Yellen Asks Congress to Raise Debt Ceiling Through 'Regular Order', a Debt Default Would Harm Financials and Housing But Seen as a 'Low Risk' by Analyst

Treasury Secretary Janet Yellen asked Congress today to increase the debt ceiling via regular order rather than as part of a reconciliation bill. Her request comes on the day same day Democrats plan to present the multi-trillion budget resolution.

“In recent years Congress has addressed the debt limit through regular order, with broad bipartisan support. In fact, during the last administration, Democrats and Republicans came together to do their duty three times. Congress should do so again now by increasing or suspending the debt limit on a bipartisan basis,” Yellen said in a statement.

A week ago, the two-year deal to suspend the debt ceiling expired. At this stage, President Biden can either raise or suspend the limit.

Cowen analyst Jaret Seiberg has weighed in on the debt ceiling to note that at least 10 Senate Republicans would need to support a rise in the debt ceiling.

“We view a debt default as the biggest policy threat to financials and housing. This was true under Obama and Trump. It would be an unforced error that diminishes the dollar in global commerce while raising government borrowing costs. That means more borrowing, higher taxes and less stimulus. It also means higher prices for consumers and businesses as higher borrowing costs result in inflation,” Seiberg said in a client note.

However, there is a low risk of this taking place, says Seiberg as Congress may be party-divided but also not “as dysfunctional as it may appear in the media.”

The analyst believes that the Democrats are trying to force Republicans to “support raising the debt limit rather than raise it via reconciliation, which is a way to avoid default even if every Republican voted against an increase.”

In case that happens, then a debt default is the biggest policy threat to financials and housing, he notes.

“It could put home values at risk as higher borrowing costs limit how much home one can afford. We saw in 2008 how much trouble the economy can get into if home values collapse. That leaves consumers underwater on mortgages, which leads to higher foreclosure rates and lost savings.”

For Seriberg, this is simply another episode in a decade-long fight. Markets are only worried that Congress acts on this issue, while a question whether it will get raised via reconciliation or through a vote that requires the support of Republicans is less important.

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