GOP investigation: Treasury misled Congress, public about the debt limit

By Peter Schroeder - 02/01/16 10:31 AM EST

The Obama administration considered prioritizing debt payments if the nation hit its borrowing cap, despite public assurances from the Treasury Department that such a plan would be unworkable, according to a congressional probe.

The Republican leadership of the House Financial Services Committee charged Monday that Treasury Secretary Jack Lew and other department officials misled the public when it came to the risks of the debt ceiling.

Citing subpoenaed documents, the lawmakers found that Treasury consulted with Federal Reserve officials about prioritizing payments and deliberately worked to keep lawmakers in the dark.One internal email from the Federal Reserve Bank of New York showed that “Treasury wants to maximize pressure on Congress by limiting communications about contingency planning.”

The probe found that Treasury and Fed officials had gone through “tabletop” scenarios in an effort to come up with a payment plan if the nation was no longer able to borrow funds.

“These internal documents show the Obama Administration took the nation’s creditworthiness and economy hostage in a cynical attempt to create a crisis so the President could get what he wanted during negotiations over the debt ceiling,” said House Financial Services Chairman Jeb Hensarling (R-Texas).

“The Administration owes it to the American people to be honest and transparent about its debt ceiling contingency plans.”

Treasury downplayed the GOP's findings and reiterated that any contingency plan could still carry serious consequences.
“As the Treasury Department has explained on numerous occasions … Treasury has been forced to consider a range of options with respect to how it would operate in the unthinkable event that Congress fails to raise the debt limit,” said a department spokesperson. “While Treasury has viewed the option of delaying payments as the least harmful option in this catastrophic scenario, make no mistake — this would still be default.”

The report is the latest development in a long-running feud between congressional Republicans and the White House over the debt ceiling.

The two sides have sparred for years over what bills the government would be able to pay if the debt limit were reached. The administration has consistently cast raising the debt limit as non-negotiable and said any delay could damage the economy.

But Republicans charge the government could ensure that the most critical payments are made even if the debt limit is reached.

The GOP report found that there was some concern at the New York Fed about the Treasury’s reticence to discuss alternatives to a debt-ceiling increase.

One New York Fed employee described Treasury’s approach to a fellow employee as “crazy, counter-productive, and add[ing] risk to an already risky situation.”

In 2011 and 2013, the White House faced off against congressional Republicans eager to use the borrowing cap to extract fiscal concessions from the president.

The prospect of the U.S. government not paying its debt was frightening enough to roil markets, and the administration consistently insisted that without a prompt increase to the borrowing cap, the nation was in danger of a catastrophic default.
The administration eventually refused to negotiate on the borrowing cap at all, calling the matter too serious.

In turn, Republicans repeatedly floated prioritization plans, arguing that the government brings in enough revenue to keep up with critical payments like interest on government debt and Social Security.

The Treasury has acknowledged it would be able to make principal and interest payments on government debt but said such an outcome would still be undesireable. And the notion of getting even more specific and singling out Social Security payments would be out of the question, given the massive amount of payments processed each day.

"Attempting to manually prioritize among more than 80 million payments made by the federal government each month — to troops, veterans, Social Security recipients, Medicare recipients, vendors, etc. — would be uncharted territory that’s fraught with risk," wrote the Treasury in an October blog post.

Any contingency plan has never been put to the test, as policymakers have reached an agreement in time to avoid a potential default every time the government neared its borrowing limit.

But findings that the government may have some wiggle room to minimize debt limit damage could play into future talks, as lawmakers looking to extract concessions could feel less pressure to act.

The two-year budget deal passed by Congress last year suspends the debt limit until March 2017. At that point, the cap will be raised to cover all government borrowing done in the meantime.

The House Financial Services Committee began its debt limit probe in 2013, and eventually issued a subpoena for documents in May 2015.

The panel’s investigations subcommittee is holding a hearing on the matter Tuesday.