Scrambling for Debt Ceiling Backup Plan

One week from the deadline, both sides have unveiled new strategies, but there's still no deal. Here's our guide on the good, the bad and the ugly to expect.

President Obama (Jim Watson/AFP/Getty Images)
President Obama (Jim Watson/AFP/Getty Images)

In June, I compiled a guide of nine things to know about the debt ceiling. Back then, Congress and the White House had eight weeks to reach an agreement before the Aug. 2 federal-government-defaults-on-its-loans deadline, a stretch that seems luxurious by today’s standards. Now we’re one week away from so-called Debt Armageddon!

After House Speaker John Boehner walked out on talks with the White House on Friday, determined to strike a deal with congressional Democrats instead, there’s no resolution in sight. In turn, the House and Senate have prepared separate backup plans.

Boehner has proposed that Congress pass two short-term extensions of the federal debt limit — a strategy that President Barack Obama and congressional Democrats reject — paired with about $1.2 trillion in cuts to government agencies over the next 10 years, and nothing in tax revenues.

Senate Majority Leader Harry Reid’s approach involves raising the debt limit by $2.4 trillion while cutting the same amount from the budget over the next decade. Having apparently given up on increasing taxes for now, Reid also does not include revenues in his plan. President Obama has endorsed Reid’s proposal, despite his preferred “big deal” method of combining cuts to federal spending with increased revenue by closing tax loopholes for the wealthiest Americans and corporations.

But in a televised speech to the nation on Monday, Obama still made a last-ditch appeal for his mixed approach, weighing it against the Republicans’ cuts-only method. “Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask a corporate-jet owner or the oil companies to give up tax breaks that other companies don’t get,” he said. “How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?”

Meanwhile, as political negotiations continue to prove unsuccessful, Wall Street is bracing itself for the inevitable downgrade in U.S. credit. Is the nation really about to default, or does the White House have a trick up its sleeve? Here’s a look at the latest on contingency plans, political fallout and what’s potentially coming up this week.

1. At this stage in the game, a short-term extension of the debt limit isnt enough.

On top of cutting $1.2 trillion from the federal budget, Boehner’s plan involves raising the debt limit by $900 billion — enough to pay the bills just until the end of this year. A new congressional committee would then be tasked with finding at least an additional $1.6 trillion in savings in order to raise the debt limit again through 2012. But Obama and congressional Democrats argue that kicking the can a few feet down the road won’t do — and the bond market agrees.

“It doesn’t solve the problem that there is real political risk, and that political risk only intensifies as we move closer to the 2012 presidential election,” Andrew Fieldhouse, federal-budget-policy analyst for the Economic Policy Institute, told The Root. “Standard & Poor’s recently warned that there’s a 50-50 chance of a credit downgrade, and that raising the debt ceiling is insufficient without a 10-year deficit deal. Just because you set up a commission to do some larger deal doesn’t mean it’s going to pass.”