In November 1995, then-Treasury Secretary Robert Rubin set in motion a series of extraordinary financial maneuvers to keep the government afloat after a bitter budget dispute between Democratic President Bill Clinton and a Republican-controlled Congress threatened to force the United States to default on its bond obligations for the first time in history.
Rubin knew that without congressional consent to raise the legal debt ceiling, he had only a matter of weeks before the Treasury exhausted its borrowing authority and would have to renege on interest and principal payments to its creditors – something that the secretary described as “unthinkable” and “akin to nuclear war.” Through a series of arcane financial maneuvers – including postponing or downsizing debt auctions and speeding up the redemption of some government bonds – Rubin was able to forestall a default for an additional four and a half months. Congress finally relented and voted to raise the debt ceiling on March 19, 1996.
Today, another Democratic president and congressional Republicans are locked in a budget test of wills that could end in default on the federal debt this spring unless the two sides can negotiate a budget deal that includes a boost in the federal debt authority.
Yesterday, Federal Board Chairman Ben Bernanke warned of potentially “catastrophic” economic consequences if Congress plays politics with the debt ceiling. “We must be very careful that we don’t leave any impression that the U.S. will not pay its creditors,” Bernanke told a packed house at the National Press Club.
Obama Administration officials and GOP leaders are downplaying the possibility of a crisis of that magnitude. Earlier this week, the Treasury Department said it is about $200 billion shy of its $14.3 trillion borrowing cap, and on track to reach that point between April 5 and May 31 – a slightly rosier scenario than previously announced. However, Treasury Secretary Timothy F. Geithner has warned Congress that once the government bumps up against the debt ceiling, the Treasury at most could buy an additional “several weeks” of time if it resorts to the same gimmicks that Rubin used 14 years ago.
“Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations,” Geithner wrote in a letter to congressional leaders, adding that government default would have catastrophic economic consequences and shatter the U.S. credit rating. “Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” Geithner said.
The debt ceiling, first imposed by Congress in 1917 as part of the World War I-era Second Liberty Bond Act, limits the amount of obligations that may be issued by the U.S. government to finance its general activities or that can be borrowed from trust funds, including Social Security, to fund daily operations. Congress has voted to raise the debt limit 10 times since 2001 – but invariably the vote has been politically charged, with each party attempting to shift blame to the other for the ever-mounting debt.
GOP leaders including House Speaker John Boehner, R-Ohio, and Senate Republican Leader Mitch McConnell, R-Ky., say they don’t want a default but that any increase in Treasury borrowing authority must be linked to a package of deep cuts in domestic spending programs. Yet many freshmen lawmakers closely allied to the Tea Party have vowed to oppose any hike in the debt ceiling, and there’s no way to predict what might happen if political tensions flare.
"We are not looking to shut the government down; no one benefits," Rep. Michele Bachmann, R-Minn., leader of the House Tea Party caucus, said recently on CBS's Face the Nation. "But at the same time, we are not looking at wanting to continually raise the debt ceiling."
Jay Powell, a visiting scholar at the Bipartisan Policy Center and a former Under Secretary of the Treasury for Finance under Republican President George H.W. Bush, cautioned Republicans that “it’s not wise to push the debt limit issue too far … You win the spending battle at the appropriations and budget committees, and not on the debt limit vote,” he said.
While administration officials voice optimism that a debt ceiling crisis can be averted, Treasury officials clearly will have far less room to maneuver to keep the government afloat in the event of an impasse than the Treasury did during the protracted budget crisis of 1995-1996. That’s largely because the sheer magnitude of the federal deficit and debt – and the associated borrowing needs – overwhelms whatever benefits the Treasury might derive from manipulating government accounts and investment strategies.
In 1995, at the start of the Clinton era debt crisis, the annual budget deficit was $163.9 billion and the overall national debt was $4.97 trillion. By contrast, the deficit last year was $1.3 trillion – or nearly eight times as large as in 1995 – while the gross national debt was $13.5 trillion – or nearly three times as large. At most, the Treasury could buy about one-eighth as much extra time before breaching the debt ceiling as Rubin was able to do, according to Treasury officials.