Bloomberg Businessweek’s Karen Weise followed Treasury Secretary Jack Lew’s Senate testimony this morning. Below are her updates, filed in real time.
Treasury Secretary Jack Lew appears before the Senate Finance Committee this morning to testify about what would happen if the federal government defaults on its debts. He has sounded the alarm in recent weeks and is likely to do so again today.
“I think that if you look at the calm out there, which I think is a bit greater than it should be, there’s a sense that 2011 was a terrible experience, and nobody would do that again,” he said on Sept. 24 at the Bloomberg Markets 50 Summit. The next day he told Congress that the U.S. will run out of money by Oct. 17 if it doesn’t raise the $16.7 trillion debt limit.
Expect Lew to address some of the hot topics that have arisen since then, including swatting down the growing ranks of “debt-limit deniers,” stressing the urgency of the deadline, and making a “formal presentation” that President Obama promised about whether the government can technically avoid defaulting if it pays bondholders but not other obligations like Social Security. Bloomberg Businessweek reporter Karen Weise is following the hearing, with real-time updates.
Lew’s prepared testimony is out (PDF), and he expresses a sense of urgency to raise the debt ceiling. He says a default would be “catastrophic” and creates “real risk of a financial crisis and recession that could echo the events of 2008 or worse.” Raising the limit “at the last minute” would be “very dangerous,” he says, saying that after October 17, the government will be stuck dealing only with “cash on hand and any incoming revenues” to pay its obligations. He goes on to dismiss the theory that the government could prioritize which debts its pays first to avoid technically defaulting on its debt. Finally, he says Congress should raise the debt ceiling without tacking on conditions over the budget. We’ll come back and break down some if his arguments from here.
Prioritizing is not an option. Lew is directly shooting down the idea that if the government pays bondholders but lets other obligations like Social Security payments slide, it wouldn’t be considered a default. “Prioritization is just default by any other name,” he says. Being tagged a default is important in the eye of the market because investors to question the certainty that the government makes good on its debts—which could cause rates to spike. Lew says the legal authority to pick and choose payments is not “clear at all” and that even if it wanted to do so, technologically it may not be possible. He says the government writes “roughly 80 million checks a month” in an automated system that “was not designed to be turned off selectively.”
So what does the administration want? Sen. Orrin Hatch pressed Lew to name specific numbers for how much Obama wants the debt ceiling to be increased, and for how long. Lew refused to give a direct response. He says, “the longest that Congress is prepared to extend it for is the best.” There are two things going on here. First, the Obama administration has been trying to draw a hard line that this is Congress’s mess to sort out. Also, Negotiation 101: Never be the first to throw out a number.
The timeline haggling isn’t useful. There’s been a lot of debate over when, exactly, the government will default. Is it Oct. 17, as Lew has said before? Is it Nov. 1, as some are Wall Street believe? In Lew’s written testimony, Lew says, “between October 17 and November 1, we have large payments to Medicare providers, Social Security beneficiaries, and veterans, as well as salaries for active duty members of the military.” In the Q&A, Lew says because the situation is unprecedented, it’s “impossible” to know for sure when the government will run out of options, so the whole process of slicing the deadlines isn’t helpful. “There is a parlor sport in Washington of when is ‘the last minute,’” he said. “You can’t do that with the debt limit.”
Wall Street likes what it’s hearing. While Lew’s been talking, the market opened, and the S&P 500 rose 0.6 percent on optimism that lawmakers will avoid default.
Rolling over. A number of times in the hearing we heard about how the government “rolls over” its debts. Companies do this too: they issue short-term bonds to generate the cash to pay debts, and when when those bond come due, they usually re-up and borrow again. Lew expressed concern that it would cost the government more to reissue these short-term IOUs if the country defaults and, if things got really bad, that the government wouldn’t be able to refinance these debts at all and would be forced to payback all of the debts at once. He described it as instead of having to pay your monthly mortgage payments, you have to repay the full mortgage all at once. Lew didn’t give an estimate for what it could cost, saying only, “We’re not talking about small numbers.”