Imperial Valley Press

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


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 budget plan that cuts 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.”

 ?? AP PHOTO/EVAN VUCCI, FILE ?? President Joe Biden speaks about the February jobs report from the Roosevelt Room of the White House, in March 10 in Washington.
AP PHOTO/EVAN VUCCI, FILE President Joe Biden speaks about the February jobs report from the Roosevelt Room of the White House, in March 10 in Washington.

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