House Republicans are alleging that President Obama and the Treasury Department deliberately misled Congress and the public about their ability to avoid default in case the federal debt ceiling is reached, based on a new report the Financial Services Committee has been working on for more than two years.
The report, based on documents the committee obtained from the Treasury and the Federal Reserve Bank of New York, finds that the Obama administration made plans for prioritizing payments on the debt and Social Security in the case it exhausted its ability to borrow, contrary to what administration officials have said. In fact, according to the report, the New York Fed, which carries out payments for the Treasury, has been running exercises related to prioritizing payments since 2011.
During high-stakes negotiations over raising the debt limit in recent years, the administration said it would not be able to pick and choose which payments to make if borrowing came to an end, and that accordingly the only way to prevent a default and financial crisis was for Congress to lift the debt ceiling.
"This report shows President Obama manufactured a crisis to put politics ahead of economic stability. Shame on him," said Rep. Sean Duffy, R-Wis., the chairman of the Financial Services subcommittee on oversight. "Rather than being honest, the administration deliberately misled Congress and the American people about their ability to honor our commitments to our nation's veterans and seniors."
The Republicans further charged that they were "stonewalled" when they began their investigation in 2013 and only received the documents after issuing a subpoena in May. They suggested that the Treasury tried to impeded their investigation by telling the New York Fed to withhold relevant documents.
Whether the Treasury has the ability to forestall a debt ceiling-induced financial crisis by prioritizing certain essential payments, such as interest on Treasury securities, Social Security checks and military payroll, has been a hotly debated topic in recent clashes between Obama and congressional Republicans during fiscal showdowns involving the federal debt ceiling. The GOP also has advanced legislation that would require the Treasury to continue paying off the federal debt even in the case the federal debt ceiling was reached. Such a measure, if feasible, would stave off the doomsday scenario of a default on a Treasury security by directing incoming tax revenue to payments on the debt.
It also would force immediate and deep cuts to other federal programs and services, which today are funded partly by the issuance of new debt.
"These internal documents show the Obama administration took the nation's creditworthiness and economy hostage in a cynical attempt to create a crisis so the president could get what he wanted during negotiations over the debt ceiling," said Rep. Jeb Hensarling, R-Texas, the chairman of the Financial Services Committee.
A Treasury spokesman responded with the following statement:
"Only Congress can raise the debt limit and the alternative is default. As the Treasury Department has explained on numerous occasions, due to the brinkmanship that led our country to the edge of default in 2011 and 2013, Treasury has been forced to consider a range of options with respect to how it would operate in the unthinkable event that Congress fails to raise the debt limit. While Treasury has viewed the option of delaying payments as the least harmful option in this catastrophic scenario, make no mistake – this would still be default. Thankfully, no decision has ever been necessary because Congress has always acted to raise the debt limit."
Both the Obama administration and previous Republican administrations have insisted that asking the Treasury to prioritize certain payments coming due would risk crisis. They have argued that doing so would be technically difficult, given that the Treasury's payment system processes millions of payments each month and is not designed to skip payments. Furthermore, they've said that attempting such a rescheduling of payments would generate panic and be unfair to the people who the Treasury decided not to pay.
Since 2012, it's been public knowledge that the Treasury did sketch out a contingency plan for avoiding default during the standoff between President Obama and congressional Republicans over the debt ceiling in 2011. In that scenario, the Treasury would use incoming tax revenue to continue making payments on the principal and interest on the federal debt. All other payments would be delayed until they could be made in full based on the day they came due, meaning that the government would fall further and further behind on all its obligations.
What's newly disclosed in the House Financial Services report is the extent to which the Obama administration had decided to pursue the plan in case Congress did not raise the debt ceiling by the time the Treasury exhausted its borrowing ability. By refusing to say that it had considered the plan, the GOP complains, the Obama administration was tipping the debt ceiling negotiations in its favor by exaggerating the consequences of breaching the ceiling.
But emails from the New York Fed produced in the report indicate that the Treasury did have a plan for operating past the exhaustion of borrowing authority in place, and that it was keeping it from the public. Furthermore, some messages suggest that it did so to give the administration an advantage in its talks with Congress, in which they bargained over changes to spending, taxes and Obamacare.
For instance, an internal New York Fed email, sent on Sept. 30, 2013, just days before the fiscal standoff forced a government shutdown, shows an unidentified New York Fed counsel discussing a meeting with Federal Reserve Governor Jerome Powell, in which Powell seems to be aware of the administration's strategy for negotiating with Congress. The counsel wrote that Powell "understands why Treasury wants to maximize pressure on Congress" by not communicating contingency plans to the public.
In another email sent a week earlier, New York Fed employee Roseann Stichnoth said that the Treasury's decision not to reveal its contingency plans for prioritization was "crazy, counter-productive and adds risk to an already risky situation."
The Republican report argued that those statements ran counter to Treasury Secretary Jack Lew's May 2014 congressional testimony, in which he told the committee that the president had not made a decision that the federal debt would be prioritized past the debt ceiling.
"Only the president of the United States can decide whether or not to do that," Lew said then, going on to add that "that decision has never been made by a president of either party."
TThe New York Fed referred an inquiry to the Treasury.