October 28, 2020

Clock Is Ticking for Recess, and for a Deficit Deal

WASHINGTON — Budget talks between the White House and Senate Republicans have gone nowhere since Congress began its summer recess, increasing chances of a fiscal stalemate that could lead to a government shutdown in October or the threat of a government default later in the fall.

Negotiators who had hoped for a summer breakthrough say the chances for a major deficit reduction deal are rapidly slipping away. While many members of both parties say they would like to avoid either a shuttering of the government as of Oct. 1 or a default caused by failing to increase the federal debt limit, no acceptable solution has emerged. Lawmakers say the consequences could be severe.

“It ends badly for the American people and the Republican Party if we shut down the government,” said Representative Reid Ribble, Republican of Wisconsin and a member of the House Budget Committee. “I hope grown-ups get in a room and behave like grown-ups, not simply actors on a political stage.”

In search of a compromise, a group of Senate Republicans are scheduled to meet with top White House officials next Thursday, the first such meeting since Aug. 1, when negotiators promised that staff and high-level talks would continue throughout the month.

“Nothing has occurred since that time, nothing whatsoever,” said Senator Bob Corker, Republican of Tennessee and one of the eight lawmakers involved in the talks.

Given the lack of progress, those involved say Speaker John A. Boehner will need to play a crucial role in finding an agreement. House Republican leaders consulted with their rank and file via a conference call Thursday night to sound out their ideas to avoid a fiscal crisis as early as Oct. 1. Mr. Boehner pressed gingerly for a straight short-term extension of funds to avoid an immediate government shutdown in October, but faced immediate opposition from conservatives demanding that funds be stripped from the health care law. One thought is to use a short-term spending bill to keep the government running into November, when Congress must raise the government’s statutory borrowing limit. That way, with both a debt default and government shutdown looming, Republicans could apply maximum pressure on the White House to either agree to scuttle President Obama’s health care law or accept significant changes in programs like Medicare and Social Security.

“We’re looking for leverage on a lot of things. Obamacare is just one of them,” said a senior House Republican leadership aide.

Mr. Obama personally pushed back hard on that idea Thursday and stuck to his position that he would not negotiate over the debt ceiling.

“We’ve seen a faction of Republicans in Congress suggest that maybe America shouldn’t pay its bills that have already been run up, that we shut down government if they can’t shut down Obamacare,” the president said in Buffalo. “That won’t grow our economy. That won’t create jobs. That won’t help our middle class. We can’t afford in Washington the usual circus of distractions and political posturing.”

Treasury Secretary Jacob J. Lew, speaking in the San Francisco area on Thursday, also called on Congress to increase the debt limit to avoid damage to the economy.

With so much political tumult roiling Republicans and more conservatives pushing to cut off financing for the health care law, both White House officials and Congressional Republicans are scaling back expectations that Senate-White House talks will produce the kind of grand bargain on the deficit that will win over House Republicans. Most of the federal government will shut down Oct. 1 unless Congress acts to keep money flowing. By late October or early November, Republicans believe the Treasury Department will exhaust its ability to borrow money if lawmakers fail to lift the government’s debt limit.

Senate Republican negotiators are divided over how big a deal they can accept. White House officials are increasingly concerned that any agreement they can strike will not fly in the House. And House Republicans have only just begun to address the pending showdown.

“We don’t know the end of the story here,” said Representative Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee. “The way things are shaping up right now, it’s looking very messy.”

The so-called sounding board talks with the White House, led by Senator Johnny Isakson, Republican of Georgia, grew out of Mr. Obama’s overtures last winter toward Senate Republicans. Ultimately eight senators coalesced into a group to sound out the White House, report back to other senators and try to find a way forward on deficit reduction talks that foundered after automatic spending cuts known as sequestration kicked in March 1.

But even that small group has splintered. Senators John McCain of Arizona and Lindsey Graham of South Carolina, both defense hawks, have adopted a position that they would accept a small deficit deal — perhaps $200 billion to $300 billion — to cancel the next two to three years of sequestration, spare the Pentagon further cuts, and build good will for a broader deal.

Senators Corker, Isakson and John Hoeven of North Dakota have adamantly rejected that, saying they could never cancel spending cuts now for more gradual but less certain cuts stretched over a decade. That group has held out for a broader deficit deal that would shave trillions of dollars from the growth of entitlements like Medicare and Social Security.

Senator Ron Johnson, Republican of Wisconsin and the fiercest deficit hawk in the group, keeps insisting that the nation faces a cumulative deficit of $70 trillion over the coming decades, and negotiators should be working toward a $70 trillion solution.

Article source: http://www.nytimes.com/2013/08/23/us/politics/chances-of-a-deficit-deal-are-rapidly-fading.html?partner=rss&emc=rss

Divided House Passes Tax Deal in End to Latest Fiscal Standoff

The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy.

Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.”

In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare.

The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.

Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over.

“The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls.”

Not a single leader among House Republicans came to the floor to speak in favor of the bill, though Speaker John A. Boehner, who rarely takes part in roll calls, voted in favor. Representative Eric Cantor of Virginia, the majority leader, and Representative Kevin McCarthy of California, the No. 3 Republican, voted no. Representative Paul D. Ryan, the budget chairman who was the Republican vice-presidential candidate, supported the bill.

Despite the party divisions, many Republicans in their remarks characterized the measure, which allows taxes to go up on household income over $400,000 for individuals and $450,000 for couples but makes permanent tax cuts for income below that level, as a victory of sorts, even as so many of them declined to vote for it.

“After more than a decade of criticizing these tax cuts,” said Representative Dave Camp of Michigan, “Democrats are finally joining Republicans in making them permanent. Republicans and the American people are getting something really important, permanent tax relief.”

The dynamic with the House was a near replay of a fight at the end of 2011 over a payroll tax break extension. In that showdown, Senate Democrats and Republicans passed legislation, and while House Republicans fulminated, they were eventually forced to swallow it.

On Tuesday, as they got a detailed look at the Senate’s fiscal legislation, House Republicans ranging from Midwest pragmatists to Tea Party-blessed conservatives voiced serious reservations about the measure, emerging from a lunchtime New Year’s Day meeting with their leaders, eyes flashing and faces grim, insisting they would not accept a bill without substantial savings from cuts.

The unrest reached to the highest levels as Mr. Cantor told members in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form.

Mr. Boehner, who faces a re-election vote on his post on Thursday when the 113th Congress convenes, had grave concerns as well, but he had pledged to allow the House to consider any legislation that cleared the Senate. And he was not eager to have such a major piece of legislation pass with mainly opposition votes, and the outcome could be seen as undermining his authority.

Robert Pear and Peter Baker contributed reporting.

Article source: http://www.nytimes.com/2013/01/02/us/politics/house-takes-on-fiscal-cliff.html?partner=rss&emc=rss

Tax Deal’s Passage Ends Latest Standoff

The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy.

Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.”

In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare.

The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.

Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over.

“The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls.”

Not a single leader among House Republicans came to the floor to speak in favor of the bill, though Speaker John A. Boehner, who rarely takes part in roll calls, voted in favor. Representative Eric Cantor of Virginia, the majority leader, and Representative Kevin McCarthy of California, the No. 3 Republican, voted no. Representative Paul D. Ryan, the budget chairman who was the Republican vice-presidential candidate, supported the bill.

Despite the party divisions, many Republicans in their remarks characterized the measure, which allows taxes to go up on household income over $400,000 for individuals and $450,000 for couples but makes permanent tax cuts for income below that level, as a victory of sorts, even as so many of them declined to vote for it.

“After more than a decade of criticizing these tax cuts,” said Representative Dave Camp of Michigan, “Democrats are finally joining Republicans in making them permanent. Republicans and the American people are getting something really important, permanent tax relief.”

The dynamic with the House was a near replay of a fight at the end of 2011 over a payroll tax break extension. In that showdown, Senate Democrats and Republicans passed legislation, and while House Republicans fulminated, they were eventually forced to swallow it.

On Tuesday, as they got a detailed look at the Senate’s fiscal legislation, House Republicans ranging from Midwest pragmatists to Tea Party-blessed conservatives voiced serious reservations about the measure, emerging from a lunchtime New Year’s Day meeting with their leaders, eyes flashing and faces grim, insisting they would not accept a bill without substantial savings from cuts.

The unrest reached to the highest levels as Mr. Cantor told members in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form.

Mr. Boehner, who faces a re-election vote on his post on Thursday when the 113th Congress convenes, had grave concerns as well, but he had pledged to allow the House to consider any legislation that cleared the Senate. And he was not eager to have such a major piece of legislation pass with mainly opposition votes, and the outcome could be seen as undermining his authority.

Robert Pear and Peter Baker contributed reporting.

Article source: http://www.nytimes.com/2013/01/02/us/politics/house-takes-on-fiscal-cliff.html?partner=rss&emc=rss

DealBook: U.S. Debt? Bain Might Leverage It

Mitt Romney campaigning in Hudson, N.H., on Jan. 9. He has criticized high levels of federal debt, but private equity firms able to borrow at current low rates would almost certainly be taking advantage.Jim Wilson/The New York TimesMitt Romney campaigning in Hudson, N.H., on Jan. 9. He has criticized high levels of federal debt, but private equity firms able to borrow at current low rates would almost certainly be taking advantage.

Imagine how Mitt Romney would campaign if he actually ran as a private equity executive, dangerous though that may be in this era of the Tea Party and Occupy Wall Street.

Aggressively attacked by a super PAC supporting Newt Gingrich, Mr. Romney stands accused of being a rapacious capitalist intent on destroying jobs for personal gain. Mr. Romney has responded: Au contraire! He argues that his work at Bain Capital, one of the earliest and most successful private equity firms, created jobs by making companies more efficient and successful.

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Many people on Wall Street are befuddled. After all, a private equity firm creating jobs is like Adam Sandler winning an Academy Award — it would be nice if it happened, but it sure wasn’t the goal.

The goal, of course, is high returns.

If Mr. Romney were really running as a private equity executive, how would he view what his campaign regards as one of the nation’s most pressing issues, the national debt?

Right at the top of his campaign’s home page, Mr. Romney proclaims, “We have a moral responsibility not to spend more than we take in.” The United States’ debt is such a problem, it’s like an addiction: “The first step toward recovery is admitting we have a problem and refusing to allow any more irresponsible borrowing,” his site says.

It’s almost as if Mr. Romney never worked in — what’s that other phrase for private equity? — oh yes, a leveraged buyout firm. Leverage as in debt, debt and more debt. Debt amplifies the returns of L.B.O. firms. Indeed, they often saddle companies with extra debt precisely so that their investors can cash out faster, a technique Bain deployed under Mr. Romney’s watch.

L.B.O. firms certainly never think of debt as immoral. When the borrowing is good, private equity is going to grab the money. When Mr. Romney rails against debt, he is running away from his entire career in business.

So what about the federal government? The 10-year Treasury bond rate is 1.87 percent. Since inflation is higher than that, real rates are actually below zero, meaning that a lender to the United States government will get back less money in 10 years than it started with.

That’s right: When the government borrows, its lenders actually lose money. Yet foreigners and Americans, institutions and individuals alike are extraordinarily willing to shovel money at the United States government right now.

Are there private equity executives anywhere in the world who would counsel their companies not to borrow at such extremely low rates? I haven’t had the privilege of meeting one. Their mantra is, borrow now, for tomorrow the Mayans might turn out to be right. Few indeed are the companies that could borrow that cheaply and not make some kind of return on essentially free money.

“If debt is available to you historically cheaply, it almost always makes sense to take it,” said Shivan Govindan, a private equity executive for the Resource Financial Institutions Group. “Your capital strategy isn’t something ideological. You are going to optimize it for the best mix.”

So, by the logic of private equity, the United States government should borrow much more right now.

But what about the unsustainability of our debt? If a company has out-of-control costs and is spiraling toward default, it should not borrow more. True, but no company that is truly headed toward imminent default can borrow as cheaply as the American government.

If the United States government is headed toward bankruptcy, lenders are surely not acting that way. Maybe those people are making a good decision; maybe they are deluded. It doesn’t matter to the borrower.

Of course, an issue for the United States, as for a company, is whether it could put the money to good use.

“Surely, government investments would have a real return in a 10-year period higher than zero, even with waste and corruption,” said Paul L. Kasriel, an economist for Northern Trust. “This means that these investments will boost future real G.D.P. growth, which will boost future tax revenues to service the increased debt.”

There will be bridges and roads that we must fix over the next decade. We could put more young people in college, improve elementary school education, train veterans so they can find good jobs or finance exploration of alternative fuels. People will quibble — or maybe, in our polarized culture, fight tooth and nail — over the choices, but most could think of something that would be a good investment.

On a deeper level, the debate over private equity raises questions about using the metaphor of America as a business. That kind of thinking can reduce society to the sum of its revenues and profits, ignoring that much of what we do to provide for the common defense and promote the general welfare cannot or should not be measured, especially in economic terms. We take care of our elderly because it is the right thing to do, not because we expect a return on investment. Shouldn’t society promote and protect freedom and human rights? Even when there are times when doing so may be expensive or uneconomical?

There are moral issues that confront our country. Debt isn’t one of them.


Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

Article source: http://feeds.nytimes.com/click.phdo?i=967a0d78b048b9b04587f0e9551074cb

Bernanke Offers No Plan for New Stimulus

In remarks that went well beyond his previous calls for Congress and the White House to address the nation’s long-term fiscal challenges, Mr. Bernanke suggested the process itself was broken.

“The country would be well served by a better process for making fiscal decisions,” he said.

Mr. Bernanke said he was “optimistic” about the long-run prospects for the American economy, and he gave little indication the Fed was mulling any increase in its economic aid programs, although he said the issue would be revisited in September.

But Mr. Bernanke, the nation’s most prominent economist, warned that the government had emerged as perhaps the greatest threat to renewed growth.

“The quality of economic policy-making in the United States will heavily influence the nation’s long-term prospects,” Mr. Bernanke said in the much-anticipated speech at a policy conference held each August at a resort in Grand Teton National Park.

The turn toward stronger language was welcomed by some observers of partisan battles in Washington that have pitted Republicans demanding spending cuts to reduce the federal debt against Democrats arguing for cuts and increased revenue.

A deal reached earlier this month to raise the maximum amount the government can borrow, in exchange for spending cuts of at least $2.1 trillion, would not reduce the debt to a level most economists regard as sustainable, and the chaotic political brinksmanship led Standard Poor’s to remove long-term Treasury securities from its list of risk-free investments.

Maya MacGuineas, president of the non-partisan Committee for a Responsible Federal Budget, described Mr. Bernanke’s remarks as “an emergency intervention.”

“It was great to hear him weigh in so strongly,” said Ms. MacGuineas. “He’s saying what needs to be said, and hopefully people will listen because of the messenger.”

Mr. Bernanke’s speech comes on the heels of the Fed’s announcement earlier this month that it intends to hold short-term interest rates near zero until at least the middle of 2013, a reflection of its view that growth will not be fast enough during that period to drive up wages and prices.

Many investors had viewed that announcement as merely the opening of a new round of efforts by the Fed to bolster an economy that once again is struggling to grow. The government said Friday that it now estimated the economy expanded at an annual pace of just 1 percent in the second quarter, down from its initial estimate of a 1.3 percent annual pace.

Friday’s speech was eagerly anticipated because Mr. Bernanke and his predecessors have made a habit of coming to this conference, hosted by the Federal Reserve Bank of Kansas City, to clarify their views on the economy and monetary policy.

Last year, Mr. Bernanke used his remarks here to provide the first substantial indication that the Fed intended to renew its economic aid campaign. The central bank went on to buy $600 billion in Treasury securities between November and June, increasing its total portfolio of Treasuries and mortgage securities to more than $2.5 trillion.

This year, Mr. Bernanke noted that the nation faces significant challenges, including huge amount of unemployment and an unsustainable federal debt. But the speech marked a return to the Fed’s position earlier this year that it has largely exhausted the power of monetary policy and that the rest of government must do more through fiscal policy.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Mr. Bernanke said.

While offering his standard disclaimer that the Fed would take any steps necessary to help the economy, he notably omitted any description of possible measures. He did say, however, that a scheduled meeting of the Fed’s policy-making committee in late September would be extended to two days from one day “to allow a fuller discussion.”

Article source: http://feeds.nytimes.com/click.phdo?i=d870d37a4042de9b95db100c8f3bb9dd

Bucks: The Federal Debt: When Compound Interest Is Crushing

Carl Richards

The showdown over increasing the federal debt limit got me thinking about the power of compound interest. It’s always been one of the most powerful forces in the financial universe. And in the case of the debt ceiling, it appears that compound interest has the potential to become a crushing enemy.

Some people fear that the United States will lose its AAA credit-rating or even default temporarily, potentially increasing how much it costs the government to borrow money. According to the Congressional Budget Office:

…a 4-percentage-point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion; if those higher rates persisted, net interest costs in 2015 would be nearly double the roughly $460 billion that the C.B.O. currently projects for that year.

Think about that for a minute. If those worst-case-scenario interest rates came to pass and persisted, we’d be approaching a trillion dollars in interest payments per year. That’s what compound interest looks like when it’s working against you.

On a personal scale, you get a taste of it every month if you get careless with credit cards. Take a look at a bill. For every month you carry a balance, there’s a minimum payment required.

Many people only pay the minimum, not realizing that compound interest could make that $3,000 television cost way more than that and take over a decade to pay off. And that assumes you don’t add any additional charges to the balance.

New rules require that credit card companies include a section on each statement that shows just how long it will take to pay off the balance if you only make the minimum payment. Do yourself a favor and pay attention to the numbers. What you owe will only compound over time, and paying the minimum just digs the hole that much faster.

J. Reuben Clark, an undersecretary of state for President Coolidge, noted a long time ago that, interest on debt “never sleeps nor sickens nor dies… Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”

It also gets in the way of achieving our goals. Last week, one reader commented that having a zero balance on your credit card was almost as good as saving money. There is some truth to that because every dollar we spend on interest is one less dollar that can be saved for the future.

Now it becomes a question of how to make compound interest work for you instead of working against you.

Next week we’ll talk about the power of compound interest and the end of a long period of savings. In the meantime, what have you done to protect yourself from getting crushed by interest?

Article source: http://feeds.nytimes.com/click.phdo?i=9941087e037ef24395ba1f1a29bb8298

Amid New Talks, Some Optimism on Debt Crisis

After a tense day of Congressional floor fights and angry exchanges, Senator Harry Reid, the majority leader, called off a planned showdown vote set for after midnight, but said he would convene the Senate at noon on Sunday for a vote an hour later. He said he wanted to give the new negotiations a chance to produce a plan to raise the federal debt limit in exchange for spending cuts and the creation of a new Congressional committee that would try to assemble a long-range deficit-cutting proposal.

“There are many elements to be finalized and there is still a distance to go before an arrangement can be completed,” said Mr. Reid, who just a few hours earlier had played down talk of any agreement. “But I believe we should give everyone as much room as possible to do their work.”

Mr. Reid’s announcement set off an almost audible sigh of relief on Capitol Hill, where lawmakers and their aides had been bracing for an overnight clash over the debt following a day that had seen a heated House vote and lawmakers trudging from office to office in search of an answer to the impasse.

The first indication off a softening of the hard lines that have marked weeks of partisan wrangling over the debt limit came in the afternoon when the two leading Congressional Republicans announced that they had reopened fiscal talks with the White House and expected their last-ditch drive to produce a compromise.

Following the House’s sharp rejection of a proposal by Mr. Reid to raise the debt limit and cut spending, Senator Mitch McConnell of Kentucky, the Republican leader and a linchpin in efforts to reach a deal, said he and Speaker John A. Boehner were “now fully engaged” in efforts with the White House to find a resolution that would tie an increase in the debt limit to spending cuts and other conditions.

“I’m confident and optimistic that we’re going to get an agreement in the very near future and resolve this crisis in the best interests of the American people,” said Mr. McConnell, who noted he was personally talking to both Mr. Obama and Vice President Joseph R. Biden Jr., a favorite partner in past negotiations.

Mr. Boehner, who would have to steer a compromise through the House, said he based his confidence on the prospect of an agreement on the sense that “we’re dealing with reasonable, responsible people who want this crisis to end as quickly as possible.”

A Democratic official with knowledge of the talks said that Mr. McConnell called Mr. Biden early Saturday afternoon, the first conversation between the two men since Wednesday. The official said they talked at least four more times on Saturday as they tried to work out an agreement.

The deal they were discussing, this person said, resembled the bill that Mr. Boehner won approval for in the House on Friday more than it did the one that Mr. Reid had proposed.

It would immediately raise the debt ceiling by about $1 trillion, accompanied by a similar range of spending cuts, and set up a new bipartisan committee that would work to find deeper cuts in exchange for a second debt limit increase that would extend through the 2012 election.

A failure of the new committee to win enactment of its proposal could then set off automatic spending cuts across the board, including to entitlement programs. Other ideas were swirling around the Capitol as lawmakers searched for a way to avoid default. One of Mr. Reid’s top lieutenants said he saw at least a glimmer of hope.

“We are a long way from any sort of negotiated agreement,” said Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, “but there is certainly a more positive feeling about reaching an agreement than I’ve felt in a long time.”

The flurry of activity came as anxiety built up in many corners, including among Wall Street investors worried about the effects on the markets and active-duty soldiers worried about their paychecks.

After Mr. McConnell sounded a hopeful note, Mr. Reid called members of the Senate to the floor to hear him dispute the claims by his Republican counterpart and accuse Republicans of failing to enter into serious negotiations even as the Treasury risked running out of money to pay all its bills after Tuesday.

Reporting was contributed by Jackie Calmes, Helene Cooper, Binyamin Appelbaum and Robert Pear from Washington, and Thom Shanker from Kandahar, Afghanistan.

Article source: http://www.nytimes.com/2011/07/31/us/politics/31fiscal.html?partner=rss&emc=rss

Taking a Closer Look at the Result of a Credit Downgrade

A downgrade to the nation’s credit would probably increase the cost of borrowing for the federal government and for everyone else. But the Obama administration, House Republicans, some economists and Wall Street strategists have concluded that the economic impact would be surprisingly modest, one reason that negotiations over a “grand bargain” for debt reduction broke down.

The plans being debated instead by House Republicans and Senate Democrats would not reduce the federal debt to a level that most economists regard as manageable, and it seems likely that further efforts will await the results of the 2012 elections.

A compromise between the parties would avert the catastrophic consequences of default, but even if Congress agrees to pay its bills, one of the three credit rating agencies, Standard Poor’s, has said it may remove the United States from its list of risk-free borrowers.

“A downgrade has lots of downsides, but they’re minor in comparison to not raising the debt ceiling on time, so I think the focus is correct at this point,” said Mark Zandi, chief economist at Moody’s Analytics, a sister company to the rating agency that rates debt securities.

“What’s most important is raising the debt ceiling. That’s the minimum that they need to do to make sure the recovery in fact remains a recovery.”

Asked Thursday whether his plan would avoid a downgrade, House Speaker John A. Boehner said, “That is beyond my control.” He said the legislation, which the House passed Friday on a party-line vote, is “as large a step as we’re able to take at this point in time.”

President Obama warned Friday morning that the government was at risk of a downgrade, “Not because we didn’t have the capacity to pay our bills — we do — but because we didn’t have a AAA political system to match our AAA credit rating.” But administration officials say that the White House also regards the issue a secondary concern.

Earlier this month, there was widespread alarm in Washington when S P, followed by Moody’s and Fitch, another credit rating concern, warned that the soaring federal debt, and the political standoff over raising the debt ceiling, had placed the nation’s credit rating at risk.

The federal government makes about $250 billion in interest payments a year. Even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments. And the credit rating agencies have said other downgrades would follow like dominoes.

For example, Fannie Mae and Freddie Mac, the huge mortgage companies that are backed by the federal government, would be downgraded, raising rates on home mortgage loans for borrowers. Maryland and Virginia, and many local governments near Washington, their economies tied to the government, would also be downgraded. So would New Mexico, because an unusually high proportion of residents depend on federal benefits.

“A default on our nation’s obligations, or a downgrade of America’s credit rating,” 13 financial company chief executives said on Thursday in a letter to the president and Congress, “would be a tremendous blow to business and investor confidence — raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets — and, therefore, dramatically worsening our nation’s already difficult economic circumstances.”

Still, Washington’s fears of a downgrade have eased for several reasons.

Standard Poor’s warned that it might downgrade the United States in the next three months if the government did not agree on a credible plan to reduce its debts by about $4 trillion — the number used in the talks between Mr. Obama and Mr. Boehner.

But the other two agencies, Moody’s and Fitch, have shown greater patience, saying that progress toward paying down debts did not need to start immediately. That is significant, because a downgrade by a single rating agency matters less than a consensus. Investment managers, for example, may not be required to divest holdings like Treasury securities if they are downgraded only by S P.

Moody’s said on Friday that it would maintain its Aaa rating for the United States so long as the Treasury keeps paying bondholders and Congress passes a long-term deal to extend the debt ceiling. The announcement said that failure to act by Tuesday night, or to meet other obligations, including Social Security payments, would not prompt a downgrade.

Article source: http://feeds.nytimes.com/click.phdo?i=ba9e2a3a99a3f2d975374637dc42bb5e

No Matter How Debt Debate Ends, Governors See More Cuts for States

If the federal debt limit is not raised, several governors said as they gathered here on Friday for the semiannual meeting of the National Governors Association, the ensuing default will harm the economy, make it difficult for states to borrow money and delay some of the vital federal payments that states count on for everything from Medicaid to unemployment benefits.

But even if the debt ceiling is raised, as many governors expect it ultimately will be, states could still pay a high price. Both Democrats and Republicans in Washington want to pair any increase in the debt limit with deep new spending cuts — cuts that many governors fear will hurt their states as they are still recovering slowly from the Great Recession.

“If I can use a whitewater analogy here, the two rocks we need to shoot between is, on the one side, being needlessly driven into default, which will kill the jobs recovery,” said Gov. Martin O’Malley of Maryland, the chairman of the Democratic Governors Commission. “The other rock is massive public sector cuts, by whatever name, that would also kill the jobs recovery.”

Gov. Haley Barbour of Mississippi, a Republican, said that a default stemming from a failure to increase the borrowing limit would be “terrible” for states. But he said that states must also brace themselves for managing a new set of cuts even if the limit is raised. “No matter what happens, states are going to get less money from the federal government,” he said.

The uncertainty for states, coming just two weeks after most put new budgets into effect, was a new black cloud on the horizon for governors just when many thought they would have a moment’s respite. State tax collections are improving, but are still below their pre-recession levels, and this month the federal stimulus aid that has helped states balance their budgets in recent years dried up. Now states, already struggling to pay for Medicaid for the many people who lost their jobs and health care in the downturn, face the prospect of less federal money for it.

The impact of the standoff in Washington is already being felt in states.

Moody’s Investors Service warned more than a dozen states this week that their credit ratings would be re-evaluated in light of the uncertainty in Washington, which could saddle them with higher borrowing costs. Governor O’Malley learned that Maryland was one of them when he stepped off the plane here. “This happens at a time when we’re about to go out for a bond sale,” he said.

Governors from around the country — including Christine O. Gregoire of Washington, a Democrat, and Scott Walker of Wisconsin, a Republican — said that employers in their states had been reluctant to hire new workers because of the uncertainty. And Gov. Lincoln Chafee of Rhode Island, an Independent, said that the threat of dwindling federal aid gave him pause last week before he signed a bill in which his state agreed to pay for heating assistance for the poor that the federal government was expected to cut.

“My argument — and I did sign it — was that this was the first of many,” he said. “I don’t know how much Rhode Island taxpayers can do that.”

Behind the scenes, governors have been trying to avert the worst cuts by twisting the arms of their Congressional delegations and working nervously with their budget directors. Some even held a conference call with Vice President Joseph R. Biden Jr. Governors in both parties said they were most worried by talk that both President Obama and Congressional Republicans wanted to cut Medicaid payments to the states by $100 billion over the next decade.

The leaders of the governors association — its chairwoman, Governor Gregoire of Washington, and its vice chairman, Gov. Dave Heineman of Nebraska, a Republican — wrote to Mr. Obama and Congressional leaders in both parties last week urging them to reconsider, warning that such a cut would “result in reduced Medicaid expenditures, in increased state taxes or reductions in K-12 education, transportation and public safety funding.”

But deep partisan divisions remain among the governors. The Democratic Governors Association held a news conference calling for the debt ceiling to be raised, and saying that any accompanying plan to reduce the federal deficit should include tax increases as well as service cuts. And they complained that moderate Republicans were failing to speak up to avert catastrophe.

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Economix: What if the Debt Ceiling Isn’t Raised?

There are few signs of progress in the meetings between President Obama and Republican Congressional leaders about the need to raise the federal debt limit.

On Thursday, the president said the two sides were still “far apart,” although he said recent meetings were “very constructive.” For his part, the House speaker, John Boehner, said on Friday that no agreement was “imminent.”

One thing that most officials seem to agree on, however, is that failing to raise the limit by the Aug. 2 deadline will have undesirable consequences. Here are some recent statements by American officials and others on the subject:

“While some think we can go past August 2nd, I frankly think it puts us in an awful lot of jeopardy, and puts our economy in jeopardy, risking even more jobs.” — House Speaker John A. Boehner, July 8

“Potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything. And so our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.” — President Obama, July 6.

“The United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic.” — Ben S. Bernanke, the Federal Reserve chairman, July 7.

“We don’t need to tell the rest of the world that anytime people in Congress start throwing a tantrum that we’re not going to pay our bills.” — Warren E. Buffett, July 7.

“The debt-ceiling trigger does offer a needed catalyst for serious negotiations on budget discipline, but avoiding even a technical default is essential. This is a risk our country must not take.” — A letter circulated by business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers.

“There is no guarantee that investors would continue to re-invest in new Treasury securities. In fact, some market participants have already indicated that they would be disinclined to do so. As one of the major ratings agencies concluded in a recent report, failure to pay non-debt obligations ‘would signal sever financial distress and potentially imminent debt default,’ prompting the U.S. sovereign rating to be place on ‘Rating Watch Negative.’” — A letter from Treasury Secretary Timothy F. Geithner to Republican senators, June 29.

A few prominent voices have suggested that not raising the debt ceiling, while not ideal, would have acceptable consequences. Here are some of them.

“The Treasury takes in more than enough money from taxpayers to cover interest payments on the national debt. According to the Congressional Budget Office, tax revenue is estimated to be $2.23 trillion in Fiscal Year 2011 while net interest payments will only amount to $213 billion. Even if the debt ceiling remains where it is, there will be more than enough money in the Treasury to make the government’s debt payments, thereby avoiding default.” — A letter to Secretary Geithner, signed by Senator Mitch McConnell, the minority leader, and 16 other Republican senators, May 23.

“My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform — that we wouldn’t even have to find out about a meltdown because it wouldn’t happen.” — Stanley F. Druckenmiller, the retired manager of Duquesne Capital, May 14.

Are there other prominent or notable figures who’ve gone on the record about the consequences of not raising the debt ceiling? Submit them in comments.

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