The turmoil that has for three days stalled the start of the new Republican House majority offers a warning that disarray in Washington risks igniting a US debt crisis capable of roiling financial markets later this year.
(Bloomberg) — The turmoil that has for three days stalled the start of the new Republican House majority offers a warning that disarray in Washington risks igniting a US debt crisis capable of roiling financial markets later this year.
The deadlock between establishment Republicans and dissident conservatives over choosing a House speaker laid bare the depth of division within the party, and the powerlessness of GOP leaders to force a compromise on recalcitrant members.
After nine rounds over the last three days, House Republican leader Kevin McCarthy has failed to win the majority needed to become speaker, a required but simple step usually dispatched in one quick vote.
McCarthy and his allies continued talks with his dissenters on Thursday. He expressed optimism that they could reach a deal, but the impasse indicates how difficult it will be to wrangle votes on perennially challenging issues like increasing US borrowing authority.
Economists estimate the federal government will run out of ways to avoid a payments default sometime in the third quarter.
Until a speaker is in place, the House cannot conduct any other business, like naming committees or even paying themselves.
Once one is in place, fiscal policy arises as a fresh battleground. With GOP leadership hobbled, hard-line conservatives would have greater scope to trigger a US default later this year by blocking an increase in the legal debt limit. Even taking the country to the brink of default is risky for investors. And the prospect of a government shutdown also becomes more likely.
EXPLAINER: What’s the Debt Ceiling, and Will the US Raise It?
“The dysfunction is a clear signal,” Brian Gardner, Stifel Nicolaus & Co.’s chief Washington strategist, warned clients in a note Wednesday. Investors “should be on guard as the summer approaches” because “brinkmanship over the debt ceiling could lead to market volatility,” he added.
Representative Brendan Boyle of Pennsylvania, the top-ranking Democrat on the House Budget Committee, said he was already worried about a potential US default before the congressional session began because of the divisions within the GOP majority.
“The last 48 hours have only raised my level of concern,” Boyle said Thursday on Bloomberg Television’s “Balance of Power.” “Failing to raise the debt ceiling would be catastrophic, not just to the United States but to the world.”
Any financial storm would strike a vulnerable economy, with the Federal Reserve’s campaign of interest-rate increases already a drag on growth and the central bank’s capacity to respond restrained by stubborn inflation. As it is, private forecasters on average predict a 70% chance the US will tip into recession by the end of the year.
2011 Episode
The US could exhaust its legal borrowing authority by late summer or early fall without congressional action. A standoff between congressional Republicans and President Barack Obama in 2011 took the US to the precipice of default, prompting a downgrade in the government’s credit rating and a slide in US stocks.
With any potential crisis still months away, the standoff at the Capitol wasn’t a catalyst for any swings in US rates during trading Wednesday.
Many of the same holdouts blocking McCarthy are spoiling for a fight over the debt limit, demanding party leaders use the threat of default as leverage to force deep spending cuts. President Joe Biden and other Democratic leaders adamantly rejected giving in to what they disparage as “hostage taking” with the US economy.
Representative Ralph Norman of South Carolina, one of the Republican dissidents, said Wednesday suspicion that McCarthy wouldn’t stand firm in such a showdown was one reason the group is fighting him.
‘Insane Spending’
“The insane spending cannot keep up. The American people buy into that,” Norman told reporters.
Even if McCarthy prevails or the party settles on a compromise candidate, the new speaker will be weakened and dissidents emboldened, said Doug Heye, a former senior Republican leadership aide.
“Whoever is going to be the next speaker has a very tough job and part of that is the incentive structure that rewards bad behavior: You get to raise money, you go on television, you get to go to Mar-a-Lago,” Heye said, referring to former President Donald Trump’s Florida estate.
McCarthy already agreed to demands from hard-line conservatives for a change in House rules allowing just five members to force a vote on ousting the speaker at any time, a concession they will be loath to relinquish.
Pelosi Contrast
Under that rule, a few dissatisfied Republicans could overthrow the speaker any time they made a tough compromise with the Democrats who control both the Senate and White House.
Outgoing Speaker Nancy Pelosi was able to maintain control of a Democratic majority the last two years that was in many ways a mirror-image of the current Republican House. She also faced impatient newly elected progressives on her left and the same margin of control, unable to lose more than four of her members on a party-line vote.
Pelosi, though a pragmatic-minded daughter of a former Baltimore mayor, had credibility with hard-line members that McCarthy lacks — the product of her history as an insurgent progressive within Congress and a record of achievement on defining liberal causes.
She broke with the Democratic establishment to fight Congress’s 2002 authorization of George W. Bush’s Iraq War, lining up against then-House Democratic Leader Dick Gephardt as well as Hillary Clinton and Biden, who were then in the Senate. And she played a pivotal role in securing passage of Obama’s Affordable Care Act, perhaps the most significant progressive legislative achievement since Lyndon Johnson’s Great Society programs.
That earned her a measure of trust even as progressives differed with her on legislative tactics and pressed for generational change in party leadership, said John Lawrence, a former Pelosi chief of staff and author of “Arc of Power: Inside Nancy Pelosi’s Speakership, 2005-2010.”
“She was able to go to her members and say, ‘Look, you know me, I have fought as hard as I can fight and this is the best we can do,” Lawrence said.
–With assistance from Liz Capo McCormick and Zach C. Cohen.
(Updates timing in first paragraph and throughout.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.