe Biden and Congress to solve the looming crisis over the debt limit: a financial market crash.

That’s a view held by several economists and a former White House official, mindful that Congress rarely acts unless an emergency forces lawmakers to.

“For that drama not ending in tragedy, key actors have to play their roles,” said Daleep Singh, who was Biden’s national security adviser for international economics and deputy director of the National Economic Council. “Market participants have a lead role of playing the victim. They have to produce pain. They have to produce a sea of red on their Bloomberg screens because politicians need to look at those screens.”

Republicans and Democrats have been dancing around each other about the need to raise the government’s legal borrowing authority. Biden tried to edge closer on Thursday by releasing his deficits by $2.9 trillion over 10 years, an offer that House Speaker Kevin McCarthy, R-Calif, quickly dismissed as woefully insufficient. Republicans in the House Freedom Caucus on Friday proposed their own demands, which the White House quickly rejected.

This fandango could persist for several more months until the last possible moment, when the federal government would hit a currently unknown “X-date” — possibly as early as June — and be unable to pay its bills, possibly setting off a default that would suddenly wash away millions of jobs.

It is a familiar ritual. But every other time before, Congress has found agreement on the debt limit. The question now, in a period of ever-increasing political polarization, is whether today is different.

“Every single major economic institution, conservative, liberal, says that will cause a massive recession, a massive recession, and put us in the hole for a long, long time,” Biden said of the possible default as he rolled out his budget in Philadelphia.

McCarthy has promised to put together his own budget plan, but he has little urgency for striking any kind of deal so long as the stock market stays relatively calm. He has said he wants an agreement to put the government on a path toward a balanced budget. But he has also ruled out tax increases or cuts to Social Security and Medicare, which would force deep and controversial reductions in federal spending that could divide House Republicans.

Biden, who would reduce deficits largely through higher taxes on the wealthy and corporations, has said he is ready to go through budget agreements “line by line” once McCarthy has his numbers.

But McCarthy’s leverage is greatest as the “X-date” approaches at some point this summer and markets are biding their time. So far this year, the S&P 500 stock index has been positive. It has largely swung based on moves by the Federal Reserve to lower inflation or with the collapse Friday of the Silicon Valley Bank, events that are separate from the debt ceiling.

There is a widening recognition that a massive sell-off tied to debt limit tensions would provide instant clarity and snap everyone out of their ideological stagnancy. No one is rooting for the markets to sink, but as Republican lawmakers weigh the possibility of prioritizing repayments to debt holders — a risky short-term fix — there is a sense that markets need to jolt Congress into action.

“Unfortunately, it will likely take a significant financial market event for Biden and the GOP to arrive at a compromise on the debt ceiling,” said Joe Brusuelas, chief economist at the consultancy RSM US who said the standoff is already increasing the cost of borrowing for small and medium-sized companies.

Analysts at Morgan Stanley a few weeks ago concluded that the most likely “catalyst” to an agreement would be the markets expressing their “fear” of the political and economic “repercussions of default.”

When lawmakers realize they can step in with a deal and play the hero to salvage everyone’s retirement savings, they will have an incentive to come together, said Singh, who spoke at a New York City conference two weeks ago.

“They have to be able to say, ‘Look, I am reluctantly agreeing to pay for spending we’ve already authorized because I’m saving the 401(k)’s of hardworking families all across the country,’” Singh said. “I think that complacency is itself a big problem.”

There is precedent for market crashes forcing Congress’ hand.

During the 2008 financial crisis, the House rejected a $700 billion bailout package on Sept. 29, leading the Dow Jones industrial average to plunge almost 7% in a single day. That dramatic selloff ultimately laid out the stakes for Congress, and the rescue package passed the House within days and became law.

And there are those who think that Congress might not take the path that would trigger a market revolt.

Rohit Kumar, a former aide to Senate Minority Leader Mitch McConnell, R-Ky., said a market drop would “move the needle” on a debt limit deal, but it’s not a “prerequisite” for getting an agreement.

“The vast majority of lawmakers understand this has to be done,” said Kumar, now an executive at the tax consultancy PwC. “Defaulting on our debt is an entirely different animal, a bell that cannot be unrung. And I think most members appreciate that.”

The Senate Budget Committee chairman, Sen. Sheldon Whitehouse, D-R.I., has said Republicans will only seek a deal when their richest donors “start to sense the reverberations of a potential default and start making phone calls, saying, ‘OK, you guys, enough of this clowning around.'”

Given that forecasts already exist about millions of jobs potentially lost, Whitehouse acknowledged that he didn’t know why the phone calls from Republican donors are not already starting.

“Maybe they’re not feeling the tremors yet,” he said.

National News

Associated Press

Oklahoma court OK’s abortion to preserve mother’s life

OKLAHOMA CITY (AP) — A divided Oklahoma Supreme Court on Tuesday overturned a portion of the state’s near total ban on abortion, ruling women have a right to abortion when pregnancy risks their health, not just in a medical emergency. It was a narrow win for abortion rights advocates since the U.S. Supreme Court s […]
14 hours ago
FILE - This March 20, 2020, photo provided by the Missouri Department of Corrections shows Gary Mue...
Associated Press

Missouri man dubbed ‘Package Killer’ admits to 2 murders

ST. LOUIS (AP) — A Missouri man dubbed the “Package Killer” for his method of disposing bodies received two life sentences Tuesday after admitting to killing two women in the St. Louis area more than 30 years ago. Gary Muehlberg, 74, has now pleaded guilty to killing three women and faces a hearing next week […]
14 hours ago
FILE - West Virginia Gov. Jim Justice delivers his annual State of the State address in the House C...
Associated Press

Puzzling highway death part of West Virginia police probe

CHARLESTON, W.Va. (AP) — A man who died after struggling with law enforcement on a West Virginia interstate was hit by a trooper’s Taser, a police official said Tuesday in disclosing new details of one of a series of incidents that prompted Gov. Jim Justice to order a sweeping investigation of State Police. State Police […]
14 hours ago
Associated Press

Ukrainian soldiers near finish of Patriot missile training

FORT SILL, Okla. (AP) — Several large, 12-wheeled military vehicles carrying mobile missile launchers rumbled across the southwest Oklahoma prairie on Tuesday as part of a training exercise at the Fort Sill Army Post. Spilling out of the sand-colored vehicles and quickly setting up the launchers were some of the 65 Ukrainian soldiers who have […]
14 hours ago
Associated Press

Lawyer: 29-year-old who posed as teen student was lonely

NEW BRUNSWICK, N.J. (AP) — A 29-year-old woman accused of using false documents to enroll as a New Jersey high school student and attend some classes over a four-day period did so because she was lonely and longed to return to her days with friends in school, her lawyer said. The woman pleaded not guilty […]
14 hours ago
Associated Press

Editorial Roundup: United States

Excerpts from recent editorials in the United States and abroad: March 15 The Washington Post on voter fraud: A 59-year-old man was arrested last week for allegedly double voting in the 2020 presidential election. Florida authorities brought the felony charge because of information submitted by Virginia to a national database called ERIC, which is short […]
14 hours ago

Sponsored Articles

SHIBA volunteer...

Volunteer to help people understand their Medicare options!

If you’re retired or getting ready to retire and looking for new ways to stay active, becoming a SHIBA volunteer could be for you!
safety from crime...

As crime increases, our safety measures must too

It's easy to be accused of fearmongering regarding crime, but Seattle residents might have good reason to be concerned for their safety.
Comcast Ready for Business Fund...
Ilona Lohrey | President and CEO, GSBA

GSBA is closing the disparity gap with Ready for Business Fund

GSBA, Comcast, and other partners are working to address disparities in access to financial resources with the Ready for Business fund.

Medicare open enrollment is here and SHIBA can help!

The SHIBA program – part of the Office of the Insurance Commissioner – is ready to help with your Medicare open enrollment decisions.
Lake Washington Windows...

Choosing Best Windows for Your Home

Lake Washington Windows and Doors is a local window dealer offering the exclusive Leak Armor installation.
Anacortes Christmas Tree...

Come one, come all! Food, Drink, and Coastal Christmas – Anacortes has it all!

Come celebrate Anacortes’ 11th annual Bier on the Pier! Bier on the Pier takes place on October 7th and 8th and features local ciders, food trucks and live music - not to mention the beautiful views of the Guemes Channel and backdrop of downtown Anacortes.
Will it take market crash for Congress to raise debt limit?