Leaders in Congress scramble toward deal

Race to break logjam before markets open

By Matt Viser and Theo Emery
Globe Staff / July 24, 2011

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WASHINGTON - Congressional leaders scrambled yesterday to find a way out of the impasse over the nation’s debt and to forge a compromise agreement by tonight, as economists warned of looming disaster and an increasingly nervous nation hoped for a quick solution.

Following a rancorous and very public breakup of private talks between House Speaker John Boehner and President Obama on Friday - and faced with the prospect that failure could roil already skittish financial markets - the leaders met for less than an hour with the president before shuttling among camps of advisers throughout the day.

No progress was reported in the meeting with the president, but in a conference call with House Republicans yesterday afternoon Boehner said it was critical to show “some sign of progress’’ on a compromise plan, cutting federal spending and freeing the nation to raise its borrowing limit, be in place by tonight, before the Asian markets open. That could help allay financial sector fears and allow time for both chambers, beginning in the House, to vote on the plan before the nation begins to default on its obligations Aug. 3.

“Congress will forge a responsible path forward,’’ Boehner said in a statement.

Despite the shortness of time, and the high-stakes involved, both Democrats and Republicans pushed for a complex, comprehensive, and long-term deal rather than settle for a stop-gap measure.

“Absolutely, positively not,’’ House minority leader Nancy Pelosi said yesterday, when asked whether a short-term deal was viable. Obama has continued to insist that any legislation be for a long-term extension.

“I will not support any short-term agreement, and neither will President Obama nor leader Pelosi,’’ Senate majority leader Harry Reid said. “We seek an extension of the debt ceiling through at least the end of 2012.’’

Until Friday, Boehner and Obama had been negotiating a long-term plan that would have included nearly $3 trillion in cuts during 10 years, as well as a rewrite of the nation’s tax code that would have brought in at least $800 billion in new revenue.

Boehner said he left those talks when Obama asked for another $400 billion in revenues that would come through tax increases.

The speaker is now pursuing a plan that would involve roughly $3 trillion in cuts. It is unclear whether that plan would include any tax changes, but Senate Democrats - whose support will be needed in any plan - have been adamantly opposed to any proposal that includes deep cuts with no new revenues.

The plan being discussed would involve a two-phase approach that would immediately cut about $1 trillion in spending and raise the debt limit by the same amount, enough to continue spending levels until the end of the year, according to congressional aides briefed on the negotiations. A second increase to the debt limit would then be required early next year, but would be tied to a broader range of entitlement reforms and tax code changes that would come from recommendations from a congressional commission. This approach was meeting resistance yesterday from Democrats who are opposed to any short-term measure; Obama has insisted that the debt limit be extended through 2012.

Democrats appeared to be digging in last night, illustrating either last-minute political posturing to get a better deal or an impasse in the talks.

“I am deeply disappointed in the status of negotiations with my Republican colleagues,’’ Reid said in a statement, specifically saying he would oppose any agreement that does not raise the debt ceiling through the end of 2012.

A Boehner spokesman responded that “a two-step process is inevitable.’’

Economists and political observers warned that if a deal was not struck before tonight, the financial markets could begin to tumble as investors lose confidence in the political and economic systems of the United States.

“Right now, investors are scrambling to figure out how to protect themselves against a default,’’ said Michael Greenberger, a professor at the University of Maryland and former director of trading and markets of the Commodity Futures Trading Commission. “Nothing can happen short of an invasion of the United States or a detonation of a nuclear weapon that would more destroy the well being of the American people.’’

If the markets do react strongly - as soon as tonight in Asia and tomorrow morning in New York - some fear the sense of crisis could mirror what occurred three years ago when the demise of Lehman Bros. and the upheaval of the credit and mortgage markets forced Congress to consider a federal bailout of financial titans. The resulting Troubled Asset Relief Program was voted down by the House in September 2008, and the markets plunged. By the end of the week, Congress passed a version of the bill.

“The markets have kind of assumed that rationality would prevail. But every hour it’s seeming less and less likely that that will be the case,’’ said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.

Congress will have to thread a political needle if legislators are to get it done, particularly amid the partisan rancor that enveloped Washington over the past two years and has spiked in recent days. Conservative Republicans, demanding no tax increases be part of any deal, and liberal Democrats, insisting that social programs such as Medicare and Social Security remain intact, have calcified their positions.

Boehner has said that any legislation on the compromise would have to be completed by tomorrow if the House is to abide by rules that legislation be posted for three days before votes are taken. If that happens, the House could vote Wednesday and send the legislation to the Senate. Because of procedural hurdles, it typically takes days for legislation to get a final vote in the Senate.

The whole process could take the country right up to the Aug. 2 deadline. If Congress is unable to come to a deal by then, the country would be unable to borrow new money and would start defaulting on some of its obligations.

Obama and Boehner had been engaged in secret talks over an overarching deal that would have resulted in cuts to entitlement programs as well as a rewriting of federal tax codes. The deal fell apart when Boehner objected to some of the tax changes requested by the White House.

The fallout from the breakdown in talks Friday night was a display of open rancor, as the nation’s top elected officials held dueling press conferences to state their case. President Obama said Boehner hadn’t returned his phone calls. Boehner compared negotiating with the White House to dealing with Jell-O.

The scene at Capitol Hill yesterday had a surreal edge. Flashes from tourists’ cameras pausing to photograph the speaker’s offices were enough to send reporters stampeding toward his doorway, only to discover it was a false alarm.

At one point, one of Boehner’s aides wandered out of the speaker’s suite in search of a soda, and a mob of reporters formed around him, peppering him with questions about when the speaker would return. He said he didn’t know.

Matt Viser can be reached at top stories on Twitter

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