What Debt Ceiling?

Almost 50 years have passed since the Congressional Budget and Impoundment Control Act of 1974 became law. The act governs how elected officials are supposed to draft and approve a budget every year. Under the law, that process is supposed to go like clockwork.

To say it doesn’t go like clockwork is an understatement. What does happen like clockwork are missed deadlines, rushed stopgap or omnibus spending bills to keep the federal government from shutting down, and debt ceiling crises.

Debt ceiling crises rank among the fakest of political events in Washington, D.C. There is a kabuki theater element to the performative brinkmanship that takes place each time the growth of the national debt requires Congress to increase the government’s statutory debt limit. 2023’s performance is no different.

On March 10, 2023, U.S. Treasury Secretary Janet Yellen issued a warning related to what would happen if the debt ceiling was not raised:

In my assessment—and that of economists across the board—a default on our debt would trigger an economic and financial catastrophe. I urge all members of Congress to come together to address the debt limit—without conditions and without waiting until the last minute.

In less than two weeks, Janet Yellen’s warning proved hollow. That’s because she and the Biden administration appear to have executed an end run around both the statutory debt limit and the U.S. Congress to bail out politically influential depositors affected by the collapse of Silicon Valley Bank.

Writing in The Hill, Paul Kupiec describes how they did it:

In the past week, the Fed’s financial statement shows it borrowed an additional $143 billion to fund the FDIC’s bailout of Silicon Valley Bank (SVB) and Signature Bank, even though the FDIC is supposed to fund bank bailouts using the deposit insurance fund and, if need be, by borrowing from the U.S. Treasury. Instead, the Fed borrowed these funds and lent them to the FDIC to keep these bank failures from reducing the Treasury’s cash balances. You may recall that the Treasury is already precluded from any additional borrowing under the current congressional debt limit. …

So, faced with cash demands to finance the SVB and Signature Bank failures, dwindling Treasury cash balances, and a congressional debt limit that precludes additional Treasury borrowings, the administration decided to circumvent the FDIC’s legally authorized funding sources and use Federal Reserve emergency lending powers to fund the FDIC bailout.

The Fed is now borrowing to fund the FDIC loan as well as the Fed’s own operating losses to the tune of $184 billion, and yet these costs do not show up in the Federal budget deficit nor do the Fed’s borrowing count against the congressional Federal debt ceiling even though these borrowings clearly are U.S. government debt.

The Biden administration’s end run demonstrates it is not constrained by the statutory debt limit. The precedent they have set shows all the debt ceiling crises since 1974 are little more than political showpieces. By borrowing money to bail out Silicon Valley Bank’s depositors “off the books,” they may have done away with the illusion the debt limit imposes fiscal restraint upon Washington D.C.’s politicians and bureaucrats.