Paulson and Mnuchin have in recent weeks spoken with both McConnell and Yellen as the Biden administration tries to ensure the country does not default on its debt obligations and spark a global financial crisis.
The backchanneling by Mnuchin and Paulson — who had previously worked together at Goldman Sachs — reflects the widespread alarm among economists and U.S. business interests about the consequences of an unprecedented default on the federal debt. If the United States was unable to borrow money to pay all of its bills, a number of economists have predicted that it would lead to a calamity that could trigger a meltdown in financial markets and plunge the economy into recession. Republicans have refused to help Democrats approve a new debt ceiling suspension despite approving three such measures during the Trump administration, under which the national debt rose by roughly $8 trillion.
Yellen has recently warned that the debt ceiling must be raised or suspended by some time in October or the country’s fiscal situation will be severe.
Paulson met with McConnell in his office in the U.S. Capitol last week and discussed the debt limit standoff, two people familiar with the exchange said. Paulson primarily listened to McConnell’s views on the matter, as the Senate GOP leader made clear he was not bluffing about Democrats having to raise the debt limit without Republican support. Paulson expressed in the meeting a high degree of concern about the dangers and likelihood of a federal default and its implications for the global economy, the people said. Paulson worked closely with McConnell and other lawmakers in 2008 to address the financial crisis.
After the discussion, Paulson told the Biden administration that McConnell is serious that Democrats must approve the debt ceiling hike on their own through the budget reconciliation process, given their control of Congress and the White House and their pursuit of a partisan spending package, the people said. Democrats have said the debt ceiling must be approved on a bipartisan basis — with GOP support — as it has been historically and given that the current national debt was created by spending approved by both parties.
Mnuchin called McConnell the week of Sept. 6 amid intensifying fears about the debt limit standoff, two other people familiar with the matter said. Mnuchin and McConnell discussed the legislative mechanics of how the debt limit would be lifted, as well as the difficult negotiations with Democrats over the debt ceiling under Trump in 2018. Mnuchin made clear his concerns about the consequences of default. Mnuchin also told the Biden administration that McConnell is not bluffing about Democrats needing to approve the matter on their own, the people said.
McConnell previously told Punchbowl News that he had relayed similar messages to several “intermediaries” he said had been sent by Democrats to talk him down from his position.
McConnell’s position on the debt limit is expected to come under increasing scrutiny. McConnell has this year repeatedly cited the comments about inflation by economist Lawrence H. Summers, who served in the Clinton and Obama administrations. But Summers was highly critical of McConnell’s refusal to help Democrats extend the debt limit.
“We took on this debt in a bipartisan way. We’re prepared to expand the debt in a bipartisan way. I don’t see why it’s justified to refuse to acknowledge reality,” Summers said in an interview. “Reality is not a partisan thing. Raising the debt limit is acknowledging reality, not making a partisan choice.”
Paulson and Summers joined former Democratic treasury secretaries W. Michael Blumenthal, Robert Rubin, Timothy Geithner and Jacob “Jack” Lew in a letter released Wednesday urging congressional leadership to avert the “unprecedented” consequences of default.
“An accidental default could occur if the debt limit is not raised in time,” the treasury secretaries wrote.
Notably absent from the list were Mnuchin and other former treasury secretaries, such as John Snow. Meanwhile, Trump on Wednesday issued a statement endorsing McConnell’s position, arguing, “The only powerful tool that Republicans have to negotiate with is the Debt Ceiling, and they would be both foolish and unpatriotic not to use it now.”
The debt limit standoff represents a crisis for the Treasury Department — that Paulson and Mnuchin would be intimately familiar with — as it deploys all measures at its disposal to avoid a default that would hurt the U.S. economy. The prior debt ceiling suspension expired in August. Since then, Treasury has deployed a series of “extraordinary measures” to prevent a default but is rapidly running out of options.
But suspending the debt limit again may be outside Treasury’s control. Congressional Democrats have introduced a package that includes a debt ceiling suspension, funding to avert a shutdown of the federal government, emergency aid for those affected by natural disasters and money for the resettlement of people who fled Afghanistan. That measure passed the House on Tuesday night but is expected to fail in the Senate due to GOP opposition to supporting the debt ceiling suspension.
Yellen has personally spoken with McConnell and House Minority Leader Kevin McCarthy (R-Calif.) about the debt ceiling impasse, according to conversations previously reported by Punchbowl News.
Yellen has made other calls to senior congressional Democrats and Republicans about the debt limit. But her conversations have focused on the economic consequences of default, not the mechanics of approving legislation through Congress, a person familiar with the matter said.
Yellen has emphasized that Congress has historically resolved the debt limit with “broad bipartisan support.” She wrote an op-ed in the Wall Street Journal this week warning of severe consequences of failing to act, a message punctuated by a letter from a Treasury advisory committee that helps manage U.S. debt.
“Near-term action by Congress is required to preserve the tremendous benefits that the U.S. Treasury market provides to taxpayers and to avoid the immense damage a missed payment could have on the Treasury market and U.S. economy,” Beth Hammack and Brian Sack, chair and vice chair of the Treasury Borrowing Advisory Committee, wrote Tuesday in a letter to Yellen. “To default would be unthinkable, but even to risk that outcome would be reckless and irresponsible.”