Debt Ceiling Up, Credit Rating Down, Committee Formed; Reaction Ripples

Published August 19, 2011

August has been known for the dog days of summer. After this August it may be known for the wild days of markets.

Congress in August raised the national debt ceiling and created a “super Congress” to recommend cuts in government spending. Soon after, the credit rating agency Standard & Poor’s dropped the government’s debt rating, stock markets went into record gyrations, the value of the dollar continued to drop, Treasury bond prices rose, interest rates fell, and prices for gold, silver, and other inflation hedges climbed.

On Aug. 18 the New York Stock Exchange opened with a plunge of more than 300 points in the first 10 minutes of trading. And that was after the NYSE invoked “Rule 48” to allow the exchange to suspend price indications that help determine the floor price at the open during regular sessions. “Substantial activity in the futures market before the open” allows the exchange to invoke Rule 48, according to the NYSE’s Web site.

Widespread Doubts

Skepticism over the economy—and the government’s moves to fix it—abounds. The Federal Reserve signaled doubts in August by pledging to hold interest rates at record lows for “at least” two more years. International financial services firm Morgan Stanley followed with a report stating the U.S. is “dangerously close” to another recession despite government attempts to strengthen the economy.

“It may be hard to believe but the current gyrations are nothing compared to what’s coming,” said economist Robert Wenzel, editor and publisher of the Web site.

“The money supply is growing very rapidly, again, under the watch of Fed Chairman Ben Bernanke,” he added. “Prices at the producer level are already growing at 7 percent plus on an annual basis. This rate could hit double digits by the end of the year. Then bond rates are going to start climbing. What is Bernanke going to do at that point, fight the inflation by slowing money growth or fight the climbing interest rates by printing more money?”

Presidential Contenders’ Criticisms

Republican Party contenders for the nomination for president in the 2012 election are also skeptical.

Rep. Ron Paul (R-TX) has spent his long career in Congress opposing government spending and debt ceiling increases.

“I believed the debt was going to be a problem many years ago, and debt is a problem. You don’t get out of the problem of too much debt by allowing the Congress to spend a lot more and granting them another $2.4 trillion of debt,” said Paul  on Fox Business News. Paul opposed the debt ceiling deal and finished in second place in the Iowa Republican Straw Poll in August, fewer than 200 votes behind Rep. Michele Bachmann (R-MN).

He also challenges the constitutionality of the “super Congress,” formally known as the Joint Select Committee on Deficit Reduction, that was created as part of the debt deal. It is made up of six House members and six Senators whose task is to identify $1.5 trillion of spending cuts over the next 10 years.

In a press statement, Paul described the committee as “nothing more than a way to disenfranchise the majority of Congress by denying them the chance for meaningful participation in the crucial areas of entitlement and tax reform. It cedes power to draft legislation to a special commission, handpicked by the House and Senate leadership. The legislation produced by this commission will be fast-tracked, and Members will not have the opportunity to offer amendments.”

Bachmann also opposed the debt ceiling deal, as did most other fellow Republican presidential aspirants including Mitt Romney. Texas Gov. Rick Perry (R), who jumped into the race after the straw poll, said he also opposed the debt deal.

Legislative Leaders’ Support

Despite these criticisms, most lawmakers supported the deal, which was led by House Speaker John Boehner (R-OH) and Senate Majority leader Harry Reid (D-NV). President Barack Obama signed it into law shortly after receiving it.

In an address on the Senate floor, Reid said, “The agreement protects the long-term health of our economy. And it establishes a committee that will look at every option for reducing future spending—no matter how painful to either party.”

Reid referred to the Democrat and Republican Parties, ignoring the loosely organized Tea Party that burst onto the scene two years ago and helped throw the 2010 elections to the Republicans. It’s made up of millions of citizens who say they are fed up with both major political parties.

Tea Party Undaunted

In the weeks leading up to the August debt deal, Vice President Joe Biden and some other politicians accused the Tea Party of acting like “terrorists” and “extortionists” for opposing a rise in the debt ceiling.

Tea Party leaders shrug off the insults. Before the final vote was cast, William Temple, chairman of the Tea Party National Convention, told FIRE Policy News the vote would be “a throwdown issue. This is the Alamo for us. We don’t want to see the government continue this wasteful spending.”

He pledged the Tea Party would work to unseat any Republicans who supported a higher debt ceiling.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of FIRE Policy News.