Reed Optimistic for Debt Deal in Lame-Duck U.S. Congress

Prospects are good that Congress will make a down payment on reducing the budget deficit in an end-of- year session if President Barack Obama is re-elected and Democrats retain control of the Senate, Jack Reed, a member of the chamber’s Banking Committee, said.

“It’ll be a big incentive to sitting down and trying to come up with something that’s balanced, that has to have revenues,” Reed, a Rhode Island Democrat, said in an interview yesterday. “It’s going to be complicated, but I hope the message coming out of the election is ‘let’s get this done.’”

When lawmakers return to Washington following the Nov. 6 election for a lame-duck session, they will have only weeks to avert more than $500 billion in tax increases and $100 billion in automatic spending cuts set to take effect in January.

Obama and House and Senate leaders have failed for two years to reach a deal to cut about $4 trillion over 10 years. Democrats oppose cuts to entitlement programs such as Medicare and Social Security, and Republicans have ruled out raising taxes on upper-income earners.

With polls showing Americans frustrated with Washington’s inability to get things done, the election may give either Democrats or Republicans a mandate to proceed with their vision for scaling back the deficit, Reed said. Democrats say any deal must include both spending cuts and tax increases while Republicans insist on spending cuts only.

‘Key to Unlock’

“The key to unlock a lot of this is whether revenue is actually on the table,” said Reed. “The president’s instincts would be to go for a grand bargain as he was trying to arrange” with Republican House Speaker John Boehner in 2011.

“So much turns on the election,” Reed said.

While Obama would prefer a large-scale deal following the election, “there’s something to be said for a framework that is a down-payment approach,” said Reed. “That would give some confidence” to U.S. creditors and financial markets.

Republicans oppose ending the George W. Bush-era tax cuts for couples earning more than $250,000 a year, as the president is demanding. Instead, Republican leaders and presidential candidate Mitt Romney propose curbing some as-yet unidentified deductions and credits while lowering income tax rates.

Reed predicted Republicans may drop their resistance to higher taxes for upper-income Americans after the election, once they realize the economic and political peril of ending popular breaks like those for home mortgages and health care.

Health Care Costs

“One of the biggest ones is health-care costs for companies,” he said. “You’re going to take that away? Mortgage interest deduction, when the housing market is just beginning to get a little traction, you take that away?”

Reed said he agrees with Obama’s threshold of ending the Bush tax cuts for couples’ income over $250,000 a year.

“To most people, that is a huge amount of money to be making on an annual basis,” the senator said.

On a planned overhaul of the nation’s housing-finance system, Reed said a proposal from the administration is needed to spur congressional action.

“It will help to be a presidential initiative, at least to get a template on the table and then we start working from there,” Reed said.

Treasury officials have been working on a housing-finance plan since they outlined options in 2011. Treasury Secretary Timothy F. Geithner said in February that he would release the plan by the beginning of this summer, though he hasn’t done so.

Volcker Rule

Reed said a final “Volcker rule” to restrict banks’ proprietary trading must be “workable” and able to sustain market and legal scrutiny. He said the multibillion-dollar trading loss by JPMorgan Chase & Co. (JPM) reinforced the need for the Volcker rule to prevent banks with federally insured deposits from trading for their own accounts.

“It reinforces the point that the Volcker rule is important,” Reed said. “That is still the position that a lot of people have, which otherwise might have been dismissed.”

Reed, who also serves on the Senate Armed Services Committee, said he is monitoring developments in a merger plan by BAE Systems Plc (BAESY) and European Aeronautic Defense & Space Co. (EADSY) He said he hasn’t seen signs of whether such a combination will encounter barriers in Congress from lawmakers concerned about the effect on security and competition for U.S. defense firms.

The companies are exploring an aerospace and defense merger that would result in a company with estimated revenue of $94 billion, exceeding Chicago-based Boeing Co. (BA)’s $76 billion in sales last year.

Reed said the merger is running into resistance from European governments and it isn’t clear whether it will proceed. The German government is raising concerns about keeping a balance of power with France, where EADS is based, and about where centers of command will be based.

“However that comes out will reflect how that’s viewed here,” said Reed, who said he hasn’t been contacted by either company’s Washington lobbyists. “If it looks like the arrangements give them certain advantages that aren’t available to our companies, I think there will be a ‘that’s not fair’ reaction.”

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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