The Senate Banking Committee, chaired by Tim Johnson, D-S.D., and the Senate Finance Committee, chaired by Max Baucus, D-Mont., held separate hearings on Oct. 10 to air their concerns about the consequences of a default on the U.S. government's debt that could occur during this week if Congress and the White House are unable to reach an agreement to extend the debt ceiling and to fund the government.
This article will report first on the Banking Committee hearing and then on the Finance Committee hearing, the more interesting of the two. Several senators participated in both hearings.
In opening remarks, Johnson warned that a U.S. government default could occur for the first time in history and do damage that could last for generations, and even the mere threat of a default is costly, because it drives up interest rates.
Michael Crapo, R-Idaho, emphasized the underlying deficit problem and called for action on entitlement and tax reform as part of any debt ceiling extension.
Jack Reed, D-R.I., asserted that a default would violate the 14th Amendment, and he warned of catastrophic consequences, citing increases in credit spreads, interest rates on Treasury bills and a downgrading of the collateral value of USG securities in Hong Kong, all of which have already occurred.
Pat Toomey, R-Pa., urged the administration to take steps to protect Treasury debt first if the debt ceiling is not extended, while Sherrod Brown, D-Ohio, decried the prospect that the Treasury would have to choose between Wall Street and Main Street as to whom to pay.
The panel of witnesses represented leading trade associations from the financial sector: Frank Keating, a former governor of Oklahoma, now CEO of the American Bankers Association; Kenneth Bentsen, Jr., a former congressman from Texas, whose uncle Lloyd was a senator, vice presidential candidate and Treasury Secretary, now president of the Securities Industry and Financial Markets Association; Gary Thomas, president of the National Association of Realtors; and Paul Schott Stevens, a former Reagan administration staffer, now CEO of the Investment Company Institute.
Not only the panelists, but also the senators, seemed totally oblivious that the associations represented were all central to the financial disaster that occurred in 2008 and that they have all resisted implementation of Dodd-Frank provisions intended to reduce the likelihood of another crisis, which could occur at any time.
The witnesses quite sanctimoniously warned that the government has an obligation to pay its bills and that if the government defaults, it would affect the ability of the Treasury to access the global financial markets and drive interest rates up throughout the economy, potentially causing financial markets to freeze again and plunging the economy back into a recession or worse. Bentsen in particular warned that the nation would be in unchartered territory if the government defaults, and that a default would raise all sorts of technical issues based on the effects of a default on institutions that rely on Treasurys as collateral for their routine operations. He stressed the importance of timely communication.
The Finance Committee hearing was much more substantive, even dramatic at times. It began at the unusual time of 8 a.m., in order to accommodate Treasury Secretary Jack Lew's schedule. There was even a brief hostage situation, as Lew attempted to establish that he needed to leave at 9:35 a.m. to go to another meeting, but the Senators kept him for about 10 more minutes.
In opening remarks Baucus quoted Presidents Lincoln and Reagan, whereas Republican Senators cited then-Sen. Barack Obama's opposition to a debt ceiling increase in 2006. Baucus called a prospective default a potential "fatal heart attack" that could lead to a 20 to 30 percent decline in federal spending.
Except for a brief reference by Lew, one mentioned that the International Monetary Fund (IMF) luminaries will be in town as this drama plays out, but Baucus referred to IMF Managing Director Christine Lagarde's characterization of a resolution to the dispute as "mission critical."
Baucus urged agreement on an extension of the debt ceiling through the 2014 election season into early 2015.
Ranking Republican Orrin Hatch, R-Utah, recalled Obama's vote against raising the debt ceiling in 2006, and he pointed out that since then the debt has more than doubled, from $8.6 trillion to $16.7 trillion, 107 percent of the GDP. He challenged the notion that the debt ceiling covers only spending Congress has approved, and he complained specifically that the administration's deferral of the healthcare mandate for employers will cost $12 billion. He went on to dispute administration claims that non-budget items aren't attached to debt ceiling increases, and he pointed to a chart showing that The Washington Post fact checker had awarded four Pinocchioes to the White House for this claim.
He wondered aloud whether the president would even sign an extension, and he complained bitterly that the administration had refused to consider five entitlement reforms, even before the debt crisis occurred. He called it "disconcerting" that the administration refuses to consider even relatively noncontroversial entitlement reforms unless they are combined with tax increases.
In a brief statement, Lew noted that the full faith and credit of the United States has never been called into question, and he said the biggest threat to it is "manufactured political crises." He pointed to a tripling of the interest rate on short-term Treasurys and the highest volatility index in a year. He suggested that fiscal issues be addressed in a balanced fashion, and he followed the example of Baucus in quoting President Reagan from both 1983 and 1987. He ridiculed the idea that an option to consider would be to pay only the interest on expiring bonds.
Leading off the questioning, Baucus led Lew through a refutation of the notion that the government could prioritize its payments, as some Republicans have suggested. (In the Senate Banking Committee hearing, David Vitter, R-La., quoted the prominent Republican economist Martin Feldstein as saying there is no danger that the government could not service Treasury securities, because enough cash comes in monthly to do that.)
Lew followed the argument and took advantage of the opportunity to say that prioritization would be default by another name, because some bills would have to go unpaid.
In response to a question by Hatch, repeated by other senators, Lew stated that the administration would prefer the longest possible extension, frustrating Hatch by not specifying a length, and he even offered to consider a method that would obviate periodic debt limit increases. In response to a question from Chuck Grassley, R-Iowa, he recalled that there was a time when Congress had to approve every individual debt issue. He went on to say that the circumstance changed in 2011 when a minority of the Republicans adopted the view that a default would be manageable.
Chuck Schumer, D-N.Y., raised the prospect that the markets could force the issue of the pending default before Oct. 17. He also polished an argument he would repeat at the Senate Banking hearing that the Republicans are "deniers," who are following the likes of Rep. Paul Broun, R-Ga., who says he doesn't believe anything he was taught in medical school.
Pat Roberts, R-Kan., provided a window into the discussions when he listed some items under discussion, such as a provision on medical devices, a 40-hour week for some employees, the Keystone pipeline, calling for $1 trillion in new taxes rather than $880 billion and means testing tax deductions, declaring that the last two items in particular are non-starters.
He asked what the administration's agenda is, but Lew merely reiterated a willingness to talk about anything and to do the hard things once a deal is done on the debt ceiling and reopening the government.
Pat Toomey, R-Pa., called the present circumstance "more dire" than that of 2011 — "shocking" — and he asked Lew to assure investors that under no circumstances would the United States miss a debt payment, but Lew demurred, saying this would be up to the president.
The markets evidently expect a deal to be reached by Tuesday on at least a short-term extension of the debt limit.
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