Debt-ceiling debate muddied by TARP vote

The fight to raise the nation’s $14.3 trillion debt ceiling has been made tougher by the public’s lingering disgruntlement with the Wall Street bailout.

Like the Troubled Asset Relief Program (TARP), the debt-ceiling hike is seen by most economists as vital to the nation’s economy. But also like the TARP, it would require Washington to borrow enormous amounts of money, making it wildly unpopular with the public — and with a host of congressional conservatives who built their 2010 campaigns around promises of fiscal responsibility and deficit reduction.

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The resulting dynamics have left congressional leaders — particularly House Republicans — to straddle the divide, hoping to protect the economy without losing favor with voters. The public’s enduring unease with the Wall Street bailout, according to voices on and off Capitol Hill, has only complicated the debate.

“It’s created a bad taste for many people,” said Rep. Peter Welch (D-Vt.), who supported the TARP in 2008 and is now urging passage of a “clean” debt-limit hike. Welch characterized both policies as “politically unpopular but fundamentally necessary.” 

“Anything that has the implication that it’s about permitting more spending, people recoil against,” he said.

Wall Street leaders are also urging Congress to pass a quick debt-ceiling bill for the sake of a stable economy.

“If the United States actually defaults on our debt, it would be catastrophic,” JPMorgan CEO Jamie Dimon said recently at the U.S. Chamber of Commerce. “If anyone wants to push that button … they’re crazy.”

Some experts warned that having the big banks at the front lines of the lobbying push could backfire, considering the reputation of those institutions following the recession. 

“It is a liability,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal policy group. “For convincing the public,” he said, “it’s really counterproductive.” 

Welch disagreed, calling Wall Street’s public lobbying “very constructive.”  

“These people live in the real world of the credit markets, and they speak with authority,” he said. “The more they speak out — and the sooner — the more it will temper the extreme wings of both parties.”

Baker suggested resentment over the TARP lingers. 

“A lot of people felt deceived by the TARP, and they’re very suspicious of what’s happening here,” Baker said.

Since 1917, Congress has set a ceiling on the nation’s debt, allowing the Treasury Department to issue bonds to fund its deficit spending up to a certain level. The government is expected to reach its current limit of roughly $14.3 trillion in the middle of May.

The White House and Democratic leaders want Congress to raise the ceiling quickly, warning that too much delay will create a market panic that could threaten the fragile economic recovery. That also has Wall Street on edge. 

“The idea that the United States would take the risk — people would start to believe we won’t pay our bills — is a ridiculous proposition, irresponsible, completely unacceptable basic risk for us to take,” Treasury Secretary Timothy Geithner said on Tuesday. 

But a growing chorus of conservatives is disputing the notion that congressional inaction on the debt limit would be devastating. They say the bigger threat is the continuation of soaring deficit spending.

“The idea that we might say that this is a catastrophe is wrong,” Sen. Tom Coburn (R-Okla.) told “Meet the Press” on Sunday. “What is catastrophic is to continue to spend money that we don’t have on things we don’t absolutely need and continue to mortgage our future and not fix the very real problems that are in front of us.”

Some of the most vocal opponents of raising the debt ceiling are GOP freshmen who ran on a platform critical of the TARP in particular and deficit spending in general. 

Rep. David Schweikert (R-Ariz.) told Fox News last Thursday that he’s using town halls to try to “chip away at the story that Secretary Geithner has been telling around the country, that the world comes to an end — which just isn’t true.”

“Just because you hit the debt ceiling doesn’t mean there isn’t enough income to cover your debt payment,” Schweikert said. “We have plenty of income.”

Brian Gardner, a former congressional staffer who helps Wall Street understand what’s happening in Washington as a public policy analyst at Keefe, Bruyette & Woods, said some members “are constrained by the promises they ran on.”

Still, Gardner is confident that Congress will ultimately raise the debt limit “by necessity.” In an April 17 client note, he urged investors to “be very cynical and discount any political theatrics as the debt-ceiling vote approaches.”

“Our advice is — remember TARP,” Gardner wrote. “In the fall of 2008, the House originally rejected TARP, but days later, after the Senate passed TARP, the House reversed itself and the bill was passed.”

Ethan Pollack, senior policy analyst at the Economic Policy Institute, a liberal policy shop, pointed out a fundamental difference between the two debates. Many people who opposed TARP did so on principle, he noted, while many of those threatening to oppose raising the debt ceiling simultaneously concede the importance of the hike.

Speaker John Boehner (R-Ohio), for instance, has said a failure to raise the debt ceiling will play havoc with the global economy and kill jobs at home. Still, he’s warned that Republicans will allow both to happen if they don’t get “something big” in return.

“Not raising the debt limit would have serious, very serious, implications for the worldwide economy and jobs here in America,” Boehner told Fox News earlier this month. “But having said that, we’re just not going to do the typical Washington thing — roll over, increase the debt limit — without addressing the underlying problems.”