October 22, 2021

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How America’s Debt Limit Became “A Mortgage That’s Worth Collateral”

A decade ago, a clash between Democrats and Republicans over an increase in America’s borrowing capacity left the country in days of default and prompted a major credit rating agency to downgrade its credit rating for the first time.

After the episode, Mitch McConnell, the senior Republican in the Senate, described the debt ceiling to the Washington Post as “a mortgage worth bailing out”.

A decade later, the debt limit the United States can accept is again the subject of heated discussions in Washington between Democrats, who control Congress but cannot garner enough votes to unilaterally raise it, and Republicans who refuse to vote. .

The controversy is unusually significant because, without the escalation, the United States could no longer pay its bills in October, which could destroy its economy and undermine a pillar of the international financial system.

Legislators have been discussing raising credit limits for decades. But the desire to marginalize the world’s largest economy dates back to 2011, when Republicans curbed Democratic spending and set a cap on it.

“Most (Republican) leaders believe that the 2011 debt ceiling crash was ultimately a success because they (then, President Barack Obama) were able to force (then President Barack Obama) to sign most of the bill. The bill has been the standard in spending cuts for decades, ”said Brian Riddle, who was Rob Portman’s Republican Senate chief economist at the time.

The deal he struck should cut government spending over the years.

But it didn’t work out: the US national debt and budget deficit skyrocketed in the years that followed due to the spending of the Republican and Democratic presidents.

Others involved in the 2011 confrontation warned that even without default, risk situations have their own consequences.

Shai Aqbas, director of economic policy for the center, said, “It is difficult to measure how this is affecting our country and its economic power, but it is likely that it is already taking place beneath the surface and is causing our credibility to erode . ”The bipartisan policy that had collaborated with Federal Reserve Chairman Jerome Powell a decade earlier.

– Another year, same people –

Some countries have to borrow as much as the United States while negotiating periodic increases in the debt they can borrow.

Not only must Congress agree to raising the debt ceiling to avoid a “default,” it must also agree on government funding to avoid the closure in late September.

All while negotiating two major spending bills that Democratic President Joe Biden wants to pass.

As in the showdown a decade ago, the Republicans in the Senate are led by McConnell.

Senators today insist that raising the debt ceiling is the responsibility of the Democrats in power and that their party will not help them.

In 2011, both sides negotiated an agreement aimed at deepening the budget deficit over the next few years, but ultimately unsuccessful.

Obama’s Republican successor, Donald Trump, signed tax cut laws that widened the deficit, and then two massive spending measures pushed it to a record high in 2020 despite keeping the economy off a worse recession. Stopped.

– a “silly” discount –

Biden signed a third pandemic spending bill, and two of his measures currently under study could add to the deficit further.

The most untimely result of the 2011 debt ceiling freeze came shortly after its decision, when S&P Global Ratings downgraded the country’s credit rating below its top rating, while Moody’s Investor Services and Fitch Ratings, two other major agencies, left it unchanged. .

“It seemed silly to me,” because the country never went bankrupt, said Warren Payne, who was chief economist on the Republican-led House Ways and Means Committee at the time of the downgrade.

“In 2011 there was no intention of allowing payment defaults. And I think if you look at the testimony of the congressmen now, there is no intention of allowing defaults now, ”he said.

However, it is not yet clear how the failure should be avoided.

CS / MDL / LM / DG