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What’s Next After the Debt Ceiling Debate?

Congress strategizes on ways to improve the ailing economy

Summer should be a time for relaxation, family barbecues and the beach. Unfortunately, the past few weeks have been extremely volatile and have kept many people anxious and worried. Earlier this month, the market was on a roller coaster ride, spiking up and down at least 400 points several days in a row, causing distress and nervousness to investors, retirees, state and federal governments and pension managers all over the world. Investors continued to worry about Euro bonds and whether to reconsider the European currency as problems in Spain and Italy worsened and doubts arose over France’s triple-A rating. In the United States, many people were still trying to get past the polarizing and contentious debt ceiling debate. Throw a few natural disasters into the mix—Hurricane Irene and the East Coast earthquake—and we’ve experienced a tumultuous and somewhat bizarre month.

Debt Ceiling Recap
The suspense began with the debt ceiling discussions in Congress. The government had a deadline of Aug. 2 by which to vote to lift the federal debt ceiling and avoid a default. Although legislators finally scraped together a resolution at the last minute, they lost the confidence of the American people that the legislators had the ability to fix the economy. The debt debate was contentious with Democrats insisting on adding tax cuts to the spending cuts that Republicans demanded and Republicans pushing spending cuts in the form of entitlement reform, which were unacceptable to Democrats. Final score: Congress 1 (barely), American People 0.

The Deal
In the end, both parties agreed to lift the debt ceiling and allow the government to continue borrowing to pay its expenses. The agreement calls for about $2.4 trillion in spending cuts over the next 10 years, with $900 billion in cuts to be enacted immediately. In addition, the bill establishes a bipartisan Congressional commission responsible for determining where the second round of deficit cuts should be made. The resolution included a “trigger” that would be implemented if Congress failed to enact cuts, after which certain across-the-board cuts would automatically be made to areas of the budget, including Medicare, military spending, education and transportation.
The House approved the bill by a 269 to 161 vote, the Senate later passed it and the President signed it into law on Aug. 2. Although the deal was agreed upon by the deadline date, the damage had already been done. The weeks preceding the bill’s passage were contentious and heated, with politicians taking any opportunity to stand in front of a microphone and congratulate their own party for getting the deal done while pointing fingers at the opposing party. This caused confusion about the issues at hand and ultimately frustration that some lawmakers refused to make certain concessions, thereby creating unnecessary delays.

The Aftermath and Downgrade
When the bill was finally passed, the country drew a collective sigh of relief; we thought our troubles were over, the debt ceiling had been lifted, and Congress could get back to more important work, like fixing the economy. The relief was short-lived, however, because of the decision by Standard & Poor’s (S & P) to downgrade U.S. debt from AAA to AA. The downgrade sent markets and investors reeling, and an air of uncertainty hovered over the economy. Nevertheless, in the aftermath of the downgrade, instead of avoiding U.S. debt that had been determined to be riskier than before, investors actually flocked to U.S. Treasuries, believing them to be safe investments despite S&P’s warning.
Since the downgrade, S & P itself has been questioned on issues ranging from the methodology of the downgrade, to the legitimacy of its decision, to whether the company itself is in a position to accurately assess risk considering its role in the mortgage-backed securities fiasco. Weeks later, the downgrade, though not yet forgotten, doesn’t seem to be negatively affecting investors as most see U.S. debt as a solid investment.

What’s Next For Congress
Deficit reduction will continue to be at the top of Congress’ “to-do” list, especially since the Congressional Budget Office recently announced that the 2011 deficit is expected to hit almost $1.3 trillion, the third highest deficit in decades. The “Super-committee” whose job it is to determine where the spending cuts mandated by the debt bill will come from also convenes in September. And amid all the talk of cutting spending to reduce the deficit, Congress will also be faced with the ailing economy in the midst of an election year. As another downturn looms in our future, so looms another fight over stimulus and, specifically, how to deal effectively and swiftly with the sluggish economy.

Additional Stimulus
Once Congress returns from summer break, the President is expected to push another jobs bill that would extend existing job benefits and incentives to employers. That bill may also include an extension of unemployment insurance for people who’ve been out of work for an extended period of time. In addition, there may even be additional incentives for employers to hire the long-term unemployed.

The housing market and, specifically, the debilitated mortgage market may also get some help from the government. It has been widely noted that for the economy to pick up, the housing market must be revived. Homeowners want not only to keep up with their mortgage payments, but also to rebuild equity in their homes. The government could help by buying up some of the bad mortgages, relieving banks and homeowners from the bad debt or allowing homeowners to refinance. Once the housing market is rejuvenated and homeowners feel confident that they can pay their mortgages, spending is likely to increase and the unemployment rate will go down. Hopefully…that’s the plan anyway…

The stimulus package may also present other incentives for small businesses, for example, cutting taxes or offering additional write-offs for businesses and addressing corporate taxes.

Finally, the Fed could also allow for a third round of quantitative easing, essentially printing more money and encouraging banks to lend. The last round, known as QE2, was met with mixed reviews and was roundly criticized by many. Numerous experts argue QE2 was unnecessary and didn’t work, others maintain that it wasn’t enough. The Fed was expected to announce another round of quantitative easing last Friday but remained quiet about any further action.

Whether another comprehensive stimulus package is offered or individual bills simply allow for piecemeal government spending, we will probably find out this fall.

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