By: Susan Davis, Aamer Madhani and Gregory Korte, USA TODAY
WASHINGTON - The fight over the government shutdown, which entered its third day Thursday, turned toward heightened concern over the need to raise the nation's $16.7 trillion debt ceiling and avoid a potentially catastrophic default on its bills.
President Obama emphasized the stakes at an event at a construction company in Rockville, Md., Thursday, saying Washington's inability to deal with the looming debt ceiling would be worse than the government shutdown. Distribution of Social Security and disability benefits would be delayed, and pensions would be decimated and interest rates would skyrocket, Obama said.
"As reckless as a government shutdown is, as many people are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse," Obama said.
A Treasury Department report released Thursday spelled out the consequences of failing to raise the debt ceiling: "Even the prospect of a default can be disruptive to financial markets and American businesses and families." During the July 2011 fight over the debt ceiling, the report said, consumer confidence fell 22%, the stock market dropped 17% and monthly payments on new mortgages went up an average of $100 - all because of market uncertainty over the increase in the debt limit.
Raising the debt ceiling does not influence future government spending; it is the federal government's commitment that it will pay off its existing debt. Failure to raise the ceiling weakens the U.S. government's commitment to the bonds it sells investors around the world and could lead to a major sell-off of those bonds, stimulating a global financial crisis.
That will not happen, House Republicans pledged Thursday. They said a bill the House passed in May, which has not become law, would prioritize debt payments if the government did not meet the deadline to raise the debt ceiling.
"I think that all this talk about a default has been a lot of demagoguery, a lot of false demagoguery," Rep. Steve King, R-Iowa, said on CNN's New Day. "We have plenty of money coming in to service the debt. then we stop servicing the debt, that would be default."
The House's Full Faith and Credit Act orders the Treasury Department to prioritize payments so that principal and interest on the debt is paid first, but the administration has warned that such an approach could cause havoc in financial markets and harm the U.S. economy.
"House Republicans have passed legislation to ensure there will never be default on an American bond, on the full faith and credit of the United States," House Financial Services Chairman Jeb Hensarling, R-Texas, told MSNBC.
Obama said he would veto that bill if it ever passed the Senate and reached his desk, saying it would result in Congress refusing to pay bills it has already agreed to. "American families do not get to choose which bills to pay and which ones not to pay, and the United States Congress cannot either without putting the nation into default for the first time in its history," the White House said in a statement of administration policy in May.
The stalemate has taken a toll on financial markets. By 1:45 p.m. Thursday, the Dow Jones industrial average, the bellwether index on Wall Street, had dropped 85 points. Financial executives who met with Obama Wednesday agreed that risking default over the debt ceiling increase, in the words of Goldman Sachs Chairman and CEO Lloyd Blankfein, "should not even be considered a viable option."
Despite the warnings, Obama and congressional Republicans are no closer to ending the shutdown. A meeting between Obama and congressional leaders late Wednesday failed to yield an agreement.
"Yesterday's meeting at the White House, frankly, wasn't particularly encouraging," said Senate Minority Leader Mitch McConnell, R-Ky, one of the participants. Neither side budged from its starting negotiating position.
Obama and Democrats say they will negotiate on the budget after Republicans agree to move a Senate-passed bill that pays for government through Nov. 15 and does not affect the 2010 health care law. Obama also said Republicans must agree to vote to raise the federal debt ceiling, the nation's borrowing limit, by Oct. 17.
Republicans still want changes to the Affordable Care Act, but many are calling for additional cuts in government spending and other changes as the calendar is forcing a combined vote to end the shutdown and extend the debt ceiling.
On Thursday, House Republicans continued to pursue a piecemeal shutdown strategy to pass targeted funding bills for popular government services. However, the bills are being stone-walled in the Senate, where Senate Majority Leader Harry Reid, D-Nev., has offered to negotiate with Republicans on a broader budget agreement only after they approve a stopgap spending bill to fully reopen the federal government.
House Majority Leader Eric Cantor, R-Va., wrote to rank-and-file Republicans in a memo Thursday that he was confident Obama and congressional Democrats would eventually bow to negotiations if Republicans hold the line.
"While no one can predict with certainty how the current shutdown will be resolved, I am confident that if we keep advancing common-sense solutions to the problems created by the shutdown that Senate Democrats and President Obama will eventually agree to meaningful discussions that would allow us to ultimately resolve this impasse," Cantor wrote, "The American people have elected a divided government and they expect us to work together and they will not countenance one party simply refusing to negotiate."
King told CNN that lawmakers were prepared to remain in session until the crisis is resolved. "If the other side refuses to negotiate then there's really nothing that can be done except to continue to offer to negotiate. And we'll be in this town until this is resolved. I don't think anybody's going home here in Congress."
House Republicans have scheduled a 10 a.m. meeting Friday to discuss their negotiating positions.
Contributing: David Jackson