By Lori Montgomery, Zachary A. Goldfarb and William Branigin, Updated: Wednesday, October 9, 3:20 PM
With financial markets reflecting growing concern about the potential for a U.S. default, the White House on Wednesday announced a series of meetings with lawmakers from both parties to focus on the government shutdown, looming debt crisis and festering fiscal stalemate.
House Democrats have been invited to 1600 Pennsylvania Ave. NW on Wednesday afternoon, a White House official said. Senate Democrats, House Republicans and Senate Republicans will be asked to attend similar sessions in the coming days.
The meetings come as Republicans are accusing President Obama of not negotiating with them over the budget and debt-ceiling impasse. On Tuesday, Obama and House Speaker John A. Boehner (R-Ohio) clashed publicly, and no progress was made on how to reopen the government and pay the nation’s bills.
Obama was particularly unhappy to learn of one consequence of the shutdown: the Defense Department’s inability to pay death benefits to the families of troops killed in the line of duty. White House spokesman Jay Carney told reporters Wednesday that the Pentagon had informed Congress of that consequence before the shutdown but that it was not specifically addressed in legislation to ensure the continuity of military pay. Obama ordered the Office of Management and Budget and White House lawyers to find a solution, and he “expects this to be fixed today,” Carney said.
Shortly after Obama directed that the $100,000 payouts be made as scheduled when necessary, the House voted 425 to 0 to approve a measure that would ensure the Pentagon is able to pay the death benefits.
The bill is expected to be ignored by the Senate, where majority Democrats oppose approving piecemeal short-term spending measures instead of reopening the entire federal government.
Saying that he was “offended, outraged and embarrassed” by the lapse, Defense Secretary Chuck Hagel announced Wednesday that the Pentagon will enter into a contract with the private Fisher House Foundation to ensure that the death benefits are paid. He said the Defense Department will reimburse the foundation once the shutdown ends.
House Republican and Democratic leaders met around midday Wednesday to discuss the current impasse just a few hours before House Democrats were scheduled to meet with Obama at the White House. Aides said the meeting lasted about 40 minutes but did not yield any new agreements.
In a statement, House Minority Leader Nancy Pelosi (D-Calif.) said that she and Rep. Steny H. Hoyer (D-Md.), the minority whip, “reiterated that there are 200 Democratic votes to accept the Republican budget number of $986 billion to reopen government, and that we would agree to smooth the path to a budget conference. We were disappointed the speaker did not take ‘yes’ for an answer.”
A Boehner spokesman, Brendan Buck, said the speaker’s office received word that Obama would be inviting all GOP House members to the White House on Thursday. But the Republicans decided instead to send a smaller 18-member group, “including the elected leadership and certain committee chairmen,” Buck said.
“Nine days into a government shutdown and a week away from breaching the debt ceiling, a meeting is only worthwhile if it is focused on finding a solution,” Buck said in a statement. “That’s why the House Republican Conference will instead be represented by a smaller group of negotiators.” The list includes Boehner, House Majority Leader Eric Cantor (R-Va.) and Budget Committee Chairman Paul Ryan (R-Wis.).
The White House said Obama is “disappointed” by Boehner’s decision to limit Republican attendance at the meeting.
“The President thought it was important to talk directly with the members who forced this economic crisis on the country about how the shutdown and a failure to pay the country’s bills could devastate the economy,” Carney, the White House spokesman, said in a statement. Obama “will talk to anyone anytime . . . but will not pay the Republicans ransom for doing their job,” Carney said. “If the Republicans want to have a real discussion, they should open the government and take the threat of default off the table.”
According to a survey conducted after the shutdown took effect last week, the Republican Party is now viewed favorably by only 28 percent of Americans, down from 38 percent in September, the Gallup polling organization reported Wednesday. “This is the lowest favorable rating measured for either party since Gallup began asking this question in 1992,” Gallup said.
It said the Oct. 3-6 poll showed that 62 percent of Americans now view the GOP unfavorably, a record high, and that 49 percent view the Democratic Party unfavorably.
Republicans on Capitol Hill, meanwhile, circulated a memo from one of the nation’s leading credit-rating agencies Wednesday to press an argument that the risk of a U.S. default is not as serious as the administration is portraying it.
In the memo, Moody’s Investors Service said the U.S. Treasury Department is likely to continue paying interest on the government’s debt even if Congress fails to lift the limit on borrowing next week, preserving the nation’s sterling AAA credit rating.
The memo offered “answers to frequently asked questions” about the government shutdown, now in its second week, and the federal debt limit. Obama has said that, unless Congress acts to raise the $16.7 trillion limit by next Thursday, the nation will be at risk of default.
But in the memo dated Oct. 7, Moody’s said: “We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”
The memo argued that the situation is actually much less serious than in 2011, when the nation last faced a pitched battle over the debt limit.
“The budget deficit was considerably larger in 2011 than it is currently, so the magnitude of the necessary spending cuts needed after 17 October is lower now than it was then,” the memo said.
It offered a starkly different view of the consequences of congressional inaction on the debt limit than is held by the White House, many policymakers and other financial analysts. During a news conference at the White House Tuesday, Obama said missing the Oct. 17 deadline would invite “economic chaos.” And over the weekend, economists at Goldman Sachs said the economy would take a devastating hit even if Treasury kept making payments on the debt, because the pullback in federal spending would reduce gross domestic product by as much as 4.2 percentage points.
In a news conference at the White House Tuesday afternoon, Obama was asked whether he would “prioritize and pay bondholders first to maintain the semblance of credit.” He replied: “I do know that there have been some who’ve said that if we just pay bondholders, if we just pay people who’ve bought Treasury bills, that we really won’t be in default because those interest payments will be made. And to them, what I have to remind them is, we’ve got a lot of other obligations, not just people who pay Treasury bills.”
Obama cited Social Security checks, veterans’ benefits and payments to government contractors, for example. “If the markets are seeing that we’re not paying all our bills on time, that will affect our creditworthiness even if some people are being paid on time,” he said. Paying some obligations but not others could also result in higher interest rates, he said
“There is no magic wand that allows us to wish away the chaos that could result if, for the first time in our history, we don’t pay our bills on time,” Obama said. “And when I hear people trying to downplay the consequences of that, I think that’s really irresponsible.”
On Tuesday, short-term borrowing by the Treasury Department became twice as expensive as it had been the day before, one of the most significant signs of alarm in the bond markets since the financial crisis of 2008.
On Capitol Hill, Secretary of Veterans Affairs Eric K. Shinseki acknowledged to a House committee Wednesday that his department was not well prepared for a government shutdown, telling members that he did not believe that Congress would permit such a thing to happen
“If you knew a shutdown was going to happen, it wasn’t shared with me,” Shinseki said during questioning by House Veterans’ Affairs Committee Chairman Jeff Miller (R-Fla.). “I didn’t think you would allow this to happen.”
The Veterans Affairs Department’s lack of adequate plans for a shutdown “didn’t become obvious to us until late September,” Shinseki said. That was after the House Republican leadership embraced a right-wing strategy for using the budget battles to try to dismantle Obama’s signature health-care initiative.
Shinseki painted a grim picture of the shutdown’s impact on veterans. He cited a reversal in the department’s efforts to reduce a backlog of disability claims and said that if the shutdown is not resolved before the end of the month, the VA will not be sending checks out to 5.18 million beneficiaries.
The VA on Monday furloughed about 7,800 Veterans Benefits Administration employees. Once the money for benefits is gone, most of the remaining 13,000 VBA workers will be furloughed as well, since they would not have work to do, Shinseki said.
In his White House news conference Tuesday afternoon, Obama warned that default would be “insane, catastrophic, chaos,” and he demanded that House Speaker Boehner take the weight of that threat off the U.S. economy.
Once that happens, Obama said, “I am happy to talk with him and other Republicans about anything.” But Obama said he also told Boehner in a telephone call Tuesday morning that “having such a conversation, talks, negotiations shouldn’t require hanging the threats of a government shutdown or economic chaos over the heads of the American people.”
An hour later, Boehner fired back that Republicans will not yield until Obama comes to the bargaining table.
“I didn’t come here to shut down the government, and I certainly didn’t come here to default on our debt,” Boehner told reporters at the Capitol. But Obama, he said, is seeking “unconditional surrender by Republicans” before “he’ll sit down and talk. That’s not the way our government works.”
Both men spoke in calm tones, striving to appear reasonable. But with the shutdown in its second week and a critical deadline for government borrowing just eight days away, anxiety was building in Washington and on Wall Street.
Just last month, investors were willing to make short-term loans to the U.S. government virtually for free. On Tuesday, the one-month Treasury bill, which paid 0.13 percent interest Monday, spiked to 0.27 percent — the highest rate since 2008. Borrowing for slightly longer durations has also become much more expensive in recent days.
“What we’re seeing is a greater concern that the Congress and the White House will not be able to reach an agreement in order to avoid tripping over the debt ceiling,” said John M. Canavan, an analyst with Stone & McCarthy Research.
The national debt hit the $16.7 trillion legal limit in May. Treasury Secretary Jack Lew has since employed a variety of emergency measures to conserve cash. Lew will exhaust those measures on Oct. 17, when he will be forced to rely on a cash balance of about $30 billion and incoming revenue to pay the nation’s bills.
Lew has declined to say when the United States is likely to begin missing payments, the definition of default. But independent analysts say it would happen no later than Nov. 1, when the Treasury Department must pay out nearly $60 billion to Social Security recipients, Medicare providers, civil-service retirees and active-duty military service members.
Economists, financial analysts and most policymakers agree that default would be catastrophic because U.S. Treasury bonds form the backbone of global financial markets. “It could well be that what is now a recovery would turn into a recession or even worse,” said Olivier Blanchard, the top economist at the International Monetary Fund.
‘A very deep recession’
Obama spoke to reporters and answered questions for well over an hour Tuesday, stressing that the consequences of congressional inaction on the debt limit would be far more devastating than lawmakers’ failure to fund federal agencies past Oct. 1.
“In a government shutdown, millions of Americans face inconvenience or outright hardship,” Obama said. “In an economic shutdown, every American could see their 401(k)s and home values fall, borrowing costs for mortgages and student loans rise, and there would be a significant risk of a very deep recession at a time when we’re still climbing our way out of the worst recession in our lifetimes.”
Obama ruled out taking unilateral action, by minting a platinum coin or by invoking Section 4 of the 14th Amendment, which states that the “validity of the public debt of the United States . . . shall not be questioned.” Setting aside the question of legality, Obama said such actions would create a suspect class of Treasurys that would prompt investors to demand higher interest rates or walk away altogether.
“There are no magic bullets here,” Obama said. “There’s one simple way of doing it, and that is Congress going in and voting.”
Boehner has insisted that the House will not agree to reopen the government or raise the debt limit without concessions from Democrats. Obama challenged him to test that assertion by putting legislation to a vote.
“At minimum, let every member of Congress be on record,” Obama said. “And if it fails and we do end up defaulting, I think voters should know exactly who voted not to pay our bills, so that they can be responsible for the consequences that come with it.”
On Tuesday, Democratic leaders in the Senate were laying plans to do just that. Senate Majority Leader Harry M. Reid (D-Nev.) introduced a bill that would suspend enforcement of the debt limit through the end of next year, after the 2014 midterm elections.
All 54 Senate Democrats — even those facing tough races — appeared to be falling into line behind the measure. GOP Senate leaders, however, were optimistic about holding their ranks and denying the bill the 60 votes it needs to overcome a GOP filibuster, a test that could come as soon as Saturday.
But during a closed-door lunch meeting Tuesday, veteran GOP senators expressed grave concerns about derailing the bill with no alternative plan for raising the debt limit by the Oct. 17 deadline, according to one Republican in the room.
GOP proposes ‘working group’
House GOP leaders, meanwhile, unveiled a new strategy for handling the crisis, proposing to create a 20-member bipartisan “working group” to end the shutdown and raise the debt limit.
The working group, to be composed of Republicans and Democrats from the House and the Senate, would be charged with brokering agency funding levels for fiscal 2014, perhaps replacing deep cuts known as the sequester with cuts to federal health and retirement programs.
The measure passed the House 224 to 197, with most Democrats voting no. But Democrats in the Senate quickly dismissed it as “supercommittee 2.0” — after the failed fiscal negotiations of 2011 — and noted that the group’s charge includes nothing about raising taxes on the wealthy, a Democratic priority. Before the House could even vote, the White House threatened to veto the measure.
The House also approved a measure to ensure that federal prison guards, U.S. Capitol Police officers and staffers at other agencies currently on the job would be paid as usual for the duration of the shutdown. A separate bill passed by the House over the weekend to provide back pay to furloughed personnel is still awaiting a vote in the Senate.
Both measures that passed Tuesday were presented to the House Republican rank and file in a closed-door morning meeting. After that session, Boehner told reporters that “there’s never been a president in our history that did not negotiate over the debt limit,” noting that Obama bargained not only with him in 2011 but also with moderate Democrats in 2010. The latter negotiation produced an agreement to create an independent fiscal commission known as Bowles-Simpson.
Boehner refused to say, however, what he hopes negotiations this time would produce.
“I’m not drawing any lines in the sand,” he said. “There’s no boundaries here. There’s nothing on the table. There’s nothing off the table. I’m trying to do everything I can to bring people together and to have a conversation.”
Paul Kane, Ed O’Keefe, Jackie Kucinich and Philip Rucker contributed to this report.