By Peter Schroeder - 05/17/11 12:32 AM EDT
The U.S. government officially hit the federal debt limit Monday, prompting the Treasury Department to invoke new measures to prevent a default.
Treasury Secretary Timothy Geithner tapped into two government employee pension funds to free up cash, and warned in a letter to congressional leaders of “catastrophic economic consequences” if the ceiling is not hiked.
Negotiators led by Vice President Biden will not meet this week. And with the House on recess, and with Geithner saying U.S. borrowing authority would not be exhausted until Aug. 2, lawmakers and the White House have an 11-week timeframe to work out a deal.
Wall Street, too, had little reaction; the Dow Jones Industrial Average was down 47 points for the day amid continued worries about a slowing economy.
Geithner’s moves have been telegraphed well in advance, and were designed to calm markets that many worry could tumble if investors come to believe the debt ceiling will not be raised. Geithner also has been trying to ratchet up pressure on Republicans to reach a deal with the White House.
House Minority Leader Nancy Pelosi (D-Calif.) visited Wall Street on Monday as the two parties battle to position themselves as the more responsible in the debt fight.
She told CNBC that everything, including Medicare and Social Security, would be on the table in the talks to reduce the deficit and raise the debt limit.
“I think Medicare is on the table. I think Social Security is probably on its own table, because we have to have it be solvent, it has to be strong, and we have to deal with it in its own mechanism, in my view,” Pelosi said.
“But the fact is, all the money is fungible, and at the end of the day, the deficit must be reduced.”
The minority leader’s trip follows Speaker John Boehner’s (R-Ohio) address to the Economic Club of New York, in which he said that the White House would have to agree to trillions in spending cuts to get a deal on the debt ceiling. Boehner also demanded that Democrats agree to spending cuts that exceed the $2 trillion hike in the debt ceiling requested by the White House.
“Americans understand we simply can’t keep spending money we don’t have,” Boehner said Monday in a statement responding to Geithner’s announcement. He said House Republicans will not back an increase to the debt limit unless it comes with “serious budget reforms and significant spending cuts.”
The biggest divide in the talks is whether tax hikes will be a part of the formula for reducing the deficit. Republicans have said no tax increases should be considered, but the White House and Pelosi want to raise taxes on wealthier households and specific industries, notably U.S. oil companies.
“Nobody’s going to cry over the oil companies having $32 billion,” Pelosi said on Monday in a reference to the more than $30 billion in profits recorded by the industry in the first quarter of 2011.
Boehner said tax hikes “will only hurt job creation and do more damage to our economy.”
Pelosi, for her part, said it is not possible to reduce the deficit on spending cuts alone.
“There aren’t enough cuts you can make to reduce the deficit. You also must look for growth,” she said on CNBC. “You also have to look at the tax code. You have to make it simpler and fairer.”
While Republicans used Monday’s news to again cast Democrats as irresponsible and profligate spenders, Democrats faulted the GOP for being unrealistic and irresponsible.
“We can’t afford to play these political games and trigger a default crisis that would lead to catastrophe,” Senate Majority Leader Harry Reid (D-Nev.) said in comments on the Senate floor. He said lawmakers “would be out of our minds” not to raise the debt limit.
Some Republicans continued to argue the administration is overstating the need to raise the debt ceiling.
“Keeping the debt ceiling at its current level would force Congress to prioritize spending, but it would not force a default on our debt,” said Rep. Jim Jordan (Ohio), chairman of the conservative Republican Study Committee (RSC). “The only thing forcing a default would be Treasury Secretary Geithner allowing such a catastrophe to take place.”
The RSC is backing legislation it says will allow the government to hit the ceiling without defaulting, though Treasury officials maintain that such arrangements would be unworkable.
Treasury had started to take steps to avoid a default even before Monday.
On May 6, the Treasury stopped issuing State and Local Government Series Treasury securities. These special securities can be bought by state and local governments working to refund municipal bond deals, and count against the debt limit.
The steps Geithner announced Monday will free up $12 billion over two months by halting new investments in the Civil Service Retirement and Disability Fund and redeeming existing investments in that fund.
Geithner also has the one-time option of not reinvesting securities that mature in that federal employee retirement fund, as the Treasury usually would do. In that situation, the Treasury could free up $67 billion more in headroom on June 30, when some of those securities mature.
Along similar lines, Geithner announced Monday that he was slowing investment in the Government Securities Investment Fund for federal employees’ retirement, which will create another $130 billion.
Geithner warned that while these steps have been used in the past when Congress has lagged on raising the debt ceiling, they would be “less useful” this time around. The government has increased the amount it borrows monthly over the years, meaning each of these steps buys less time than it had previously.