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    How Washington Decided to Rescue Silicon Valley Bank

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    Officials were initially unsure about the need for the measures they eventually announced to shore up the financial system, but changed their minds quickly.WASHINGTON — On Friday afternoon, the deputy Treasury secretary, Wally Adeyemo, met with Jamie Dimon, the chief executive of JPMorgan Chase & Company, at Mr. Dimon’s office in New York.The Biden administration and the Federal Reserve were considering what would be the most aggressive emergency intervention in the banking system since the 2008 financial crisis, and the question the two men debated was at the heart of that decision.Could the failure of Silicon Valley Bank, the mega start-up lender that had just collapsed, spread to other banks and create a systemic risk to the financial system?“There’s potential,” Mr. Dimon said, according to people familiar with the conversation.Mr. Adeyemo was one of many administration officials who entered last weekend unsure of whether the federal government needed to explicitly rescue Silicon Valley Bank’s depositors before markets opened on Monday morning.In the White House and the Treasury, some officials initially saw the bank’s swift plunge to insolvency as unlikely to spark an economic crisis — particularly if the government could facilitate a sale of the bank to another financial institution.They quickly changed their minds after signs of nascent bank runs across the country — and direct appeals from small businesses and lawmakers from both parties — convinced them the bank’s problems could imperil the entire financial system, not just rich investors in Silicon Valley.On Friday morning, aides met with President Biden in the Oval Office, where they warned that the panic engulfing Silicon Valley Bank could spread to other financial institutions, according to a White House official. Mr. Biden told them to keep him updated on developments.By Friday afternoon, before financial markets had even closed, the Federal Deposit Insurance Corporation had stepped in and shut down the bank.Still, the kind of rescue that the United States ultimately engineered would not materialize publicly until Sunday, after intense deliberations across the government.This account is based on interviews with current and former officials in the White House, Treasury and the Fed; financial services executives; members of Congress; and others. All were involved or close to the discussions that dominated Washington over a frenzied process that began Thursday evening and ended 72 hours later with an extraordinary announcement timed to beat the opening of financial markets in Asia.The episode was a test for the president — who risked criticism from the left and the right by greenlighting what critics called a bailout for banks. It also confronted Treasury Secretary Janet L. Yellen with the prospect of a banking crisis at a moment when she had become more optimistic that a recession could be avoided. And it was the starkest demonstration to date of the impact that the Fed’s aggressive interest rate increases were having on the economy.Wally Adeyemo, deputy Treasury secretary, was initially unsure whether the government would need to intervene to rescue Silicon Valley Bank’s depositors. Andrew Harnik/Associated PressSilicon Valley Bank failed because it had put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds that promised modest, steady returns when interest rates were low. As inflation jumped and the Fed lifted interest rates from near zero to above 4.5 percent to fight it over the last year, the value of those assets eroded. The bank essentially ran out of money to make good on what it owed to its depositors.By Thursday, concern was growing at the Federal Reserve. The bank had turned to the Fed to borrow money through the central bank’s “discount window” that day, but it soon became clear that was not going to be enough to forestall a collapse.Officials including Jerome H. Powell, chairman of the Fed, and Michael S. Barr, its vice chair for supervision, worked through Thursday night and into Friday morning to try to find a solution to the bank’s unraveling. By Friday, Fed officials feared the bank’s failure could pose sweeping risks to the financial system.Compounding the worry: The prospects of arranging a quick sale to another bank in order to keep depositors whole dimmed through the weekend. A range of firms nibbled around the idea of purchasing it — including some of the largest and most systemically important.One large regional bank, PNC, tiptoed toward making an acceptable offer. But that deal fell through as the bank scrambled to scrub Silicon Valley Bank’s books and failed to get enough assurances from the government that it would be protected from risks, according to a person briefed on the matter.A dramatic government intervention seemed unlikely on Thursday evening, when Peter Orszag, former President Barack Obama’s first budget director and now chief executive of financial advisory at the bank Lazard, hosted a previously scheduled dinner at the bank’s offices in New York City’s Rockefeller Center..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.Among those in attendance were Mr. Adeyemo and a pair of influential senators: Michael D. Crapo, Republican of Idaho, and Mark Warner, Democrat of Virginia. Both were sponsors of a 2018 law that rolled back regulation on smaller banks that critics now say left Silicon Valley Bank vulnerable.Blair Effron, a large Democratic donor who had just been hired by Silicon Valley Bank to advise it on its liquidity crunch, was also there. Earlier that day, the bank had attempted to raise money to stave off collapse with the help of Goldman Sachs — an effort that, by Thursday evening, had clearly failed.The Federal Reserve ultimately opened a lending program to help keep money flowing through the banking system.Al Drago for The New York TimesMr. Effron and Mr. Adeyemo spoke as it became evident that Silicon Valley Bank was running out of options and that a sale — or some bigger intervention — might be necessary. Jeffrey Zients, Mr. Biden’s new chief of staff, and Lael Brainard, the new director of his National Economic Council, were also being pelted by warnings about the bank’s threat to the economy. As Silicon Valley Bank’s depositors raced to withdraw their money on Thursday, sending its stock into free fall, both Ms. Brainard and Mr. Zients began receiving a flurry of calls and texts from worried leaders in the start-up community that the bank heavily served.Ms. Brainard, who had experienced financial crises in other countries while serving in Mr. Obama’s Treasury Department and as a Federal Reserve Board member, had begun to worry about a new crisis emanating from SVB’s failure. She and Mr. Zients raised that possibility with Mr. Biden when they briefed him in the Oval Office on Friday morning.Other officials across the administration were more skeptical, worrying that the lobbying blitz Ms. Brainard and others were receiving was purely a sign of wealthy investors trying to force the government to backstop their losses. And there were concerns that any kind of government action could be seen as bailing out a bank that had mismanaged its risk, potentially encouraging risky behavior by other banks in the future.Ms. Brainard started fielding anxious calls again on Saturday morning and did not stop until late in the evening. She and Mr. Zients briefed Mr. Biden that afternoon — virtually this time, because the president was spending the weekend in his home state of Delaware.Mr. Biden also spoke Saturday with Gov. Gavin Newsom of California, who was pushing aggressively for government intervention in fear that a wide range of companies in his state would otherwise not be able to pay employees or other operational costs on Monday morning.Concerns mounted that day as regulators reviewed data that showed deposit outflows increasing at regional banks nationwide — a likely sign of systemic risk. They began pursuing two possible sets of policy actions, ideally a buyer for the bank. Without that option, they would need to seek a “systemic risk exception” to allow the F.D.I.C. to insure all of the bank’s deposits. To calm jittery investors, they surmised that a Fed lending facility would also be needed to buttress regional banks more broadly.“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them,” President Biden said on Monday.Doug Mills/The New York TimesMs. Yellen on Saturday convened top officials — Mr. Powell, Mr. Barr and Martin J. Gruenberg, the chairman of the F.D.I.C.’s board of directors — to figure out what to do. The Treasury secretary was fielding back-to-back calls on Zoom from officials and executives and at one point described what she was hearing about the banking sector as hair-raising.F.D.I.C. officials initially conveyed reservations about their authority to back deposits that were not insured, raising concerns among those who were briefed by the F.D.I.C. that a rescue could come too late.By Saturday night, anxiety that the Biden administration was dragging its feet was bubbling over among California lawmakers.At the glitzy Gridiron Club Dinner in Washington, Representative Ro Khanna, a California Democrat, cornered Steve Ricchetti, a top White House aide and close adviser to the president, and urged Mr. Biden and his team to be decisive. He warned that many of Mr. Biden’s major achievements would be washed away if the banking system melted down.“I said, Steve, this is a massive issue not just for Silicon Valley, but for regional banks around America,” Mr. Khanna said, adding that Mr. Ricchetti replied: “I get it.”Privately, it was becoming clear to Mr. Biden’s economic team that banking customers were getting spooked. On Saturday evening, officials from the Treasury, the White House and the Fed tentatively agreed to two bold moves they finalized and announced late on Sunday afternoon: The government would ensure that all depositors would be repaid in full, and the Fed would offer a program providing attractive loans to other financial institutions in hopes of avoid a cascading series of bank failures.But administration officials wanted to ensure the rescue had limits. The focus, according to a person familiar with the conversation, was ensuring that businesses around the country would be able to pay their employees on Monday and that no taxpayer money would be used by tapping the F.D.I.C.’s Deposit Insurance Fund.It was a priority that the rescue not be viewed as a bailout, which had become a toxic word in the wake of the 2008 financial crisis. The depositors would be protected, but the bank’s management and its investors would not.By Sunday morning, regulators were putting the finishing touches on the rescue package and preparing to brief Congress. Ms. Yellen, in consultation with the president, approved the “systemic risk exception” that would protect all of the bank’s deposits. The bipartisan members of the Federal Reserve and the F.D.I.C. voted unanimously to approve the decision.That evening, they announced a plan to make sure all depositors at Silicon Valley Bank and another large failed financial institution, Signature Bank, were repaid in full. The Fed also said it would offer banks loans against their Treasury and many other asset holdings, whose values had eroded.“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them,” Mr. Biden said during brief remarks at the White House.By Tuesday afternoon the intervention was showing signs of working. Regional bank stocks, which had fallen on Monday, had partially rebounded. The outflow of deposits from regional banks had slowed. And banks were pledging collateral at the Fed’s new loan program, which would put them in a position to use it if they decided that doing so was necessary.The financial system appeared to have stabilized, at least for the moment. More

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    War in Ukraine Deepens Divide Among Major Economies at G20 Gathering

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    Treasury Secretary Janet L. Yellen urged her counterparts at a summit in India to condemn Russia’s actions, and she defended the cost of supplying aid to Kyiv.A year after Russia’s invasion of Ukraine, the war is deepening the division among the world’s major economies, threatening fragile recoveries by disrupting food and energy supply chains and distracting from plans to combat poverty and restructure debt in poor countries.Those fissures were evident this past week as top economic policymakers from the Group of 20 nations gathered for two days at a resort in Bengaluru, a city in southern India, where efforts to demonstrate unity were overshadowed by flaring tensions over Russia. During the summit, Western nations imposed a barrage of new sanctions on Moscow and unveiled more economic support for Ukraine, while developing countries like India, which have been reaping the benefits of cheap Russian oil, resisted expressing criticism.The differing views left officials struggling to cobble together the traditional joint statement, or communiqué, on Saturday, forcing senior representatives from the Group of 7 nations, the world’s most advanced economies, to try to convince reluctant counterparts that defending Ukraine was worth the cost.“Ukraine is fighting not only for their country, but for the preservation of democracy and peaceful conditions in Europe,” Treasury Secretary Janet L. Yellen said on Saturday in an interview, explaining the case that she had made to the more reluctant countries. “It’s an assault on democracy and on territorial integrity that should concern all of us,” she added.The summit took place at a pivotal moment for the global economy. The International Monetary Fund last month upgraded its global output projections but warned that Russia’s war in Ukraine continued to cast a cloud of uncertainty. The fund also noted that increasing “fragmentation” in the world could be a drag on growth in the future.Ms. Yellen was among the most forceful critics of Russia during the two-day meeting. At one point, she directly confronted senior Russian officials in a private session and called them “complicit” in the Kremlin’s atrocities.The grappling over how to characterize Russia’s actions led Bruno Le Maire, the French finance minister, to publicly vent his frustration with some countries that would not assail Russia in writing. He noted that when the leaders of the Group of 20 nations met in November, in Bali, Indonesia, their statement had asserted that most members strongly condemned the war, and he said on Friday that he was opposed to watering down that sentiment.“I want to make it very clear that we will oppose any step back from the statement of the leaders in Bali on this question of the war in Ukraine,” Mr. Le Maire, who declined to name the holdouts, said at a news conference. “We strongly condemn this illegal and brutal attack against Ukraine.”India’s close economic ties with Russia have made its role as the host of the Group of 20 this year especially challenging. Moscow is a major supplier of energy and military equipment to India, while the United States is India’s largest trading partner.To remain neutral, India has tried to avoid describing the conflict as a “war” and instead focused on other issues. In an opening address to the summit, Prime Minister Narendra Modi laid out the threats facing the global economy, but he made no mention of Russia, pointing instead to “rising geopolitical tensions in many parts of the world.”Some of the resistance to condemning Russia is because of concern about the United States’ use of its economic might to isolate a member of the Group of 20.“The fact that the U.S. clearly has so much power to take action against a geopolitical rival is a significant concern,” said Eswar Prasad, a trade policy professor at Cornell University who speaks to both American and Indian officials. “There’s clearly been a splintering of the G20.”Mr. Prasad added that the aggressive use of sanctions by the United States had raised anxiety among other nations — even if they disagreed with Russia’s actions — that they could someday be exposed to Washington’s wrath.That use of economic warfare was on display on Friday, when the United States imposed sanctions on more than 200 individuals and entities in Russia and other countries that are helping to financially support Moscow’s invasion of Ukraine. Sanctions were also placed on Russia’s metals and mining sector and on energy companies.The war in Ukraine was not the only matter this past week that consumed finance ministers in India.The United States and Europe continued to hash out differences over American subsidies for electric vehicles that European countries believe will harm their economies. A global tax agreement that was struck in 2021 continues to flounder, raising the prospect that it could unravel. And talks over restructuring debt burdens facing poor countries to avoid a cascade of defaults failed to bear fruit, largely because of resistance from China.“There hasn’t been a significant change that I see,” said Ms. Yellen, who expressed frustration at China’s role as a roadblock this past week.But it is the war in Ukraine that has left the world’s economic leaders most divided. In many cases, resistance to supporting Ukraine and confronting Russia is the result of complicated domestic politics in many countries, and the United States is no exception.A growing number of Republicans, including former President Donald J. Trump, have been arguing in recent weeks that the United States cannot afford to endlessly support Kyiv. They contend that at a time when the United States is burdened by record levels of debt and a weakening economy, that money would be better spent on domestic problems.In the past year, the United States has directed more than $100 billion dollars of humanitarian, financial and military aid to Ukraine. The Congressional Budget Office projected last week that the United States was on track to add nearly $19 trillion to its national debt over the next decade, $3 trillion more than previously forecast.For the Biden administration, scaling back aid to Ukraine does not appear to be an option.In the interview, Ms. Yellen argued that the United States can afford to bear the costs and that supporting Ukraine was a priority for national security and economic reasons.“The war is having an adverse effect on the entire global economy,” Ms. Yellen said, “and providing the support that’s necessary for Ukraine to win this and bring it to an end is certainly something that we really can’t afford not to do.” More

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    U.S. Could Default on Debt as Early as Summer, New Estimate Says

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    The Bipartisan Policy Center said the nation could run out of cash this summer or early fall if Congress did not raise the debt limit.WASHINGTON — The United States faces a default sometime this summer or early fall if Congress does not raise or suspend the debt ceiling, a Washington think tank warned on Wednesday.The projection from the Bipartisan Policy Center is the latest estimate of when the government could run out of cash to pay its bills. The nation, which borrows huge sums to help pay for everything from military salaries to Social Security benefits, hit its $31.4 trillion borrowing cap on Jan. 19. Since then, the Treasury Department has been employing what are known as extraordinary measures to ensure that the government has enough to pay what it owes, including payments to bondholders.“We anticipate that those emergency measures, as well as the cash that Treasury has on hand, will most likely be exhausted at some point during the summer or early fall,” Shai Akabas, the center’s director of economic policy, said during a briefing on Wednesday morning.Last week, the nonpartisan Congressional Budget Office projected that the department’s ability to prevent the United States from defaulting on its debt could be exhausted between July and September. That estimate was slightly more favorable than what Treasury Secretary Janet L. Yellen suggested when she told Congress last month that her department’s ability to keep financing the country’s obligations could be exhausted in June.The day when the United States runs out of cash — known as the X date — depends largely on how much the Treasury Department collects in 2022 tax revenue, the Bipartisan Policy Center said. The group warned that moment could be “too close for comfort” given the vagaries around tax receipts.“There is a possibility that the cash balance in early to mid-June will be so low that it will necessitate action,” Mr. Akabas said. He added that given “the considerable uncertainty in our nation’s current economic outlook,” it was impossible to know for certain when the X date might happen.“Policymakers have an opportunity now to inject certainty into the U.S. and global economy by beginning, in earnest, bipartisan negotiations around our nation’s fiscal health and taking action to uphold the full faith and credit of the United States well before the X date,” he said.Ms. Yellen’s extraordinary measures to keep the government running have included redeeming some existing investments and suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Once those measures are exhausted, the United States will need to borrow more money or face default. She has urged Congress to raise or suspend the debt limit.It remains unclear how quick or easy it would be to do that. Republican lawmakers have insisted that President Biden agree to undefined spending cuts to win their votes to raise the cap, arguing that the borrowing binge is putting the United States on a path to fiscal disaster. Mr. Biden has insisted that he will not negotiate spending cuts as part of any debt limit legislation, saying that the cap has to be raised to fund obligations that Congress — including Republicans — have already approved. More

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    U.S. Could Default on Its Debt Between July and September, C.B.O. Says

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    The nonpartisan budget office also said that if tax receipts fall short of projections, and Congress fails to act on the debt limit, the U.S. could run out of cash before July.WASHINGTON — The Treasury Department’s ability to continue paying its bills and prevent the United States from defaulting on its debt could be exhausted sometime between July and September if Congress does not raise or suspend the cap on how much the nation can borrow, the nonpartisan Congressional Budget Office said on Wednesday.The estimate suggests that lawmakers could have slightly more leeway than Treasury Secretary Janet L. Yellen estimated last month, when she told Congress that her department’s ability to keep financing America’s obligations could be exhausted in June.The United States borrows huge sums of money by selling Treasury securities to investors across the globe. That funding helps pay for military salaries, retiree benefits and interest payments to bondholders who own U.S. debt. The nation hit its statutory $31.4 trillion borrowing cap last month, forcing the Treasury Department to employ a series of accounting maneuvers to help ensure the government can continue paying its bills without breaching the debt limit.“If the debt limit is not raised or suspended before the extraordinary measures are exhausted, the government would be unable to pay its obligations,” the C.B.O. said in the report on Wednesday. “As a result, the government would have to delay making payments for some activities, default on its debt obligations or both.”However, the budget office noted that the timing of the so-called X-date is uncertain because it depends on how much tax revenue comes into the federal government over the coming months. The office said that if receipts fall short of its estimates, the Treasury could run out of funds before July.Ms. Yellen has been employing extraordinary measures since January to keep the government running. Those have included redeeming some existing investments and suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.In a speech on Tuesday, Ms. Yellen warned that a default would be catastrophic.“In my assessment — and that of economists across the board — a default on our debt would produce an economic and financial catastrophe,” Ms. Yellen said at the National Association of Counties Legislative Conference. “Household payments on mortgages, auto loans and credit cards would rise, and American businesses would see credit markets deteriorate.”Calling on Congress to act, she added: “This economic catastrophe is preventable.”It remains unclear how quick or easy it will be to raise or suspend the debt cap. Republican lawmakers have insisted that President Biden agree to undefined spending cuts in order to win their vote to raise the cap. Mr. Biden has insisted he will not negotiate spending cuts as part of any debt limit legislation, arguing that the cap has to be raised to fund obligations that Congress — including Republicans — already approved.A separate C.B.O. report out on Wednesday showing the federal government will add $19 trillion in debt over the next decade and run $2 trillion annual deficits is likely to inflame those tensions.In a tweet on Wednesday, Speaker Kevin McCarthy once again called for pairing discussions about spending cuts to raising the borrowing cap. More

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    Can A Trillion Dollar Coin Resolve the Debt Ceiling Crisis?

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    The latest standoff over raising the nation’s debt ceiling is giving new life to an old theory about how to avoid a default.WASHINGTON — The debt limit standoff between Republicans and Democrats has elevated questions about creative solutions for averting a crisis, including one that at first blush might seem unthinkable: Could minting a $1 trillion platinum coin make the whole problem go away?What was once a fringe idea is now being presented to top economic policymakers as a serious remedy.Asked on Wednesday about the notion that there might be another option if Congress failed to lift the borrowing cap, Jerome H. Powell, the Federal Reserve chair, said there was not.“There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due,” Mr. Powell said. “Any deviations from that path would be highly risky.”Treasury Secretary Janet L. Yellen was unable to avoid the debt limit crisis brewing back in the United States as she crisscrossed Africa last week and fielded queries about the coin, which she dismissed as a “gimmick.”Instead, Ms. Yellen sent two stern letters to Speaker Kevin McCarthy outlining the “extraordinary measures” she was taking to ensure the United States can keep paying its bills and urged Congress to “act promptly” to protect the nation’s full faith and credit by lifting the debt limit.President Biden told Mr. McCarthy on Wednesday that while there was room for discussion about addressing the deficit, Congress would have to pass a debt limit increase with no strings attached to avoid a financial cataclysm. Mr. Biden and Mr. McCarthy met at the White House for more than an hour in a discussion that carried high stakes, with the federal government set to exhaust its ability to pay its bills on time as early as June.But the idea of a coin still has its fair share of supporters, and they are not giving up.As political gridlock over the borrowing cap has hardened, the notion that the Treasury secretary could defuse the debt limit drama with her currency minting powers has re-emerged, including on Twitter, where the hashtag #MintTheCoin is again buzzing.Still, the feasibility of averting America’s debt crisis by minting a valuable piece of currency is far from clear. Here’s a look at origins of the coin, how it might be used and the potential consequences.A Most Extraordinary MeasureIf Congress cannot reach an agreement by early June to increase the debt limit, which was capped at $31.4 trillion in late 2021, Ms. Yellen’s ability to use government accounting tools to delay a default could soon be exhausted, and the United States would be unable to pay all of its bills on time.Treasury Secretary Janet L. Yellen in Zambia last month. She urged Congress to “act promptly” to protect the nation’s full faith and credit by lifting the debt limit.Fatima Hussein/Associated PressThis could cause a deep recession and potentially a financial crisis, shutting down large swaths of the economy and preventing beneficiaries of Social Security and Medicare from receiving their money. Although Ms. Yellen has the power to move funds around government accounts to delay a default, eventually the government’s coffers will run dry without the ability to raise more tax revenue or borrow more money.That’s where the coin comes in. Proponents of the idea believe Ms. Yellen could use her authority to instruct the U.S. Mint to produce a platinum coin valued at $1 trillion — or another large denomination — and deposit it with the Federal Reserve, the government’s banker, which manages the Treasury Department’s “general account.”Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

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    Wall St. Is Counting on a Debt Limit Trick That Could Entail Trouble

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    If the debt limit is breached, investors expect Treasury to put bond payments first. It’d be politically and practically fraught.Washington’s debt limit drama has Wall Street betting that the United States will employ a fallback option to ensure it can make good on payments to its lenders even if Congress doesn’t raise the nation’s borrowing limit before America runs out of cash.But that untested idea has significant flaws and has been ruled out by the Biden administration, which could make it less of a bulwark against disaster than many investors and politicians are counting on.Many on Wall Street believe that the Treasury Department, in order to avoid defaulting on U.S. debt, would “prioritize” payments on its bonds if it could no longer borrow funds to cover all its expenses. They expect that America’s lenders — the bondholders who own U.S. Treasury debt — would be first in line to receive interest and other payments, even if it meant delaying other obligations like government salaries or retirement benefits.Those assumptions are rooted in history. Records from 2011 and 2013 — the last time the U.S. tipped dangerously close to a debt limit crisis — suggested that officials at the Treasury had laid at least some groundwork to pay investors first, and that policymakers at the Federal Reserve assumed that such an approach was likely. Some Republicans in the House and Senate have painted prioritization as a fallback option that could make failure to raise the borrowing cap less of a disaster, arguing that as long as bondholders get paid, the U.S. will not experience a true default.But the Biden administration is not doing prioritization planning this time around because officials don’t think it would prevent an economic crisis and are unsure whether such a plan is even feasible. The White House has not asked Treasury to prepare for a scenario in which it pays back investors first, according to multiple officials. Janet L. Yellen, the Treasury secretary, has said such an approach would not avoid a debt “default” in the eyes of markets.“Treasury systems have all been built to pay all of our bills when they’re due and on time, and not to prioritize one form of spending over another,” Ms. Yellen told reporters this month.Perhaps more worrisome is that, even if the White House ultimately succumbed to pressure to prioritize payments, experts from both political parties who have studied the temporary fix say it might not be enough to avert a financial catastrophe.Senator Ted Cruz, center, and other Republicans during a news conference on debt ceiling on Capitol Hill last week.Haiyun Jiang/The New York Times“Prioritization is really default by another name,” said Brian Riedl, formerly chief economist to former Republican Senator Rob Portman and now an economist at the Manhattan Institute. “It’s not defaulting on the government’s debt, but it’s defaulting on its obligations.”Congress must periodically raise the nation’s debt ceiling to authorize the Treasury to borrow to cover America’s commitments. Raising the limit does not entail any new spending — it is more like paying a credit-card bill for spending the nation has already incurred — and it is often completed without incident. But Republicans have occasionally attempted to attach future spending cuts or other legislative goals to debt limit increases, plunging the United States into partisan brinkmanship.Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

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    The U.S. Hit Its Debt Limit. What Happens Next?

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    The Treasury Department has started employing “extraordinary measures,” but the path to raising the debt ceiling is likely to be a long one.The United States hit a limit this week on how much money it can borrow, forcing the Treasury Department to initiate so-called extraordinary measures to make sure the nation has enough cash to fulfill its financial obligations.Treasury Secretary Janet L. Yellen has told lawmakers that those measures will allow the United States to keep paying military salaries, retiree benefits and interest to bondholders through at least early June.But initiating those extraordinary measures is just the first step in a series of moves that will take place as the Treasury tries to keep the United States from defaulting on its debt. Ultimately, it will be up to Congress to decide whether to let the country borrow more money or allow it to default on its debt by failing to pay investors who expect interest and other payments.At stake is the fate of the U.S. economy, which could face a financial crisis and fall into a deep recession if lawmakers cannot reach an agreement.Among the looming questions is when the United States will hit the so-called X-date — the point at which the government can no longer find creative ways to stay beneath the $31.4 trillion debt limit and will need to borrow more money or fail to pay its bills.The other big question: Will Congress agree to raise the borrowing cap?So far, House Republicans have vowed to oppose any increase in the debt limit without spending cuts. President Biden has said the debt limit needs to be raised without conditions. That has set up what could be a protracted fight to ensure that the United States does not default on its debt.Here are some of the key moments to expect over the next few months.A Spring Budget BattleThe White House is expected to unveil its annual budget proposal in early March, outlining Mr. Biden’s spending priorities. That could serve as an opening bid for any negotiations between the Biden administration and Republicans in Congress, who have been calling for spending cuts and are likely to seize on this document as evidence of what they say is “runaway spending.”Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

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    America Set to Hit Its Borrowing Limit Today, Raising Economic Fears

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    The milestone will not immediately affect markets or growth, but it sets the stage for months of entrenched partisan warfare.WASHINGTON — The United States is expected to hit a congressionally imposed borrowing limit on Thursday, requiring the Treasury Department to engage in accounting maneuvers to ensure the federal government can keep paying its bills.The milestone of hitting the country’s $31.4 trillion debt cap is the product of decades of tax cuts and increased government spending by both Republicans and Democrats. But at a moment of heightened partisanship and divided government, it is also a warning of the entrenched partisan battles that are set to dominate Washington in the months to come, and that could end in economic shock.Newly empowered Republicans in the House have vowed that they will not raise the borrowing limit again unless President Biden agrees to steep cuts in federal spending. Mr. Biden has said he will not negotiate conditions for a debt-limit increase, arguing that lawmakers should lift the cap with no strings attached to cover spending that previous Congresses authorized.Treasury officials estimate the measures that they will begin employing on Thursday will enable the government to keep paying federal workers, Medicare providers, investors who hold U.S. debt and other recipients of federal dollars at least until early June. But economists warn that the nation risks a financial crisis and other immediate economic pain if lawmakers do not raise the limit before the Treasury Department exhausts its ability to buy more time.The episode has prompted fears in part because of the lessons both parties have taken from more than a decade of debt-limit fights. A bout of brinkmanship in 2011 between House Republicans and President Barack Obama nearly ended in the United States defaulting on its debt before Mr. Obama agreed to a set of caps on future spending increases in exchange for lifting the limit.Most Democrats have solidified in their position that negotiations over the debt limit only enhance the risks of economic calamity by encouraging Republicans to use it as leverage. That is particularly true of Mr. Biden, who successfully stared down Republicans and won an increase in 2021 with no stipulations.Newly elected Republicans, emboldened by anger among their base and conservative advocacy groups over failures in the past to exact concessions for raising the limit, have pledged not to let that happen again.Treasury Secretary Janet L. Yellen has dismissed ideas for lifting the borrowing cap unilaterally, such as minting a $1 trillion coin, as fanciful.Sarahbeth Maney/The New York TimesIn reality, both parties have approved policies that fueled the growth in government borrowing. Republicans repeatedly passed tax cuts when they controlled the White House over the last 20 years. Democrats have expanded spending programs that have often not been fully offset by tax increases. Both parties have voted for large economic aid packages to help people and businesses endure the 2008 financial crisis and the 2020 pandemic recession.Federal spending declined from its pandemic high in 2022, reaching nearly $6 trillion in the fiscal year, or just under 24 percent of the economy. The federal budget deficit, which is the shortfall between what the United States spends and what it takes in through taxes and other revenue, topped $1 trillion for the year. That is a decline from the past two years as emergency pandemic spending expired, though the Biden administration predicts the deficit will rise again in the current fiscal year.Understand the U.S. Debt CeilingCard 1 of 4What is the debt ceiling? More