Will it take market crash for Congress to raise debt limit?

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What might it take to get President Joe Biden and Congress to reach a deal on raising the debt limit? According to several economists and a former White House official, the financial markets might need to crash before lawmakers are forced to act.

Speaker of the House Kevin McCarthy, R-Calif., holds a ceremony to nullify the D.C. crime bill, at the Capitol in Washington, March 10, 2023. Republicans and Democrats have been dancing around each other about the need to raise the government's legal borrowing authority. President Joe Biden tried to edge closer on Thursday, March 9, by releasing his budget plan that cuts deficits by $2.

Republicans and Democrats have been dancing around each other about the need to raise the government’s legal borrowing authority. Biden tried to edge closer on Thursday by releasing his budget plan that cuts deficits by $2.9 trillion over 10 years, an offer that House Speaker Kevin McCarthy, R-Calif, quickly dismissed as woefully insufficient. Republicans in the House Freedom Caucus on Friday proposed their own demands, which the White House quickly rejected.

McCarthy has promised to put together his own budget plan, but he has little urgency for striking any kind of deal so long as the stock market stays relatively calm. He has said he wants an agreement to put the government on a path toward a balanced budget. But he has also ruled out tax increases or cuts to Social Security and Medicare, which would force deep and controversial reductions in federal spending that could divide House Republicans.

There is a widening recognition that a massive sell-off tied to debt limit tensions would provide instant clarity and snap everyone out of their ideological stagnancy. No one is rooting for the markets to sink, but as Republican lawmakers weigh the possibility of prioritizing repayments to debt holders — a risky short-term fix — there is a sense that markets need to jolt Congress into action.

“They have to be able to say, ‘Look, I am reluctantly agreeing to pay for spending we’ve already authorized because I’m saving the 401’s of hardworking families all across the country,’” Singh said. “I think that complacency is itself a big problem.”During the 2008 financial crisis, the House rejected a $700 billion bailout package on Sept. 29, leading the Dow Jones industrial average to plunge almost 7% in a single day.

 

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