Janet Yellen says failing to raise debt ceiling would spark new financial crisis
In a speech this morning to a group of community bankers, Janet Yellen outlined the consequences of failing to raise the debt ceiling, saying the economy’s recovery from the Covid-19 pandemic would be undone and a new financial crisis would be triggered.
“In my assessment – and that of economists across the board – a US default would generate an economic and financial catastrophe. Over the past few years, American families and businesses – including many of yours – have worked hard to mount a historic economic recovery. A default would reverse all of the hard-earned progress that we’ve made. And it would set us back even further,” she told a meeting of the Independent Community Bankers of America.
She described a scenario where the government would be unable to pay its bills, disrupting government services such as air traffic control and law enforcement as well as payments to military veterans and social security recipients.
“And of course, the financial crisis that accompanies a default on our debt could multiply the severity of the downturn,” Yellen continued. “The US Treasury market serves as the very bedrock of the global financial system. There’s a reason for that: the world has never doubted that America will pay the principal and interest on its bonds – in full and on time. That’s a fundamental principle of modern finance. A default would crack open the foundations upon which our financial system is built. It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs and fire sales.”
Key events
Back to the Senate banking committee, Democratic and Republican lawmakers were skeptical of explanations from former Silicon Valley Bank CEO Gregory W Becker for why the institution went under.
“That sounds a lot like the dog ate my homework,” remarked the committee’s Democratic chair Sherrod Brown, after Becker in his opening statement blamed the Federal Reserve’s interest rate hikes as well as what he called a social media-fueled bank run for the collapse.
Brown asked Becker to explain why Silicon Valley Bank did not have a chief risk officer on its staff for some of last year. That’s a position typically tasked with guarding against the type of insolvency that the bank eventually fell into. “We took risk management seriously,” Becker responded, and blamed the gap on the time it took to find a suitable candidate.
The committee’s top Republican Tim Scott indicated he found Becker’s explanation wanting. “You said you took risk management seriously. It’s hard to believe that comment,” he said, pointing out that at the time of its collapse, 90% of Silicon Valley Bank’s deposits were uninsured by the federal government.
Here are a few of the other elections happening across the United States today:
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Kentucky Republicans will vote on a challenger to take on the state’s Democratic governor Andy Beshear, who is standing for a second term in November.
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Control of Pennsylvania’s House of Representatives – and the fate of an abortion access referendum the GOP may put before voters – is at stake in two special elections that will determine which party controls the chamber, according to the Associated Press. Democrats need to win just one of these to cement their majority, and thwart Republicans’ efforts.
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Speaking of Pennsylvania, today is the day of the city’s Democratic primary for mayor – the victor of which is likely to win the general election in the solidly blue city. As with the Chicago mayor’s race earlier this year, the New York Times reports that the contest will serve as a bellwether of voters’ appetites for progressive leaders.
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Jacksonville, Florida is one of the few major cities in the United States with a Republican mayor, Lenny Curry. Term limits prevent him from running for another term, and polls are open in a runoff election today where voters will decide whether to replace him with another Republican, or hand the reins of the city to the Democratic candidate.
There are a number of elections happening across the country today, including in Kentucky, where a Republican secretary of state who has taken pride in expanding voter turnout is facing a challenge from within his party, the Guardian’s Kira Lerner reports:
Kentucky’s Republican secretary of state has earned widespread praise for increasing his state’s voter turnout during the coronavirus pandemic and for expanding opportunities to vote. He has also shot down conspiracy theories about the 2020 election and defended his state’s election system from claims of fraud, a stance that could cost him his job.
On Tuesday, Michael Adams is facing a primary challenge from two Republicans who align themselves with the growing faction within the GOP who believe elections are frequently rigged and stolen. The winner will face Buddy Wheatley, a Democrat and former state representative, in November.
In an interview, Adams said it would “absolutely” be worth it if he loses the race to have defended and expanded Kentucky’s elections, but he was hopeful that Kentucky Republicans understood the ways his reforms had benefited them.
Failed Silicon Valley, Signature bank executives face Senate grilling
The former leaders of collapsed financial institutions Silicon Valley Bank and Signature Bank are set to testify before the Senate banking committee in a hearing starting now.
The witnesses include the former Silicon Valley Bank CEO, Gregory W Becker, Scott A Shay, former chairman and co-founder of Signature Bank, and its former president, Eric R Howell. The two banks were shut down by federal authorities in the course of a weekend in March after suddenly becoming insolvent, raising fears of a crisis that could spread across the financial system. Another major regional bank, First Republic, failed the following month, and it’s unclear the extent of the risk posed to other financial institutions.
Senators will probably ask about that at the hearing, which you can follow at the live stream embedded at the top of the page.
The Congress gurus at Punchbowl News have a rundown of all the reasons to be worried about lawmakers’ ability to actually pass a debt limit compromise ahead of the 1 June deadline.
Their concerns focus on the logistics of both reaching a compromise and getting a bill approved by Congress. Despite all the meetings, including the one scheduled for this afternoon between Joe Biden, Kevin McCarthy and other congressional leaders, the sides still appear to be far apart.
Here, according to Punchbowl, are a few of the things that could still go wrong:
Timing. House Republican leadership estimates congress needs 10 days to move this deal if and when it comes together. There are 10 weekdays until June 1 pic.twitter.com/B89V6Nad6k
— Jake Sherman (@JakeSherman) May 16, 2023
Janet Yellen says failing to raise debt ceiling would spark new financial crisis
In a speech this morning to a group of community bankers, Janet Yellen outlined the consequences of failing to raise the debt ceiling, saying the economy’s recovery from the Covid-19 pandemic would be undone and a new financial crisis would be triggered.
“In my assessment – and that of economists across the board – a US default would generate an economic and financial catastrophe. Over the past few years, American families and businesses – including many of yours – have worked hard to mount a historic economic recovery. A default would reverse all of the hard-earned progress that we’ve made. And it would set us back even further,” she told a meeting of the Independent Community Bankers of America.
She described a scenario where the government would be unable to pay its bills, disrupting government services such as air traffic control and law enforcement as well as payments to military veterans and social security recipients.
“And of course, the financial crisis that accompanies a default on our debt could multiply the severity of the downturn,” Yellen continued. “The US Treasury market serves as the very bedrock of the global financial system. There’s a reason for that: the world has never doubted that America will pay the principal and interest on its bonds – in full and on time. That’s a fundamental principle of modern finance. A default would crack open the foundations upon which our financial system is built. It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs and fire sales.”
Yellen confirms 1 June deadline for debt limit standoff
In a letter to the Republican speaker of the House, Kevin McCarthy, released yesterday, the treasury secretary, Janet Yellen, confirmed the first day of June remains the estimated date when the US government could default if the debt limit is not raised, dashing hopes that incoming tax revenue or other measures could push the deadline back further.
“With additional information now available, I am writing to note that we still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” Yellen wrote, adding: “The actual date Treasury exhausts extraordinary measures could be a number of days or weeks later than these estimates.”
She then warned McCarthy that even if a default is avoided at the last minute, the protracted uncertainty has already caused problems for the US economy:
We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States. In fact, we have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June. If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.
I continue to urge Congress to protect the full faith and credit of the United States by acting as soon as possible.
Biden and McCarthy to meet as debt ceiling talks enter crunch time
Good mornings, US politics blog readers. Talks between Democrats and Republicans over raising the debt limit have gone the direction the pessimists told us they would. We’re only 16 days away from 1 June, when the US government – having hit the legal limit on how much money it can borrow months ago – is expected to exhaust its cash on hand and could default on its debt obligations, potentially causing a financial calamity.
Joe Biden and top lawmakers in Congress have seen this day coming for months, and they’ve been negotiating for weeks, but there’s still no deal to raise the borrowing limit even though both parties say a default must be avoided.
The good news here is that Biden, Kevin McCarthy and congressional leaders are meeting at 3pm ET, so perhaps a breakthrough is in the offing.
Here’s what else is going on today:
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The treasury secretary, Janet Yellen, is speaking this morning to a conference of the Independent Community Bankers of America in Washington DC, where she may elaborate on the administration’s view of the debt ceiling standoff.
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You may hear more about the report special counsel John Durham released on Monday examining the origins of the 2016 investigation into Donald Trump’s ties to Russia.
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Michael McCaul, the Republican chair of the House foreign affairs committee, may hold the secretary of state, Antony Blinken, in contempt over his refusal to turn over a 2021 dissent cable written by embassy staff in Kabul, Afghanistan.