Banks Warn Obama About His Debt

A group of the largest US banks and fund managers stepped up the pressure on Congress and the Obama administration to reach a deal to increase the country’s debt limit, saying that even a short default could be devastating for the financial markets and economy. The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy. In the first 19 months of the Obama administration, the federal debt held by the public increased by $2.5260 trillion, which is more than the cumulative total of the national debt held by the public that was amassed by all U.S. presidents from George Washington through Ronald Reagan. The U.S. Treasury Department divides the federal debt into two categories. One is “debt held by the public,” which includes U.S. government securities owned by individuals, corporations, state or local governments, foreign governments and other entities outside the federal government itself. The other is “intragovernmental” debt, which includes I.O.U.s the federal government gives to itself when, for example, the Treasury borrows money out of the Social Security “trust fund” to pay for expenses other than Social Security.

The most pressing budgetary issue confronting Congress and the Obama administration is the need to raise the US debt ceiling, which stands at $14,300 billion. That threshold will be reached by May 16 and the Treasury department has said that in the absence of congressional action, the world’s largest economy could default by early July. Although such a scenario is still likely to be avoided, the looming deadline is stoking concerns within the financial industry. When Obama took the oath of office on Jan. 20, 2009, the total federal debt held by the public stood at 6.3073 trillion, according to the Bureau of the Public Debt, a division of the U.S. Treasury Department. As of Aug. 20, 2010, after the first nineteen months of President Obama’s 48-month term, the total federal debt held by the public had grown to a total of $8.8333 trillion, an increase of $2.5260 trillion.

In just the last four months (May through August), according to the CBO, the Obama administration has run cumulative deficits of $464 billion, more than the $458 billion deficit the Bush administration ran through the entirety of fiscal 2008.

“Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the US Treasury and overall financial markets in uncharted territory and could trigger another catastrophic financial crisis,” said Matthew Zames, a JPMorgan executive, in a letter to Tim Geithner, the Treasury secretary, this week.

Mr Zames was writing as chairman of the Treasury Borrowing Advisory Committee, which includes some of the largest investors in US government bonds, such as Bank of America [BAC  12.33    0.10  (+0.82%)   ], Goldman Sachs [GS  152.23    -1.04  (-0.68%)   ], Morgan Stanley [MS  25.51    -0.29  (-1.12%)   ], Pimco [TUZ  50.86    -0.007  (-0.01%)   ], RBS [RBS  13.79    0.02  (+0.15%)   ], Tudor [TDRLF  0.1595    -0.0722  (-31.16%)   ] and Soros Fund Management.

In the letter, Mr Zames outlined several consequences of a default – or even an extended delay in raising the debt limit – that are causing jitters on Wall Street.

These included the dumping of US government debt by foreign holders and the downgrade of the US triple-A credit rating, following last week’s move by Standard & Poor’s to change its outlook on the US from “stable” to “negative” for the first time in 70 years. The letter was released 10 days before the launch of a new round of high-stakes fiscal negotiations to be led by Joe Biden, US vice-president.

Senior administration officials have said they have received assurances from Republican leaders that they understood the high stakes involved in the discussion on raising the debt ceiling and would avoid pushing the US towards default.

Back in 2006 when he was a Senator and the political winds were blowing in the opposite direction, he had this to say when he voted against raising the debt limit: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.” Just two months ago, Obama proposed his $3.7 trillion 2012 budget – it contains no efforts at deficit reduction or spending controls, much less entitlement reform – thereby ensuring that, before his real proposal was released, he drew the Republican response from House Budget Committee Chairman Paul Ryan (R-Wis). Obama’s new plan is nothing more than a combination of class warfare – soak-the-rich tax hikes – coupled with a perpetuation of the ruinous, job-killing fiscal course Obama already set us on: spending 23.6 percent of GDP in 2012, he calls for a spending increase to 24.2 percent in 2021, and of course no real effort at entitlement reform.

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