There is never a good time for a political showdown that carries with it the possibility that the U.S. government might default, even briefly, on its debt obligations. However, now is an especially bad time for our politicians to play a game of chicken with the country’s credit.
The recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank suggest we are in the midst of a rolling regional bank crisis that could spread to the non-bank part of the financial sector. Meanwhile, the economy could be on the cusp of a recession. The Federal Reserve is slamming the monetary policy brakes to curb the highest inflation in decades even as regional banks tighten lending conditions to prop up their shaky balance sheets. The last thing we now need is a debt crisis that could complicate an already messy economic picture by raising questions both at home and abroad about the full faith and credit of the United States government.
In a letter to Congress, Treasury Secretary Janet Yellen is now warning that the government could hit the debt ceiling as early as June. She warns of a catastrophe if the debt ceiling is breached and the government is forced to default on its debt obligations.
While no one knows exactly what would happen in the event of an unprecedented U.S. government default on its debt, Yellen’s warning of mayhem in financial markets is plausible. In 2011, when debt ceiling negotiations went down to the wire, the stock market tanked, borrowing costs went up, and Standard and Poor’s stripped the U.S. government of its coveted AAA bond rating. This all occurred even though a deal was struck at the last moment and the U.S. government avoided default. One shudders to think what would have happened in financial markets had the government actually defaulted.
Given how high the stakes are, it is lamentable that at this late hour a seemingly unbridgeable gap on this issue separates House Speaker Kevin McCarthy from President Joe Biden. McCarthy clings to his position that the Republican Party will not support a debt ceiling increase without a commitment to deep public-spending cuts. He does so even though he knows full well that making deep cuts to Biden’s spending agenda, including the president’s student loan program and additional funding for the IRS, is anathema to the Democratic Party.
For his part, Biden insists that the ceiling should be raised with no strings attached to accommodate the spending increases that Congress already approved, as has been done on numerous previous occasions. At the same time, both sides are trying to pin the blame for any economic and financial-market disaster on the other side, hoping their opponent will blink as we all stare over the abyss.
In 2008, following the Lehman bankruptcy, then-President George Bush struggled to secure congressional approval for his Troubled Asset Relief Program. At least, he struggled until the stock market swooned and a potential financial disaster stared Congress right in the face. Congress eventually did the right thing and approved that program. We have to hope that similar turbulence will not be needed now to get McCarthy and Biden to budge from their hardline positions and reach a sensible compromise that will spare the country from financial market disaster.
If there is a glimmer of hope, it is that Biden has agreed to sit down with McCarthy next week to discuss the issue. We have to hope that when they meet, they will put politics aside and find common ground on the need to find the means to put our country’s finances on a sounder footing by curbing spending and by closing tax loopholes.
A sensible start might involve raising the debt ceiling for a few months to give time for substantive negotiations on an economic program that might be in the country’s long-term economic interest. Such a compromise might represent a start to ending Washington’s current political dysfunction and save the country from an economic and financial market calamity.
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Dr. Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
Note: This piece has been updated to fix a coding issue. We apologize for any issues.
John
May 2, 2023 at 6:20 pm
The GOP has learned nothing.
We know what will happen based on the 2011 tea party disaster. Entitlement which are driving federal spending will not be touched.
We could raise the medicare tax to 12% which would add 500 bill + in yearly revenue and cut the debt by 5 trillion over 10 years.
Instead we will see again some sequestration type deal where defense and domestic spending will be cut equally. This will give carte blanche to China as defense really needs to rise to 5% GDP if we want to have a chance in this Cold War 2 situation unless we declare defeat. That the GOP can prove itself worse than the democrats when it comes to defense seems unimaginable
jeff
May 2, 2023 at 7:04 pm
Why is anyone blaming the republicans? Biden has said no negotiations, then promised negotiations if congress passed a bill, and then Biden reneged. Biden has been spending like a drunken sailor and is driving the country into the highest deficit we have ever seen. Biden is the worst thing that ever happened to this country. Carter looks like a master politician next to Biden.
403Forbidden
May 2, 2023 at 7:51 pm
America isn’t headed for a debt crisis.
Before June 1, 2023 comes around, Biden will clear the GOP resistance and get the money to hurl it the way he liked it.
That’s due to the fact that nobody wants the military to get unpaid irrespective of whether the soldiers are stationed at fort Bragg in US or in the eastern Syrian province of deir Ezzor or at the massive ramstein base or on the Indian ocean island of Diego Garcia.
The US will only be confronted by a real debt crisis when Yellowstone erupts or when the US dollar is no longer the world’s reserve currency.
El Gato
May 2, 2023 at 8:43 pm
Amen Jeff! Biden dumping money into the economy at an unprecedented rate (we printed more money in the last two years than the entire time the country has been in existence)has created the mess we are in. The spigot needs turned off!
Winston Smith
May 2, 2023 at 10:54 pm
Government spending drives inflation impoverishing ordinary Americans. Why not have a crisis now rather than let them steal my life savings over the next 15 years?
I’d rather a debt crisis today than slavery ten years from now.
len
May 3, 2023 at 11:51 am
In spite of the media hype over the looming debt ceiling. The Federal government AKA, ‘We the People’ will not default on its debt obligations. Simple reason, that would stop over spending immediately. Who in the government would allow that?
John 2
May 4, 2023 at 2:41 pm
American Heritage has an article on the Founders’ understanding of the tricks and perils of government debt. Nothing has changed. Both parties have built this with the usual methods, and it must stop.