“There are certain weapons that are just improper to use against humanity, and to use this against the American public — it is a political weapon of mass destruction. It’s too powerful.”
Speaking to CNBC on October 16, Warren Buffett, chairman and CEO of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), was making an allusion to the atomic bomb, but was directly referencing the fiscal impasse that has dominated Washington over the past several weeks. What started as a fight over the federal budget and the Affordable Care Act escalated into brinksmanship over the debt limit, and the prospect of a default — however unlikely — sent a chill through financial markets around the world.
The snafu began at the end of September when ultra-conservative Republican members of the House of Representatives tried to use the federal budget as a vehicle to defund the Affordable Care Act. The strategy, perhaps most visibly championed by Senator Tex Cruz (R-Tex.), failed, meeting uncompromising resistance from Senate Democrats and President Barack Obama.
Republicans, though, refused the change the tune of their argument, at first shooting down any budget that did not defund or delay the ACA, and later by denying a vote on a clean stopgap measure to fund the government, which tripped into a partial shutdown on October 1. The ultra-conservative faction demanded that changes to the ACA be part of any budget agreement, and the Obama administration, backed by the Democratic party, refused to budge an inch: a classic standoff.
As both parties dug in, put on their blast goggles, and began lobbing political grenades at one another from either side of the aisle, the focus of the debate — and of public conversation — began shifting toward October 17, the date at which Treasury Secretary Jack Lew said the government would exhaust its borrowing authority.
If Congress failed to act to raise the debt limit by then, the government would be forced to use a relatively small amount of cash on hand plus incoming revenues in order to meet its obligations. Without the ability to borrow, the government would only be able to meet about two-thirds of its obligations. The great fear in this event is that the Treasury would be unable to prioritize payments — something Secretary Lew suggested the Treasury did not have the logistical capacity to do — and America would default on its sovereign debt.
Testifying before the Senate Finance Committee on October 10, Secretary Lew stated that political brinksmanship — which only intensified from the time of his testimony up through the eleventh hour — “points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy, and real risk of a financial crisis and recession that could echo the events of 2008 or worse.”
The potential for catastrophic financial crisis is the political weapon of mass destruction that Buffett was referring to. Unfortunately, it was invoked in the most-recent round of debt ceiling brinksmanship.
Fortunately, it appears as if Congress has diffused the situation — for now — and has passed a last-minute measure to temporarily increase the borrowing limit and fund the government.