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  • Writer's pictureThe San Juan Daily Star

Yellen’s debt limit warnings went unheeded, leaving her to face fallout


Treasury Secretary Janet Yellen during a Senate Appropriations Committee hearing on Capitol Hill, in Washington on March 22, 2023.

By Alan Rappeport


In the days after November’s midterm elections, Treasury Secretary Janet Yellen was feeling upbeat about the fact that Democrats had performed better than expected and maintained control of the Senate.


But as she traveled to the Group of 20 leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the U.S. economy.


“I always worry about the debt ceiling,” Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use their remaining time in control of Washington to lift the debt limit beyond the 2024 elections. “Any way that Congress can find to get it done, I’m all for.”


Democrats did not heed Yellen’s advice. Instead, the United States has spent most of this year inching toward the brink of default, as Republicans refused to raise or suspend the nation’s $31.4 trillion borrowing limit without capping spending and rolling back parts of President Joe Biden’s agenda.


Top White House and Republican negotiators reached a deal in principle Saturday to raise the debt limit for two years while cutting and capping some government spending over the same period, but congressional passage of the plan before June 5, when the Treasury is projected to exhaust its ability to pay its bills, was not assured. The federal government’s cash balance has already fallen below $40 billion.


Yellen has held her contingency plans close to the vest but signaled this week that she had been thinking about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury secretary laid out the difficult decisions she would face if the Treasury was forced to choose which bills to prioritize.


Most market watchers expect that the Treasury Department would opt to make interest and principal payments to bondholders before paying other bills, yet Yellen would say only that she would face “very tough choices.”


White House officials have refused to say if any contingency planning is underway. Early this year, Biden administration officials said they were not planning for how to prioritize payments. As the U.S. edges closer to default, the Treasury Department declined to say whether that has changed.


Yet former Treasury and Federal Reserve officials said it was nearly certain that emergency plans were being devised.


Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018, said that given the rapidly approaching X-date, “one would expect” that “there would be quiet conversations between the Treasury Department and the White House around how they would manage a technical default and perhaps prioritization of payments.”


The Treasury Department has developed a default playbook from previous debt limit standoffs in 2011 and 2013. And Yellen has become quite familiar with those: During the last two significant standoffs — in 2011 and 2013 — she was a top Federal Reserve official contemplating how the central bank would try to contain fallout from a default.


Yellen was briefed on the Treasury’s plans during those debates and engaged in her own contingency discussions about how to stabilize the financial system in the event that the United States could not pay all of its bills on time.


According to the Fed’s transcripts, the Treasury Department did in fact plan to prioritize principal and interest payments to bondholders in the event that the X-date was breached. Although Treasury Department officials had trepidations about the idea, they had expressed to Fed officials that it could ultimately be done.


Fed officials also discussed steps that they could take to stabilize money markets and to prevent failed Treasury auctions from prompting a default even if the Treasury Department was successfully paying creditors. Yellen said in both 2011 and 2013 that she was on board with plans to protect the financial system.


“I expect that actions of this type might well prove unnecessary after the Treasury finally states that they do intend to pay principal and interest on time and we have finally issued our own set of policy statements,” Yellen said in 2011. “But if the stress nevertheless escalates, I’d support interventions to alleviate pressures on money market funds.”


Yellen added that she was concerned about how vulnerable market infrastructure was in the event of a default and said officials should be thinking about ways to plan for a default in the future.


“Given that we could face a similar situation somewhere down the road, I think it’s important for us to think about lessons learned so that we and markets will be better prepared if we face such a situation again,” Yellen said.


Eric Rosengren, who was the president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected that Yellen, who is known for being rigorously prepared, was busy considering contingency plans as she did at the Fed more than a decade ago.


“It would be irrational not to do some planning,” said Rosengren, adding that Yellen’s background of dealing with financial stability matters makes her well placed to be as ready as possible for the fallout of a default. “The last thing you want is to be completely unprepared and have the worst outcome.”


As the debt ceiling standoff has intensified, Yellen has not been as involved in negotiations with lawmakers as some of her predecessors.


Biden tapped Shalanda Young, his budget director, and Steven Ricchetti, White House counselor, to lead the negotiations with House Republicans. Yellen has not attended the Oval Office meetings between Biden and Republicans.


“It doesn’t look from the outside like Yellen is playing an active role in the budget negotiations,” said David Wessel, a senior economic fellow at the Brookings Institution who worked with Yellen at Brookings. “That may be that it’s not her comparative advantage, it may be that the White House wants to do it themselves, and it may be that they want to protect the credibility of Treasury predicting the X-date.”


Yellen has taken a more behind-the-scenes role, briefing the White House on the nation’s cash reserves, calling business leaders and asking them to urge Republicans to lift the debt limit and sending increasingly regular letters to Congress warning when the federal government will be unable to pay all its bills.


A White House official pointed out that Yellen has been the Biden administration’s primary messenger on the debt limit on the Sunday morning talk shows and that she is coordinating on a daily basis with Jeffrey Zients, the White House chief of staff, and Lael Brainard, the director of the National Economic Council, to plot the administration’s strategy. Other officials have participated in the Oval Office meetings because the White House continues to view them as budget negotiations, the official added.


The Treasury secretary also cut short a recent trip to Japan for a meeting of the Group of 7 finance ministers so she could return to Washington to deal with the debt limit.


Whenever the debt limit standoff does subside, Democrats will most likely come under renewed pressure to overhaul the laws that govern the nation’s borrowing the next time they control the White House and Congress. Fearing that a fight over the debt limit would put her in the precarious position that she now faces, Yellen said in 2021 that she supported abolishing the borrowing cap.


“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Yellen said at a House Financial Services Committee hearing. “And if to finance those spending and tax decisions, it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.”

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