WASHINGTON — WASHINGTON (`) — There is one way to force President Joe Biden and Congress to resolve the looming crisis beyond the debt limit: a financial market crash.
Several economists and a former White House official hold that view, knowing that Congress rarely acts unless an emergency compels lawmakers to do so.
“For this drama not to end in tragedy, key players must play their part,” said Daleep Singh, who was Biden’s national security adviser on international economics and deputy director of the National Economic Council. “Market participants have a leading role by playing the victim. You have to create pain. They have to produce a sea of red on their Bloomberg screens because politicians have to look at those screens.”
Republicans and Democrats have danced around the need to increase the government’s legal borrowing powers. Biden tried to get closer Thursday by releasing his budget that cuts deficits by $2.9 trillion over 10 years, an offer that House Speaker Kevin McCarthy, R-Calif, was quick to dismiss as woefully inadequate . Republicans in the House Freedom Caucus tabled their own demands on Friday, which the White House quickly rejected.
This fandango could continue for several more months, until the last possible moment, if the federal government hit a currently unknown “X-date” — possibly as early as June — and would be unable to pay its bills, potentially triggering a default flush suddenly millions of jobs gone.
It’s a well-known ritual. But every other time before, Congress has reached an agreement on the debt ceiling. The question now, in a time of increasing political polarization, is whether things are different today.
“Every single major economic institution, conservative, liberal, is saying this is going to cause a massive recession, a massive recession, and it’s going to bug us for a long, long time,” Biden said of the potential default as he rolled out his budget in Philadelphia .
McCarthy has promised to put together his own budget plan, but he has little urgency in completing any sort of deal as long as the stock market remains relatively calm. He has said he wants an agreement to put the government on the path to a balanced budget. But he has also ruled out tax increases or cuts to Social Security and Medicare that would force deep and controversial federal spending cuts that could split House Republicans.
Biden, who would reduce deficits largely through higher taxes on the wealthy and corporations, has said he’s ready to go through budget agreements “line by line” once McCarthy has his numbers.
But McCarthy’s impact is greatest as the “X-Date” approaches sometime this summer and markets are biding their time. So far this year, the S&P 500 stock index has been positive. It has changed largely due to Federal Reserve measures to lower inflation or the collapse of the Silicon Valley Bank on Friday, events separate from the debt ceiling.
There is growing recognition that a massive sell-off around debt ceiling tensions would bring instant clarity and snap everyone out of their ideological stagnation. No one advocates a market demise, but as Republican lawmakers weigh the possibility of prioritizing repayments to debtholders — a risky short-term solution — there is a sense markets need to spur Congress into action.
“Unfortunately, it will likely take a significant financial market event before Biden and the GOP come to a compromise on the debt ceiling,” said Joe Brusuelas, chief economist at consulting firm RSM US, who said the standoff is already increasing borrowing costs for small and medium-sized businesses.
Morgan Stanley analysts concluded a few weeks ago that the most likely “catalyst” for a deal would be markets, which would voice their “fears” about the political and economic “impact of a default.”
When lawmakers realize they can step in with a deal and play hero to save everyone’s retirement savings, they will have an incentive to come together, said Singh, speaking at a conference in New York City two weeks ago.
“They need to be able to say, ‘Look, I reluctantly agree to pay expenses that we’ve already approved because I’m saving the 401(k)’s of hard-working families across the country,'” Singh said . “I think complacency itself is a big problem.”
There are precedents for market crashes that compel Congress to act.
During the 2008 financial crisis, the House of Representatives rejected a $700 billion bailout on September 29, causing the Dow Jones industrial average to plummet nearly 7% in a single day. That dramatic sell-off eventually set the stakes for Congress, and the bailout passed the House and became law within days.
And there are those who believe Congress may not take the path that would spark a market revolt.
Rohit Kumar, a former adviser to Senate Minority Leader Mitch McConnell, R-Ky., said a market downturn would “move the needle” on a debt-limit deal, but it’s not a “requirement” for a deal.
“The vast majority of lawmakers understand that this needs to be done,” said Kumar, now a senior executive at tax consultancy PwC. “Defining on our debts is a whole different beast, a bell that cannot be rung. And I think most members appreciate that.”
Senate Budget Committee chair Sen. Sheldon Whitehouse, DR.I., said Republicans would only seek a deal if their wealthiest donors “start feeling the aftermath of a potential default and start making calls and saying.” : ‘Okay, you guys, enough of this fooling around.'”
With millions of potentially lost jobs already forecast, Whitehouse admitted he doesn’t know why the phone calls from Republican donors aren’t already starting.
“Maybe they don’t feel the shaking yet,” he said.
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