The debt ceiling has been a looming issue ever since the Republicans took control of the House of Representatives this January. The alarmist crowd warned that if the debt ceiling is not raised it could lead to a United States default, higher interest rates, and perhaps even an economic catastrophe. The more optimistic crowd said that as the deadline neared both sides would come to their senses and eventually pass a debt ceiling increase. The default scenario is now just over one week away, and the alarmists seem to have the better argument thus far.
Today White House Chief of Staff Bill Daley said the debt standoff has already done “tremendous damage” to the United States economy. Credit rating agencies have already said that they are looking closely at the full faith and credit of the United States. Businesses have apparently put off hiring until the uncertainty is resolved.
In addition, there are currently no signs of a big breakthrough. The Republicans are still digging in, demanding a package that includes spending cuts but no revenue increases. In addition, the GOP is demanding the debt ceiling be raised in a two-step process, with another debt ceiling increase coming before the 2012 election. Democrats believe a “balanced approach” must include revenue increases, and are also opposed to necessitating another debt ceiling vote before the next election.
In the Senate Majority Leader Harry Reid (D-NV) is working on one plan, and in the House Speaker John Boehner (R-OH) is preparing another. The problem is neither plan can actually become law without the cooperation of the other side.
Time is also starting to run out in order to make a deal. In the Senate multiple members have vowed to filibuster a debt ceiling increase. A filibuster could be broken with a vote of 60 Senators, but it might take up to three of four days to accomplish that task. In the House the Republicans passed a rule that stated all legislation must be written 72 hours before it is voted on.
Even worse, the markets will soon start reflect the lack of progress. Today Speaker Boehner said he wanted to produce a deal before 4 pm EST in order to reassure the Asian trading markets before they open. Boehner’s own 4 pm deadline came and went with no agreement. Tomorrow the United States and European markets will open. Once investors start to seriously account for a default the damage to the economy may be irreversible.
As the clock ticks on the default bomb pragmatism and compromise are taking a backseat to ideology and stubbornness. The “unrealistic” worst case scenario is suddenly becoming very real indeed.