Finance Executives Say Risk of Default Is Already Damaging the Economy
President Biden met with finance executives on Wednesday as he continued to try to put maximum pressure on Senate Republicans to raise the debt ceiling before Oct. 18, the date the Treasury Department has said the United States would go into default.
Shortly after the meeting, Senator Mitch McConnell, the minority leader, seemed to relent from his opposition to allowing Democrats to lift the ceiling in the short term through regular channels. He said he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December.”
The White House dismissed Mr. McConnell’s statement as an informal offer and said the president would rather Republicans allow a vote on a spending bill to go forward.
The executives all warned that the economy would be threatened should the country default on its debts for the first time in history.
“It’s already beginning to cause some damage in the economy,” Jane Fraser, the chief executive of Citigroup, told the president. “It will hurt consumers. It will hurt small businesses.”
“It’s not an exaggeration to say that even small distortions in the Treasury market can cost taxpayers tens of billions of dollars over many years,” she added, referring to the market for bonds issued by the Treasury Department.
Mr. Biden, seeking to convey the consequences to everyday Americans, asked the executives to explain what would happen if the United States went into default for only a day or two.
“Certainly, as we know, there are hundreds of millions of investors that are involved in the markets today that have put their hard-earned savings into the markets,” said Adena Friedman, the chief executive of Nasdaq. “And we would expect that the markets will react very, very negatively.”
Mr. McConnell of Kentucky had long said Democrats must use a more complicated process known as reconciliation to overcome Republican opposition to raising the debt ceiling. In his statement on Wednesday, he reiterated that the reconciliation process was the only option he supported for a longer-term increase in the limit, unless “Democrats abandon their efforts to ram through another historically reckless taxing and spending spree.”
The financial sector had been projecting a grim two weeks ahead. A report released by Goldman Sachs said that there was little reason to believe Congress would meet the Oct. 18 deadline, but that “the public and financial market response would likely force a quick political resolution.”
Senate Democrats are still weighing their options for a path forward. Jen Psaki, the White House press secretary, told reporters on Wednesday that the White House did not want to keep prolonging things with an extension. “We don’t need to go through a cumbersome process that every day brings additional risks,” Ms. Psaki said.
Asked why the White House does not support a short-term debt ceiling increase that could, at least temporarily, calm financial markets, Ms. Psaki replied, “Why not just get it done now?” She said Mr. Biden and Mr. McConnell had not yet spoken about the debt limit.
The budget process of reconciliation would most likely involve two marathons of politically charged votes that Mr. Biden has predicted would be “fraught with all kinds of potential danger for miscalculation.” Democrats say there is no guarantee that Republicans wouldn’t drag those votes out to inflict procedural and political discomfort.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury bills and savings bonds to fulfill its financial obligations. Because the U.S. runs budget deficits, it must borrow huge sums of money to pay its bills.
When will the debt limit be breached? Technically, the U.S. hit its debt limit at the end of July. Treasury Secretary Janet Yellen has been using “extraordinary measures” since then to delay a default. Ms. Yellen warned of “catastrophic” consequences if the debt limit isn’t raised before a default, which the Treasury estimates would happen on Oct. 18.
What are those consequences? Ms. Yellen told Congress that inaction could lead to a self-inflicted economic recession and a financial crisis. She also said that failing to raise the debt ceiling could affect programs that help millions of Americans, including delays to Social Security payments.
Why does the U.S. limit its borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so the Treasury did not need to ask for permission each time it needed to issue bonds to pay bills.
Why hasn’t Congress acted yet? Led by Senator Mitch McConnell, Republicans have said Democrats must supply all the votes to raise the debt ceiling, but have filibustered their attempts to do so. Senate Democrats increasingly see the G.O.P. blockade as clear justification for changing the chamber’s filibuster rule.
What about raising the debt limit via reconciliation? Reconciliation, a fast-track process that shields fiscal legislation from a filibuster, is one way Democrats could steer around Republican opposition and act unilaterally. But Democratic leaders have publicly resisted that option, which would be complex and time-consuming.
Why is raising the debt limit so difficult? For many years, raising the debt ceiling was routine. But as the political environment has become more polarized, Congress has been playing an increasingly dangerous political game over the debt ceiling.
Do other countries do it this way? Denmark also has a debt limit, but it is set so high that raising it is generally not an issue. Most other countries do not. In Poland, public debt cannot exceed 60 percent of gross domestic product.
What are the alternatives to the debt ceiling? The lack of a replacement is one of the main reasons the debt ceiling has persisted. Ms. Yellen said that she would support legislation to abolish the debt limit, which she described as “destructive.” It would take an act of Congress to do away with the debt limit.
Another option would be to change Senate rules to weaken the ability to filibuster, a proposal that has become increasingly popular in recent years as partisan gridlock has worsened.
Lawmakers have carved out other exceptions to the filibuster. In 2017, Senate Republicans created an exception to clear a path for Neil M. Gorsuch, President Donald J. Trump’s first Supreme Court nominee, to take the bench. In 2013, Senate Democrats did so to overcome Republican opposition to President Barack Obama’s nominees for cabinet posts and judgeships.
On Tuesday evening, Mr. Biden called that route “a real possibility.” On Wednesday, he said he wanted to explain “in plain English” what was at stake should Republicans remain unmoved.
“The Democrats are willing to step up and stop this economic catastrophe if Senate Republicans will just get out of the way,” Mr. Biden said. “It’s not right, and it’s dangerous.”
Mr. McConnell said passing the extension would “moot Democrats’ excuses about the time crunch they created,” allowing them to proceed via reconciliation. “A more traditional bipartisan governing conversation could be possible” if they abandon plans for giant spending bills, he said.