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The Debt Ceiling: An unnecessary showdown
by L Asia Brown
Interim Photo Editor
This summer, for the first time in his term,
President Barack Obama was tasked with
raising the debt ceiling. The nation witnessed
a near political brawl over a usually laconic
process. A Republican-controlled House
refiised to cooperate with a Democrat-
controlled Senate; hence, the US was ahnost
brought to economic disaster as a deal was
approved by Congress at almost the very last
minute.
This type of government action was virtu
ally unfamiliar to the new generation. What
is the debt ceiling? Why does it need to be
raised? How does this affect me? All types
of questions were being asked as legislators
quarreled at the economy’s expense.
A Bit of History
The debt ceiling is the limit to which the
federal government may borrow money. In
the early 20* century, legislators would vote
on taking out loans each time it was neces
sary. To streamline the process; Congress
passed a measure, the Second Liberty Bond
Act of 1917 that would act as a general
borrowing limit. This limit would permit
the government to borrow, without votes, up
to the respective limit to which funds were
necessary. For example. Congress might ap
prove a debt limit of $2 trillion, although the
U.S. might only need to borrow $750 billion.
The U.S. is the only industrialized na-
photo courtesy ofwww.whitehouse.gov
tion with a debt ceiling. Other modernized
countries borrow funds as their leaders deem
necessary.
Wliy Borrow More?
In May, the federal government breached
the debt ceiling, meaning it had borrowed
the maximum authorized amount of $14.3
trillion.
To continue paying its bills, employees &
military salaries, entitlements to veterans and
seniors, and many more financial responsi
bilities the debt ceiling had to be raised by
August 2 to prevent what some analysts
said would be an economic mehdown. Had
a deal not been agreed upon, the government
would’ve been forced to operate on a cash-
only basis, using a cash reserve of about $74
billion to pay a select amount of obligations.
Raising the Debt Ceiling
Because the president is not able to use his
executive powers to sign bills that regulate
fvmds, it was up to Congress to formulate
and pass legislation detailing cuts and
revenues, similar to a personal budget plan,
to help get the government’s affairs back on
track.
In the end, a bill that did not include
new revenue sources was agreed upon by
Congress. Although the U.S. debt, in relation
to its economy, is the highest it’s been in 50
years, lack of compromise and organization
in Congress gave the president two choices:
reject the deal with the most support and risk
not raising the ceiling by the deadline, or
accept a deal that contained more Republi-
can-favored clauses and cuts and dodge a
possible economic tailspin. Obama signed
the bill to avoid an economic catastrophe.
The End-Result
The new legislation makes some of the
steepest cuts since President Eisenhower’s
leadership in the 1950s. Though cuts to fed
eral education are included in the estimated
$2 trillion slashed from spending, an ad
ditional $17 billion in funds were allocated
to the Pell Grant program for low-income
students. This does come at a sacrifice
for graduate students, who will no longer
receive the in-school subsidy on subsidized
loans, reported by eSchoolNews.com. They
will now have to pay the interest that ac
cumulates on their loans, even while they’re
still attending school.
The debt ceiling showdown was an ex
ample of the perils ideological governance
can cause. Having been raised several times
by most Congresses, the ceiling was never
a great controversial matter until Obama
sought to raise it. According to the White
House Office of Management and Budget,
only former President Truman did not raise
the debt limit.
In a short address to the nation prior to the
debt ceiling’s resolve, Obama outlined the
importance of raising the debt ceiling.
“Raising the debt ceiling does not allow
Congress to spend more money. It simply
gives our country the ability to pay the bills
that Congress has already racked up,” he
said. “In the past, raising the debt ceiling
was routine. Since the 1950s, Congress has
always passed it, and every president has
signed it. President Reagan did it 18 times.
George W. Bush did it seven times. And we
have to do it by next Tuesday, August 2nd,
or else we won’t be able to pay all of our
bills.”
Part of the reason behind the bicker that
lasted for weeks was the inclusion of a rev
enue source in the bill. While most Demo
crats in the Senate and House advocated for
ending Bush-era tax breaks, rookie House
Republicans, in their loyalty to the Tea-Party,
opposed all stipulations to raise taxes. Their
claim was that higher taxes would stifle
corporations’ ability to create jobs for the
American public.
The U.S.’s credit rating: Why did S&P lose faith?
by LAsia Brown
Interim Photo Editor
Dissatisfied with Congress’s lat
est debt ceiling deal and constant
posturing, several agencies includ
ing Standard & Poor’s have down
graded the US credit rating.
For the first time in history on
August 5 S&P lowered the na
tion’s long-term sovereign rating to
“AA+” from “AAA.” A shorterm
rating of “A-1+” was also affirmed
with S&P
These actions have affected
global markets. Within hours of the
news, Asian, European and U.S.
markets began plummeting. Stocks
lost the most value within days,
since some of the worst occurences
during 2008’s economic disaster.
Before it happened, many Amer
icans didn’t even know the U.S.
government had a credit rating or
any record of financial account
ability. How does the U.S. gov
ernment’s credit enable or prohibit
it from doing both domestic and
international business? Will the
downgrade affect individual credit
scores, assets, investments or debt?
There are many credit rating
agencies around the world, in most
sovereign nations. Out of the hun
dreds that exist, only 10 are Nation
ally Recognized Statistical Rating
Organizations (NRSROs). Those
ten are acknowledged by the U.S.
Securities and Exchange Commis
sion as being credible and qualified
enough to provide their “opinions
on the creditworthiness of an en
tity and the financial obligations
(such as, bonds, preferred stock,
and commercial paper) issued by
an entity.”
These firms are; A&M Best
Company, Inc., DBRS Ltd., Egan-
Jones Rating Company, Fitch, Inc.,
Japan Credit Rating Agency, Ltd.,
Kroll Bond Rating Agency, Ltd.,
Moody’s Investors Service, Inc.,
Rating and Investment Information,
Inc., Realpoint LLC, and Standard
& Poor’s Rating Services. Out of
the 10, only Egan-Jones and S&P
have lowered the government’s
credit, with Weiss Ratings being
the first U.S. based non-NRSRO to
dovragrade the nation’s score.
Fitch, Moody, and S&P are
amongst the most popular.
According to a statement re
leased by S&P, the downgrade hap
pened because of two main factors:
discontent with the debt ceiling deal
and distrust of the current American
political system and ability to effec
tively govern in terms of economic
policy.
“The fiscal consolidation plan
that Congress and the Administra
tion recently agreed to falls short of
what, in our view, would be neces
sary to stabilize the government’s
mediiun-term debt dynamics,” said
S&P’s report. “More broadly, the
downgrade reflects our view that
the effectiveness, stability, and pre
dictability of American policymak
ing and political institutions have
weakened at a time of ongoing
fiscal and economic challenges to
a degree more than we envisioned
when we assigned a negative out
look to the rating on April 18,
2011.”
The lowering of the US’s credit
rating does not directly affect per
sonal credit ratings. A person whose
credit score was 710 before the na
tion’s downgrade, won’t see a drop
in their score. According ta some
analysts, the downgraded credit rat
ing will have little to no longterm
effects.
An August 8 Huffington Post sto
ry suggested that if trends similar to
what happened when Japan’s credit
rating was lowered in 2000 come
to fhiition, the U.S. could possibly
benefit. Securities and bonds will
see little to no damage on interest
rates, the article suggests.
“Even with a downgrade, I think
the market would assume the safest
asset you could buy in a portfolio
was still Treasuries,” said Rick Rie-
der, the chief investment officer at
New York-based BlackRock Inc.
Domestic and international mar
kets operate within suspicions, not
actual credit ratings. Forbes’ Tim
Worstall commented, “The move
in the rating is simply confirming
what the market already believes.”
With exception to stocks’ nose-dive
immediately hearing news of S&P’s
downgrade, the market’s behavior
reflected the economic cynicism
long before Egan-Jones and S&P
acted.
All in all, economists believe
there is little reason to worry. Cred
it ratings of other nations, including
Japan and Austrailia, have caused
little casualty to their domestic
economies.