The Options to Avert U.S. Default After Third Schumer Try Fails

(Bloomberg) -- Time is starting to grow short to avert a U.S. debt default.

Senate Democrats’ third attempt to pass legislation to suspend the federal debt ceiling appears poised to fail on Wednesday, with Republican leaders confident they have enough support to deny the majority the 60 votes needed to overcome a filibuster. Meantime, an Oct. 18 deadline is growing closer. That’s the date around when Treasury Secretary Janet Yellen has warned the government could run out of cash to pay bills.

Senate Democratic Leader Chuck Schumer and his party face some tough choices. Here are their options, in no particular order:

‘Reconciliation’

Cave to Republican Leader Mitch McConnell’s demand that Democrats use a convoluted budget process known as reconciliation to bypass the GOP filibuster -- the same mechanism Democrats used for the pandemic-relief bill in March and are planning for a sweeping social-spending bill. It involves maneuvering through multiple steps, with time-consuming debates and unlimited amendments through “vote-a-ramas.” 

Democratic leaders say there isn’t time for a process that has previously taken months and they claim would take three to four weeks. 

Republicans believe there’s enough time left if Democrats start Wednesday or Thursday, a GOP aide said on condition of anonymity. Republicans could keep the vote-a-ramas very limited to keep things moving along, the aide said. Republicans are also looking at ways to keep the process going even if senators aren’t in town, the person said. (The Senate is scheduled to be on recess next week.)

A bipartisan agreement -- by unanimous consent -- could also allow the process to move more quickly than two weeks. GOP Senator Ted Cruz of Texas, who sometimes stands in the way of deals like that, said Tuesday he could consider one.

Stay the Course

Keep trying to pass a debt ceiling suspension and keep blaming Republicans for standing in the way. It only takes 10 Republicans to vote to break the filibuster that has been blocking a vote. None of the GOP senators would even have to vote to increase the legal limit. The measure could then pass solely with Democratic votes. That is what Schumer so far has said he would do. Each day that passes makes harder the reconciliation option that Republicans are insisting on.

This is a game of chicken that could cause increasing volatility in markets as a default deadline nears. 

A New Bill

Introduce a new bill to increase the debt ceiling. So far, Democrats have proposed suspending the legal debt limit for a period of time -- as the Senate voted to do under President Donald Trump. The current House-passed measure would suspend the limit until December 2022, just after midterm congressional elections.

But some conservative political strategists believe that step isn’t as easy to translate into campaign attack ads as a vote to raise the debt limit by a specific amount. Though raising the debt limit doesn’t authorize new spending -- it merely permits rolling over debt generated by spending and tax legislation that’s already been enacted -- admakers can cast a vote in favor as a vote to increase the national debt to the new and eye-popping multitrillion-dollar level.

Republican senators Mike Rounds of South Dakota and Republican Richard Shelby of Alabama on Monday said they might be willing to vote to end the filibuster and allow a Democrat-only vote to increase the debt limit if the legislation is drafted along those lines -- giving a dollar amount for the new debt limit. 

It isn’t yet clear whether enough Republicans would be satisfied with this concession. Senator John Cornyn of Texas, a member of the Senate Republican leadership team, told reporters Tuesday it’s not an acceptable alternative to reconciliation.

New Filibuster Exception

Democrats have the power to end the ordeal at any time and raise the debt limit without Republican support. The majority party can change the Senate rules and carve out a new exception to the filibuster rule. The budget reconciliation process that McConnell is pushing Democrats to use is itself an exception that was created to the filibuster. More exceptions were added in recent years under Democratic and Republican majorities, including for confirmation of lower-level judges and later even Supreme Court justices, as well as executive-branch appointments.

But that would require the support of all 50 Democratic senators, which at least so far the party cannot muster. Democratic Senator Joe Manchin of West Virginia said Monday he wouldn’t back creating an exception -- even a temporary one -- and suggested he would rather go through the reconciliation path than establish another precedent weakening the filibuster.

The Coin

Some analysts have suggested President Joe Biden make use of potential legal loopholes to bypass the debt limit. Among them is a law that gives the Treasury secretary the unilateral right to create platinum coins of any denomination. The theory is the Treasury could mint such a coin, declare its value to be a trillion dollars and then deposit it with the Federal Reserve, massively expanding its spending wherewithal and staving off default.

Another extreme option stems from a section of the Constitution’s 14th amendment saying the “validity” of the government’s debt “shall not be questioned.” Since the debt is the result of tax and spending decisions Congress has already legally authorized, the reasoning is that the debt cannot be questioned -- and so is legally valid once issued.

Those maneuvers risk creating legal uncertainty and court challenges. Investors might demand the U.S. government pay higher interest rates to compensate for such risk. White House Press Secretary Jen Psaki rejected the ideas on Monday, saying they are not “viable” options. Yellen also dismissed the coin idea as a “gimmick.”

Sweeteners

Democrats could add measures to a bill suspending or increasing the debt limit in order to attract enough Republican votes to overcome a filibuster. One idea is a commission to make recommendations on the future of Medicare benefits for the elderly, given a warning from the program’s trustees that the system will go insolvent in 2026 unless either benefits are cut or taxes raised. 

Democrats have ruled this out so far, and there’s no sign that enough Republicans would back a debt-limit bill conditioned on some sort of medium or longer-term fiscal framework.

But attitudes -- toward this option and all others mentioned above -- could well change if financial markets are melting down as the Treasury approaches default.

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