House Will Vote to Increase the Debt-Ceiling Timer

A new chapter has begun in the ongoing United States debt-ceiling debate. House Republicans, fresh off a private policy meeting in Virginia, announced on Friday that they will vote on a short-term increase to the federal borrowing limit.Debt

The announcement sent a surge of optimism through the markets, pulling the Dow and S&P 500 back to the brink of positive territory after trading low all morning. The NASDAQ remained weighed down by Intel’s (NASDAQ:INTC) post-earnings drop, but also pulled back from intraday lows to settle at just marginal losses.

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The Republican proposal would increase the government’s borrowing limit just enough to finance operations through mid-April. This gives Congress a little more breathing room beyond the current deadline for default, which is either late February or early March, depending on how long the Treasury’s extraordinary financing measures last. Republicans want to use this time to pass a budget.

What’s particularly interesting is the commitment device that the GOP built into their bill. Previously, Congress built in the fiscal cliff to force themselves to make a deficit-reduction decision (and that worked out really, really well). This time, if Congress doesn’t adopt a budget by April 15, then they won’t get paid…

debt-posters“This is the first step to get on the right track, reduce our deficit and get focused on creating better living conditions for our families and children. It’s time to come together and get to work,” said House Majority Leader Eric Cantor (R-Virginia). The political happy-talk may sound like business as usual, but it’s much better than simply holding the threat of default above everybody’s head. This, at least, is actually progress.

It’s unclear how the Democratically-controlled Senate will react to the measure. Democrats have come out saying that Republicans are afraid of being blamed for a possible default, which is probably true. But regardless of why they’re taking steps forward, they’re on the move.

However, market participants have come out saying that they’re afraid that Democrats won’t sit down and take the budget talks seriously. Currently, there is no mechanism to ensure that Congress passes a budget resolution each year. As a result, the last time the Democratic-led Senate adopted a budget was in 2009. Appropriations bills have filled the gap, but the process is obviously messy and indicative of the same kind of behavior that pushed the country to the edge of the cliff.

Don’t Miss: The Cautious Optimism of Timothy Geithner.