In 2011, during the worst federal debt war on record, a former Treasury official tried to convince Congress that it had no choice but to raise the legal ceiling. Jerome Powell, current Chairman of the Federal Reserve Board (FRB).
At the time, some Republican lawmakers ignored warnings issued by the Obama-era Treasury Department and sought alternatives to raising the cap, but they were affiliated with the Washington think-tank Bipartisan Policy Center (BPC). Mr. Powell succeeded in dissuading such attempts. He also served as undersecretary of the Treasury during the George H.W. Bush administration.
Back then, as now, some lawmakers began to question whether a default was such a bad thing. But Mr. Powell’s shake-up paid off, and a default was averted on the brink. His intervention didn’t prevent the downgrade of Treasuries, but it was the impetus that led him to the Fed.
He is scheduled to give his semi-annual testimony on monetary policy before the Senate Banking Committee next week, March 7. The controversy over the debt ceiling in Congress and the Republican Party, which controls the majority of the House of Representatives, calling for drastic spending cuts as a condition for raising the ceiling will certainly remind us of 2011.
Mr. Powell, too, is beginning to recreate the message he uttered more than a decade ago.
Public U.S. Federal Debt Balance, % of GDP
Source: Office of Management and Budget (OMB)
Mr. Powell said on February 1, 2019, after the Federal Open Market Committee (FOMC) policy announcement.“The only way out is for Congress to raise the debt ceiling so that the U.S. government can meet all of its payment obligations as they mature,” he said at a news conference. “It’s extremely risky to stray from this path,” he said.
Powell warns Fed can’t save U.S. economy from default
Powell, through a spokesman, declined to comment for this article.
Back in 2011, the BPC began making its own estimates of when the U.S. debt ceiling would be reached, a day Powell and his team dubbed “Day X.” The phrase is now popular on both Washington and Wall Street.
“I’m going to give you a factual explanation of how the debt ceiling works,” Powell said on Bloomberg Television that year. “I’m not going to give tactical or political advice,” he said.
Two years later, in 2013, the Fed, where he was on the board, had detailed discussions in case the debt ceiling problem escalated. Details of the discussion were revealed in later published records.
At the time, Governor Powell supported a number of measures to ensure financial stability, but expressed deep concern over the purchase of defaulted U.S. Treasuries. He objects, even stating that he finds such measures “disgusting.”
“I would refrain from saying that I would or would not like to do this at this stage, even if this issue were to cause a catastrophe and we would actually have to deal with it,” he said.
Nearly a decade later, at a press briefing on February 1, 2019, he said: “We should not assume that the authorities can protect the economy from the consequences of a lack of timely action.” .
Original title:Powell’s Debt-Limit Alarm Echoes Stealth Lobbying Effort in 2011(excerpt)
