Real talk on the debt limit

From: POLITICO's Morning Money - Wednesday Sep 29,2021 12:03 pm

Sep 29, 2021

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Quick Fix

Real talk on the debt limit — At first glance, the lack of a plan for raising the nation’s borrowing limit in the next month or seems quite scary. A default, or even a near-default, would be catastrophic for markets and the economy and undermine the bedrock of global finance: the Treasury bond and full faith and credit of the United States. But a default is simply impossible.

If they are forced into it, Democrats will have no choice but to raise the limit unilaterally, through reconciliation or some other means. They will not allow President Biden’s economy to tank under a default. Republicans, meanwhile, could theoretically filibuster a debt limit hike in the Senate.

But why would they? The party’s desire is to simply hang the hike on Democrats alone and then run against them over it. Filibustering a debt limit hike and forcing default would be politically catastrophic for Republicans as it would easy for Democrats to lay all the blame on them. MM doesn’t know exactly HOW it will get done. But it will get done.

Dems pivot to government funding vote for now — Our Caitlin Emma and Marianne LeVine: “The Senate is expected to vote as early as Wednesday on a revamped spending bill that would forestall a government shutdown at the end of the week after Democrats ditched action on the debt limit amid staunch Republican resistance.

“The standalone continuing resolution comes after Senate Republicans refused to fast-track a package on Tuesday that pairs government funding with suspension of the debt ceiling through the midterms … Several GOP senators have said they will support a bill to prevent a shutdown and deliver disaster aid to storm-battered states, as long as the package does not lift the cap on how much the government can borrow.”

X-date pegged at Oct. 18 — Our Caitlin Emma: “The Treasury Department could run out of money by Oct. 18, triggering a disastrous default on the nation’s debt that would damage the U.S. economy for years to come, Secretary Janet Yellen warned congressional leaders …

“GOP leaders insist that Democrats must handle it on their own through the special budget process that they’re using to pass President Joe Biden’s multitrillion-dollar social spending bill — an untested route that could take roughly two weeks and pose a number of procedural issues. Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer are privately discussing the options with Biden this week, although no decisions have been made.”

GOOD WEDNESDAY MORNING — Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

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Driving the Day

Yellen will participate in a virtual meeting with her G-7 Finance Minister counterparts … House Financial Services subcommittee has a hearing at 10:00 a.m. on “The Future of Banking: How Consolidation, Nonbank Competition, and Technology are Reshaping the Banking System” …

Vice President Kamala Harris “will meet Wednesday in her Ceremonial Office with five Latina small business leaders to make the case why the Bipartisan Infrastructure Deal and the Build Back Better Agenda will support startups and small businesses”

PROGRESSIVES STILL PLAN TO TANK BIDEN AGENDA (IF THEY HAVE TO) — Our Sarah Ferris and Heather Caygle: “Progressive leaders … declared that a majority of their 100-member caucus still plans to tank … Biden’s infrastructure bill this week without a firm commitment that party leaders can finish another huge agenda item. And time is running out before that vote.

“Liberal Democrats in the House are demanding details about what the Senate’s most vocal centrists will support, ratcheting up the pressure on Biden for a pair of high-stakes meetings with Sens. Joe Manchin of West Virginia and Kyrsten Sinema … Without more clarification, Congressional Progressive Caucus Chair Pramila Jayapal said most of her members still plan to oppose Thursday's infrastructure vote.”

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down and who really has the president's ear in West Wing Playbook, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

MM SIDEBAR — Those meetings with Manchin and Sinema produced … well, nothing.

BIDEN DOESN’T WANT TO KILL FILIBUSTER FOR DEBT LIMIT — Our Christopher Cadelago: “The White House said … Biden opposes changing the filibuster to suspend or raise the debt ceiling, closing off a break-the-glass option to avoid financial calamity.

“White House press secretary Jen Psaki confirmed that Biden’s position on reforming the filibuster has not changed as Democrats search for options to deal with the approaching debt ceiling deadline amid persistent refusal from Senate Republicans to step in and help.”

WARREN OPPOSES POWELL — Our Victoria Guida: “Sen. Elizabeth Warren … said she opposes a second term for Federal Reserve Chair Jerome Powell, calling him a ‘dangerous man’ because of the financial regulations that have been loosened during his tenure.

“‘Your record gives me grave concern,’ the Massachusetts Democrat told Powell while he was testifying before the Senate Banking Committee. ‘Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed. And it’s why I will oppose your renomination.’”

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Markets

SPIKE IN BOND YIELDS SPOOKS INVESTORS, DEFLATES TECH STOCKS — AP’s Damian J. Troise and Alex Veiga: “Technology companies led a broad slide in stocks on Wall Street Tuesday as investors reacted to a surge in U.S. government bond yields. The benchmark index fell 2 percent, its worst drop since May, and the tech-heavy Nasdaq fell 2.8 percent, its worst drop since March.

“The main action was again in the bond market, where a swift rise in Treasury yields is forcing investors to reassess whether prices have run too high for stocks, particularly the most popular ones. The yield on the 10-year Treasury note jumped to 1.54 percent, its highest level since late June. That’s up from 1.32 percent a week ago.”

FED QUESTIONS WALL STREET BANKS ABOUT EVERGRANDE EXPOSURE — Bloomberg’s Chanyaporn Chanjaroen, Jesse Hamilton and Hannah Levitt: “Federal Reserve officials have questioned several big U.S. banks about their exposure to China Evergrande Group, joining other global regulators in examining the potential fallout from the property developer’s debt crisis.

“Troubles at Evergrande, with more than $300 billion of liabilities, spurred the Fed to seek information to head off any risks to financial stability, according to people familiar with the matter. Hong Kong’s central bank also asked lenders there to report risks tied to Evergrande, China’s largest issuer of high-yield, dollar-denominated bonds.”

DEBT CEILING STANDOFF DISTORTS SHORT-TERM TREASURY MARKET — WSJ’s Sam Goldfarb: “The U.S. debt-ceiling standoff is skewing investor preferences for different types of Treasurys. Investors are demanding more yield to hold some short-term Treasurys with the greatest risk of delayed payment. Meanwhile, they are driving down yields on a dwindling supply of others, with the Treasury Department slowing short-term borrowing to push off hitting the ceiling.

“Similar bond-market distortions have flared up in the past when the government neared its legally imposed borrowing limit. Traders aren’t actually afraid that the government won’t pay back the money that it owes, said Blake Gwinn, head of U.S. interest rates strategy at RBC Capital Markets. But even running short of cash for a few days before lawmakers strike a deal would create headaches for asset managers and custodian banks, who use computer systems not designed to deal with bonds that continue past their maturities.”

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Fly Around

POWELL FACES HEATED QUESTIONS ON TRADING, REGS, DIVERSITY — Reuters’ Jonnelle Marte: “U.S. Federal Reserve Chair Jerome Powell faced heated questions on Tuesday from senators criticizing the central bank's trading guidelines, financial regulation and diversity efforts. Speaking to members of the U.S. Senate Banking Committee a day after two regional Fed presidents being scrutinized for their investment trades announced their retirements, Powell defended the central bank and vowed to improve policies where needed.

“‘This is a blow to the image of the central bank,’ Senator Raphael Warnock , a Democrat from Georgia, said about the trading controversy. He asked Powell about what steps he is taking to protect the ‘impartiality’ of the Fed.”

SEARCH FOR NEW BOSTON FED CHIEF TO BE ‘OPEN’ AMID CALLS FOR DIVERSITY — Reuters: “The search for a new chief of the Boston Federal Reserve Bank will be ‘comprehensive, rigorous and open,’ with details to be announced soon, a spokesman for the bank said on Tuesday. …

“Though Fed Chair Jerome Powell says that diversity is a top priority for the institution, Fed bank president searches have drawn criticism for their limited success in that regard. Of the 12 Fed bank presidents, seven — including the two outgoing Fed bank chiefs — are white men. In recent years the Fed has made a concerted effort to lay the groundwork for a more diverse Fed leadership by handpicking a more diverse set of directors to lead the Fed bank boards.”

CFTC COMMISSIONER HEADS TO SEC AS GENERAL COUNSEL — WSJ’s Paul Kiernan: “The Securities and Exchange Commission said it has hired a former aide to Chairman Gary Gensler to serve as its top legal officer. Dan Berkovitz, who announced plans earlier this month to leave his role as a commissioner at the Commodity Futures Trading Commission, will join the SEC as general counsel on Nov. 1, the agency said in a news release. Mr. Berkovitz previously served as general counsel at the CFTC when Mr. Gensler led that agency from 2009 through 2013.”

FREDDIE MAC FINDS ‘PERVASIVE’ BIAS IN HOME APPRAISAL INDUSTRY — Bloomberg’s Brentin Mock: “A study from the federal housing finance agency Freddie Mac adds to a growing body of research that finds racism in the appraisal industry is undervaluing the homes of Black and Latino Americans compared to white-owned homes. In an analysis of more than 12 million housing appraisals, Freddie Mac researchers found that ‘appraisal gaps seem pervasive’ in lowering home value determinations in Black and Latino neighborhoods.”

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