Lew’s Gamble Worked as Congress Faced Warning With Ambiguity
U.S. Treasury Secretary Jacob J. Lew’s gamble paid off.
Lew gave Congress and investors a hard deadline by marking today as the day the government could no longer borrow without an increase or suspension of the debt limit. He said nothing precise about when the U.S. might default on its obligations or how the Treasury would operate after the cash ran out. Lawmakers, facing a combination of warning and ambiguity, sealed an agreement to raise the limit before midnight.
“Washington needs deadlines to get anything done, and things only get done when they’re going to go on recess or hit the debt limit,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and now president of American Action Forum, a self-described center-right policy institute in Washington. “You need a forcing mechanism and this is as good a one as any.”
Lew’s target date, recited by lawmakers and displayed on TV network countdown clocks, instilled urgency and motivated Congress into action while disclosing the cushion the Treasury had to ensure the government didn’t miss a payment during a prolonged fiscal impasse.
The deadline, first set in a Sept. 25 letter from Lew to Congress, is when the Treasury said it would use up the accounting maneuvers that allow it to continue borrowing while staying just under the $16.7 trillion debt limit. The government would then have about $30 billion cash to pay incoming bills, Lew said. The cash balance as of Oct. 15 was $39 billion.
Oct. 17 wasn’t “an Armageddon date,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington-based group funded by labor unions and private foundations. Still, it was “taken that way,” he said.
The risk Lew and the administration faced was that if a deal wasn’t reached and markets didn’t collapse, “Republicans might say that yet again they tell us the world is going to end and it didn’t,” Baker said.
President Barack Obama signed into law a measure ending the 16-day U.S. government shutdown and extending the nation’s borrowing authority until early next year, the White House said today in a statement.
The measure was passed by wide margins in the House and Senate last night. The bill passed on an 81-18 vote in the Democratic-led Senate, followed by a 285-144 vote in the Republican-controlled House.
In a statement late yesterday, Lew said the agreement means the U.S. will “continue to honor all of our commitments.”
The Standard & Poor’s 500 Index (SPX) yesterday climbed 1.4 percent to 1,721.54, within four points of its closing record. The 10-year note yield decreased seven basis points, or 0.07 percentage point, to 2.66 percent.
The U.S. sold $68 billion of four- and 52-week bills and of 189-day cash-management securities yesterday in what would have been the Treasury’s last opportunity to bring in new cash under the debt limit. Fitch Ratings put the government of the world’s biggest economy on watch for a possible credit downgrade two days ago.
While the Treasury hasn’t given its own estimate for when it will be out of cash, analysts said the government has enough money for at least five days beyond the deadline.
Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, estimated that the Treasury had cash until Oct. 31 or Nov. 1. The Congressional Budget Office and the Bipartisan Policy Center, a Washington-based think tank founded by former Senate majority leaders, projected that money would run out sometime between Oct. 22 and Nov. 1 if the limit wasn’t raised or suspended.
The Treasury has been “open and transparent, regularly updating Congress” over the past five months, Lew told the Senate Finance Committee last week. He has also met with or spoken to congressional leaders and committee chairmen after sending letters to Congress on the debt limit to make sure they understood the situation, according to the Treasury.
Lew’s deadline was different from the dates provided by his predecessor, Timothy F. Geithner, during debt-limit talks in 2011, because Lew gave a date that left a cash-balance cushion of $30 billion.
“Treasury has walked a fine line, but an appropriate fine line,” said Ed Mills, an analyst at FBR Capital Markets & Co. in Arlington, Virginia. “It would have been irresponsible for Secretary Lew to say, ‘Well, yeah, Oct. 17 might be fungible.’ What happens if he does only have $30 billion left over in the checking account and checks for $60 billion come in?”
Lew spent the day yesterday in meetings at the White House, including with Obama, and with staff members at the Treasury including those working on debt limit-related issues, according to an aide to Lew who requested anonymity. He also spoke with former Treasury secretaries Geithner, Henry Paulson and Robert Rubin, the aide said.
Lew, 58, probably erred on the side of caution in picking a date, and he should, Holtz-Eakin said.
Oct. 17 was a legitimate deadline, said Judd Gregg, chief executive officer of the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group.
“It focused people, hopefully, on the severity of default and what the implications are for our country and for our reputation as a nation, and for our economy and for taxpayers,” Gregg, a former Republican senator from New Hampshire, said in a conference call with reporters yesterday.
Bond-market participants expected the Treasury to pay $120 billion of bills maturing today regardless of whether a deal was approved to raise the debt ceiling, another SIFMA executive said.
“Every expectation would be that Treasury will make timely payment tomorrow,” Rob Toomey, SIFMA’s managing director, said on the call yesterday.
The Treasury has been “pretty clear” about the Oct. 17 deadline, said Stan Collender, a former Democratic congressional budget aide and now a partner at Qorvis Communications in Washington. “I just think they’ve been misinterpreted.”
Some people mistakenly took Oct. 17 as the default date, which is impossible to determine, Collender said. “You can never give a specific date because you never know exactly how much money is coming in on any given day -- it’s always a little loose,” he said.
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