By STEPHEN MOORE
Rumors are bouncing through Washington and Wall Street that Republicans in Congress are flirting with a debt default in August as a way to get President Obama to agree to spending cuts.
This rumors got steam from a widely cited Reuters report that said "an increasing number of Republicans do not believe the Obama administration's dire predictions of economic catastrophe if the debt limit is not increased" and that the GOP thinks "a period of technical default can be managed without plunging markets into chaos."
The story cites Republican presidential candidate Tim Pawlenty, the former Minnesota governor; Republican Pat Toomey, the freshman U.S. senator from Pennsylvania; and GOP Rep. Paul Ryan of Wisconsin. They agree that a short-term failure to raise the debt limit would not lead to Armageddon and might even be a welcome turn of events.
Mr. Toomey has proposed legislation that is designed to make sure that there will be no default. His bill would guarantee that if the debt ceiling is not extended, bondholders would be paid first from tax revenues collected each day. This would mean that other nonessential activities of government may not get funded until an agreement were reached on the debt ceiling.But other Republicans and Wall Street insiders tell me that the possibility of a U.S. default on debt is close to zero. Wall Street economist and Republican economic advisor David Malpass said that "Treasury is required to make the interest and principal payments, and will." He also believes, as do many other economists, that talk of "downgrading the debt from AAA" is misinformation. "Treasury will be able to provide persuasive data to the rating agencies that there won't be any missed interest payments," said Mr. Malpass in a note to his investor clients.
Nevertheless, Democrats on Capitol Hill and in the White House who are arguing about how dangerous a default would be are also opposing Mr. Toomey's bill to ensure that this will never happen. Economists note that the continued slide in interest rates on 10-year Treasury bonds to 3% suggests almost no market fear that default is a realistic option. If investors were truly worried about a default and a downgrading of the debt, we would see a rise in interest rates to reflect this higher risk.
House Speaker John Boehner, who's involved in the negotiations with the Obama administration, wants to cut $1 of spending for every $1 of debt increase. The goal is to secure $2 trillion of savings before the August debt ceiling deadline. The first $1 trillion reportedly has been agreed to, but the White House is balking on the second trillion in cuts.
What is going on here is a political game, says GOP Rep. Michele Bachmann of Minnesota, who's contemplating a run for president. "Democrats just don't want to cut any spending."
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Senator Toomey Introduces “Full Faith and Credit Act” to Curb Federal Spending
WASHINGTON, D.C. – Senator Pat Toomey (R – Pa.) introduced his first piece of legislation today, entitled the Full Faith and Credit Act. The legislation will ensure that the U.S. government does not default on its debt by requiring the Treasury to prioritize payments on the debt in case the debt ceiling is not raised. Text of the legislation can be found below.
For months, some political leaders have argued that failure to raise the debt ceiling would necessarily cause the United States to default on its debt. This is not the case. If Congress refuses to raise the debt ceiling, the federal government will have more than enough money to service its debt. Next year, about 6.5 percent of all projected federal government expenditures will go to pay off the interest on our debt, and tax revenue is projected to cover about 67 percent of all government expenditures.
As Sen. Toomey explained in a recent Wall Street Journal op-ed, the Full Faith and Credit Act will take the option of default off the table and allow Congress to have a much needed debate about reining in the government’s out-of-control spending.
As Sen. Toomey explained in a recent Wall Street Journal op-ed, the Full Faith and Credit Act will take the option of default off the table and allow Congress to have a much needed debate about reining in the government’s out-of-control spending.
“We need to take the default scare tactics off the table so both sides can sit down at the table and have a serious and honest conversation about cutting spending and instituting structural reforms to put our country’s finances on a sustainable path,” Sen. Toomey said. “The Full Faith and Credit Act will allow us to have that conversation by eliminating the possibility for default in case the debt ceiling is not raised. Failing to raise the debt ceiling is not a desirable situation and would be disruptive, but the worst thing we can do is simply continue he irresponsible deficit spending that jeopardizes our economic future.”
Already, the Full Faith and Credit Act has garnered enthusiastic support from members of Congress. In the Senate, the legislation has fifteen cosponsors: Senators John Barrasso (Wyo.); Roy Blunt (Mo.); Saxby Chambliss (Ga.); Tom Coburn (Okla.); Jim DeMint (S.C); John Ensign (Nev.); Mike Enzi (Wyo.); James Inhofe (Okla.); Johnny Isakson (Ga.); Mike Johanns (Neb.); Ron Johnson (Wis.); Mark Kirk (Ill.); Mike Lee (Utah); Rand Paul (Ky.); and David Vitter (La.).
In the U.S. House of Representatives, a companion piece of legislation will be introduced by Representative Tom McClintock (Calif.-04).
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