The US debt ceiling crisis that ended with a whimper

John Boehner, speaker of the House of Representatives John Boehner - a dose of realpolitik or "giving in"?

Related Stories

The US Congress has agreed to raise the debt ceiling until March 2015, averting another crisis that almost four months ago threatened to trigger a default on US debt and plunge the global financial markets into chaos.

Raising the debt ceiling is the only way the US government can raise more money to pay off its debts. Without agreement, it runs the risk of default.

The issue has been an on-again-off-again headache for almost three years. But this time, it never really had the look of the honest-to-goodness end-of-capitalism crisis that came to a head last October.

Back then, just a couple of weeks short of defaulting on its debt, with the markets in crisis alert and the government in shutdown, Congress finally agreed to a temporary solution delaying the problem until this month.

Rather than the bang that some were expecting, it has now vanished with little more than a whimper.

This crisis had none of that drama: much of the fire has gone out of the Republican fight to keep the debt ceiling where it is.

Instead, mid-term elections in November have become their focus, and reluctantly they allowed the ceiling to be raised until March 2015.

The problem was that the "habit of governing by crisis" as President Barack Obama called it, was hurting the Republicans more than the Democrats. House Speaker John Boehner had tried to attach conditions to the bill, but simply couldn't get agreement from his party.

Drawing a line

Start Quote

By 2015 there may well be a real recovery taking place, which will help the economy fiscally”

End Quote Madhur Jha Senior global economist, Standard Chartered

Instead, accepting the realpolitik of an election year, he agreed to vote with 27 other Republicans for a "clean bill", no strings attached, to let the bill through.

He's been pilloried by right-wing groups of the GOP, most specifically the Tea Party, for "giving up".

But a lot of people breathed a sigh of relief, not least Mr Boehner himself, who, according to Reuters, was seen strolling from a news conference afterwards singing "Zip-a-Dee-Doo-Dah".

Now that a political line has been drawn under the debt ceiling debate, there is the question of where it leaves the economy. Republicans would argue that it leaves it with an ever-escalating debt.

But it has restored some faith among investors.

The deal in the House of Representatives came after the US markets had closed, but Asian and European equities rose - though they were also reacting to strong economic numbers out of China and optimistic comments from the new head of the Federal Reserve, Janet Yellen.

Madhur Jha, senior global economist at Standard Chartered, said: "The problem of the debt ceiling will of course keep coming back, but the economy has a year in which to recover, and by 2015 there may well be a real recovery taking place, which will help the economy fiscally."

Protests against the sequestration cuts in 2013 Gain on the deficit, pain on the streets - last year's sequestration protests
Dangerous debts

Even with the start of the painful and unpopular sequestration last year, which is aiming to knock $1.1tn off the budget over the next eight years by forcibly cutting billions off spending each year, debt levels are only really going to come down as the economy grows.

Madhur Jha says: "Debt is not a problem if your economy is growing. There is a lot of debate as to what the proper level of debt should be for a developed economy, say 70%.

Start Quote

The system is unable to distinguish between debt investment, long-term debt for the building of infrastructure... and short-term 'household' debt”

End Quote Justin Urquhart Stewart Seven Investment Management

"The economists Carmen Reinhart and Kenneth Rogoff wrote a paper saying historically, growth has not suffered significantly until debts reached 90% of a nation's GDP. But it's still not clear. However, once you get over 100%, it really does begin to have structural effects on the economy."

However, Justin Urquhart Stewart, co-founder of Seven Investment Management, believes the US could be at a turning point. He says that there are signs that the annual budget deficit is coming under control.

He says: "If they can get it down to around 2% of GDP, then they will be able to hold the overall debt levels steady, and who knows, even reduce it. The sequestration helped last year on the spending side, but it is really the growth that is doing the work."

If that happens, there may not need to be another raising of the debt ceiling - a distant, if not forlorn hope. But there is a growing belief that the debt ceiling process is itself doing little to help the economy.

Faith in US economic governance has taken a real battering over the last three years, as the debt ceiling issue has been a circus for political fights between Republicans and Democrats.

Meanwhile, the rest of the world has looked on, knowing that if no deal was done and the US defaulted, the result would be, in the words of the US Treasury, "catastrophic economic consequences".

Who needs a debt ceiling?

So why not just do away with the whole political palaver? There are few other countries in the world where total debt is monitored in such a single-minded way.

Proponents of the process say it keeps Congress accountable. Opponents say it dates from a period when the President had far more influence in spending, and that a responsible Congress should be able to control spending as and when it was needed.

Mr Urquhart Stewart says: "The system is unable to distinguish between debt investment, long-term debt for the building of infrastructure, like power networks and bridges, and short-term 'household' debt.

"Each should be judged on its own merits and the debt ceiling process doesn't do that."

More on This Story

Related Stories

More Business stories

RSS

Business Live

  1.  
    11:24: PwC probe

    The Financial Reporting Council isn't just investigating PwC over its involvement in Tesco. It also says today it will look at the accountant's work with Barclays following the bank's fine of £38m for putting £16.5bn of client assets at risk.

     
  2.  
    Cranking up Lada Via Email Theo Leggett Business reporter, BBC News

    "The Kremlin may be seeking to restore Russian pride in Lada - but it's relying on foreign investment to do it. The brand's parent, Avtovaz, is majority owned by the Renault-Nissan alliance - so these days its Russian identity has distinctly Franco-Japanese overtones. Oh, and last week, Renault-Nissan CEO Carlos Ghosn said the falling rouble was causing a "bloodbath" in the Russian car industry."

     
  3.  
    10:56: Tesco inquiry Kamal Ahmed BBC Business editor

    "The fact that the inquiry will investigate three years of accounts will concern investors as it could reveal further evidence that the problems go back further than initially thought. The FRC's arsenal if any wrong-doing is found is formidable. It can impose unlimited fines on PwC, it can demand unlimited costs and it can strike off any individual found to have behaved improperly."

     
  4.  
    10:46: Banking's reputation

    The Bank of England has urged banks to go further than "stress testing" to regain their customers' confidence. This from the latest Financial Policy Committee minutes: "Committee members also noted that recent misconduct and other operational failings had highlighted that rebuilding confidence in the banking system would require more than financial resilience... The Committee judged that strong, effective and well-informed management and governance arrangements would be essential to rebuild confidence in the banking system."

     
  5.  
    Via Twitter James Cook Scotland Correspondent, BBC News

    "Shoppers rescued from flooded Asda in Kilmarnock"

    East Ayrshire Police
     
  6.  
    10:20: Tesco inquiry

    Our business editor points out that the Financial Reporting Council only has power over its members - i.e. auditors, which in Tesco's case were PwC. However, the FRC can ask Tesco to assist in the investigation.

     
  7.  
    Via Twitter Kamal Ahmed BBC Business editor

    "FRC's inquiry will include PWC's auditing of Tesco's accounts as well as the preparation of those accounts"

     
  8.  
    Breaking News
  9.  
    09:55: Scotland's budget
    North Sea Oil

    The lead in the Financial Times is a suggestion that Scotland may have been saved from a crisis in its public finances by voting "no" in the referendum on independence. It says projections by the Office for Budget Responsibility suggest that had Scotland voted "yes", the falling oil prices would have led to its North Sea oil revenues slumping to just one-fifth of Holyrood's preferred forecasts in the country's first year of independence.

     
  10.  
    09:40: Snow-plough parents
    Skiing

    The Times highlights what it says is a new trend for well-heeled British parents: hiring private tutors to accompany them on family skiing trips. This apparently allows teenagers to cram for forthcoming exams, while still enjoying some action on the piste. The paper says it brings fresh meaning to the term "snow-plough parents" - those over-protective parents, bent on removing every obstacle in their offspring's path.

     
  11.  
    09:25: Spanish tax
    Cristina

    A judge in Spain has ordered that Princess Cristina de Borbon, the sister of the Spanish King, be tried on charges of tax fraud. It will be the first time a member of the Spanish royal family appears in the dock.

     
  12.  
    09:10: Facebook friends Russia
    Navalny

    On its front page, The Independent reports that Facebook has been accused of giving in to censorship after it apparently blocked access to a protest page on its site - under pressure from the Kremlin. A former US ambassador to Russia describes it as a "horrible precedent". According to The Daily Telegraph, Facebook has declined to comment on the suggestion that it stopped Russian users from viewing a page, rallying support for one of President Putin's most prominent opponents.

     
  13.  
    08:55: UK jobs Radio 5 live

    The employers' organisation, the CBI, says its latest survey suggests that half of its members plan to take on more staff next year. "Skills are at a premium in lots of areas," says CBI's director for employment and skills, Neil Carberry. "In fact one of the things we found in this year's survey is the biggest worry now for companies in their broadly rosy picture is whether they can get the skills they need to keep growing."

     
  14.  
    08:45: Markets update

    The main European markets are all looking rather chirpy this morning. Gains for oil firms, including Tullow Oil, Royal Dutch Shell and BP are driving the FTSE up 1% to 6,608. That's partly because Brent Crude has risen by 2% to $62.24 a barrel. In Germany, the Dax is up 0.9% to 9872, while in France, the Cac-40 is up 1.2% to 4293.

     
  15.  
    Cranking up Lada 08:28: Via Email Tony Higgins Lada owner

    "We had a Lada Niva. We bought it when we moved to a Lancashire hill farm in 1993. It was great. The early years were bad winters but the Lada coped very well. It was like a crab both on and off road, permanent 4WD. No power steering so hard work."

     
  16.  
    08:12: Pull over, Uber
    Xiaomi

    Uber may have been valued at $40bn, but one Chinese tech firm could now be worth an estimated $45bn, despite being relatively unknown outside Asia. The WSJ reports that smartphone and tablet maker Xiaomi, whose polished branding and devoted fan base is reminiscent of Apple's, has overtaken Samsung in China, but faces several challenges in expanding into India and beyond.

     
  17.  
    07:54: Cranking up Lada

    So, on to some of those Lada jokes. What do you call a Lada with a sun roof? A skip. What do you call a Lada with a sunroof and twin exhausts? A wheelbarrow. Etc. Send us your favourite Lada jokes: bizlivepage@bbc.co.uk and we will publish the best. Or if you've driven a Lada, and think they get a bad rap, let us know.

     
  18.  
    07:49: Cranking up Lada
    Lada

    The New York Times reports that the Kremlin is seeking to revive Russia's last major Soviet brand - the carmaker Lada. It has recruited Swedish-American Bo Inge Andersson, previously a vice president at General Motors. Lada, historically the butt of many jokes, still accounts for a third of all cars in Russia, and as foreign companies like Audi and Jaguar Land Rover suspend sales in the country due to the plummeting rouble, the utilitarian company could return to strength.

     
  19.  
    07:35: B&Q China
    bnq

    Kingfisher says it will flog its controlling 70% stake in B&Q China to Wumei Holdings for £140m. It opened its first B&Q in the country in 1999.

     
  20.  
    07:25: Oil blessing?

    The Guardian's leader takes a contrarian stance on falling oil prices, which have been widely welcomed by Western consumers. "Oil has dipped 40%, pessimists fear, because the world no longer expects a return to economic full pelt," it argues. "Europe, Japan and - relative to its own vigorous standards - China, have all been looking anaemic this year. Like low blood pressure after a heart attack, then, cheap oil should arguably be regarded not as a sign of rude health, but rather as a consequence of malaise."

     
  21.  
    07:12: Budget Samsung
    Samsung

    $100 for a Samsung smartphone? CNBC reports the South Korean company is entering the increasingly competitive budget handset market, in a bid to sell more phones in India, where many people still use simple phones. The new handset will run Samsung's own Tizen software.

     
  22.  
    06:58: Rates Radio 5 live

    The Bank of England's Martin Weale adds that he is optimistic about the year ahead. More money to spend from cheaper oil will help. He's on the committee that helps decide the key interest rate. Will it rise this year? He's careful not to second-guess his colleagues on that one.

     
  23.  
    06:46: Santa rally? Radio 5 live
    santa

    Will there be a so-called Santa rally this year? A rise in markets in the days around Christmas? Brenda Kelly from IG says you see one in almost nine out of every 10 years since the '80s.

     
  24.  
    06:28: Rates Radio 5 live

    The Bank of England's Martin Weale has been telling Wake Up to Money why he's been voting for interest rates to move off the record low of 0.5%. "It isn't only that unemployment has been falling - at least until recently extremely rapidly. It's also that when I go and visit businesses throughout the country I find they're talking of pay increases in a way quite different from what I was hearing early in the year certainly this time last year."

     
  25.  
    06:16: Markets Radio 5 live

    Brenda Kelly from IG is Wake Up to Money's markets guest. They are talking about the falling oil prices. "A lot of it is down to a glut of supply and Saudi Arabia wants to keep market share," she says. Saudi's breakeven price is only a few dollars per barrel.

     
  26.  
    06:10: Christmas spending Radio 5 live

    Mark Barnett, UK & Ireland president of Mastercard, is on Wake Up to Money, talking about Christmas shopping habits. What else? People have returned to luxury goods, he said. Holidays and furniture are down a little bit though.

     
  27.  
    06:04: Hacking 2.0
    Kim Jong

    The global cyberwar that dominated headlines last week shows no signs of abating. Hackers have infiltrated South Korea's nuclear power provider, and posted schematics of nuclear reactors and private personal records online. It's not clear whether the same group that attacked Sony Pictures is responsible.

     
  28.  
    06:00: Howard Mustoe Business reporter

    Morning! Get in touch. Tell us what you think. Email bizlivepage@bbc.co.uk or on Twitter @BBCBusiness

     
  29.  
    06:00: Joe Miller Business Reporter

    Good morning, and festive greetings all round. In a week when the business world is winding down for Christmas, we'll bring you all the news that's sneaking in the back door, and much more besides.

     

Features

From BBC Capital

Programmes

  • (File photo) A man dressed as Father Christmas with a sleigh and a reindeer Click Watch

    A website which tracks Father Christmas, plus other sites and apps to keep you entertained

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.