Debt Ceiling Chaos Overtakes Washington DC, Deadline Looms

Like Thelma and Louise, this will hurt

As of this morning, a sense of fear is becoming quite palpable in the nation’s capital.  A U.S. debt default,  previously viewed as unthinkable is now becoming, in the minds of Congress, a likely outcome.

You know all the facts by now.  We owe $14.2 trillion and will reach the ceiling mandated by Congress on August 2nd, a scant 6 days from now.  We have seen plan after plan surface, only to founder as one side or the other balks.

The $4 trillion grand bargain.  Abandoned.  The smaller $2.5 trillion plan. Tossed.  Mitch McConnell’s “leave-it-to-the-President” option.  Rejected. Negotiations between President Obama and House Speaker Boehner foundered and were abandoned amidst acrimony and finger-pointing.

The action then moved to Congress, where Boehner and Senate Majority Leader Harry Reid set about creating competing plans.

Reid’s plan seeks to cut the deficit by $2.7 trillion, but protect Social Security and Medicare and not raise taxes.

Criticism of the plan has come fast and hard from the Republican side, calling the savings ‘phantom”, depending as  it does on savings from eliminating waste and fraud and on winding down the Iraq and Afghanistan wars, without addressing major entitlement spending.

Boehner’s more complex plan calls for a two-stage process, cutting $1.2 trillion this year, then setting up a Congressional panel in January 2012 to decide an the next round of cuts.

The setback is that yesterday, the Speaker’s plan ran into two problems. First, the Congressional Budget Office said his plan would not yield $1.2 trillion in savings, only about $850 billion.  Second, he ran afoul of the Tea Party-led section of the Republican House members, who want deeper cuts yet.

As of this morning, Boehner lacks the Rupublican votes to pass his bill. In any case, he has to go back to the drawing board to redesign it.  He appears boxed in now, with Tea-Party Republicans hardening their battle lines against his plan.

So What Happens Now?

The first possibility is that Boehner presents a new plan, which may not pass muster, given the opposition by House Democrats and Tea Party Republican House members.

The second is that he reverts to the “Grand Bargain” that he walked away from with President Obama and depends on House Democrats to make it work.  However, his leadership prospects would be in jeopardy as the Tea Party Republicans (and media) will feel he betrayed them.

Third is that Reid’s plan passes the Senate and momentum builds around it in the House, where with a day or two to go, it may pass with Democrats and some Republican House members.

Failing this, we may see a Bill Clinton-supported option, otherwise known as the “nuclear option”. This is the much discussed 14th Amendment of the Constitution.

The relevant language, from Section 4 of the 14th Amendment, seems clear enough:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion shall not be questioned.”

This seems to provide some cover for the President to go it alone in raising the debt ceiling unilaterally, claiming that the public debt of the U.S. “shall not be questioned“.

Constitutional experts differ on whether this gives the President the right to ignore a Congressionally-mandated debt ceiling, but it would likely go to the Supreme Court, where the country could buy a little time while the issue is settled.

In any case, the President has publicly forsworn the use of the 14th Amendment, though it may be he does not want to jeopardize last-ditch negotiations or poison the atmosphere even more.  With a few minutes to go and no agreement, that might change.

One last-ditch option is that the White House could sign a short-term debt extension (by 10 days or so) and the whispers this may happen are getting louder. It’s clear that everyone needs more time.

And so, the wild ride continues. We’ll keep bringing you the latest updates.