The Congressional Research Service briefed members of Congress on the debt ceiling two weeks ago, telling them that the government need not shut down and could continue to pay bondholders if the debt ceiling borrowing limits were reached.
The 12 page slide show titled "Reaching the Debt Limit" obtained by CNBC explained the consequences of the debt ceiling. It explained the government need not "shut down" entirely nor default on debt payments if the government's ability to borrow is halted. Treasury will be to pick and choose which departments and programs it will continue to support in the event of a borrowing halt.
This drew criticism from some who heard the presentation.
"This is just a shell game, " one senior staffer said. "If you are the Secretary of Commerce, you don't particularly care if the Treasury can't cover your check. You are obligated by Congress to do what are you are suppose to do. You can't actually cut the funding unless you open the budget to raise the debt ceiling."
The Congressional Research Service is the public policy research arm of the Congress. It is a nonpartisan group staffed by 900 lawyers, economists and scientific researchers.
I asked Representative Jeb Hensarling (R-TX), Chairman of the House Republican Conference and Vice Chairman of the Financial Services Committee, to offer his take on the presentation.
LL: After hearing the CRS presentation, if the government "shuts down" can the Administration insure there is no default on sovereign debt?
Rep. Hensarling: There is legal authority derived from a 1980's opinion of GAO that essentially asserts the administration will have discretion on how they treat the incoming bills. That is the only legal authority that we can find that's established. Based on all of that, I would say the administration does have the authority to pay bond holders first. Now Treasury will say they don't have that power, but the overwhelming evidence says they do.
LL: So in the end, Treasury will be ones writing the checks. They essentially will be deciding who gets paid and who doesn't.
Rep. Hensarling: Potentially yes.
LL: What was the biggest take way from the CRS presentation?
Rep. Hensarling: Contrary to what Treasury has asserted, and the preponderance of the legal evidence is that the administration can ensure there is no default on sovereign debt. Now that is not to make light of the challenge at all because we are borrowing roughly 40 cents on the dollar and much of it from the Chinese and sending the bill to our children and grandchildren. But to simply assert the President has no legal authority to stave off default on sovereign debt, I think the overwhelming weight of legal evidence is the President does. That will be a decision he has to make.
LL: What items can be dismissed in terms of paying. Will the soldiers get paid?
Rep. Hensarling: If the administration chooses not to pay them than that is a real problem.
LL: But Congress needs to have the political will to change this. Do you think Congress has the political will to compromise?
Rep. Hensarling: But the bottom line is we all know this is a nation that is on the precipitous of a financial debt crisis and it is the spending that is driving the debt crisis. It is not a vote on a quote on quote debt ceiling. We all know that the Treasury secretary has recently called for a naked increase on the debt ceiling again.
We don't think its supported by either side of Congress much less the American people so there will be a vote to show the administration you need to have some sort of hurdle when it comes to this type of spending. History will show us from time to time it will work moderately well for five to six years, and then Congress falls off the wagon. Unfortunately this is different. We need to seize on this moment today and deal with it.
I will say what our Speaker has been saying—if the President is going to expect our help to pay his bill, he is going to have to start cutting up the credit cards. Specifically if there is going to be an increase in the debt ceiling, there is going to have be reductions in spending, scored by the CBO, which will be a greater number.
If he is going to try and borrow money from future generations, those future generations are going to need to be paid with interest which means addressing the cost on some of the entitlement spending programs. Some of these programs have been a comfort to my parents and grandparents but they are morphing before my eyes into a cruel ponzi scheme for my nine year old daughter and my seven year old son.
What the administration will do? What the Senate will do? I don't know. But I do know the House Republicans will seize the moment and if for some reason if the President chooses to have America default on its sovereign debt, and not to pay the troops who are in harms way then that will be on his conscience. We are in uncharted territory. That is why we put forth a budget that would put us on a path to reform and save these entitlement programs for future generations. You don't want to do this overnight. But the President has taken a very apocalyptic vision and if so, he needs to sit down in good faith and do what the Speaker has said.
LL: But many of my contacts- even some who have supported the President in the past are saying where is the President in all of this spending discussion? They say he is leading from behind- delegating to Representative Pelosi and Senator Reid.
Rep. Hensarling: I see the President maybe three or four times a year at the most and when I bring up the subject of the national debt he doesn't seem to want to talk about it. The Speaker has been clear—we have spending that will double the size of the economy over the next generation. Revenues are down temporarily but I think that's because of the policies of Pelosi, Reid and Obama.
These policies have created so much uncertainty in large part because of Dodd Frank, Obamacare and the deficit. People know this will end poorly. We'll have either massive tax increases or monetizing the debt to a point where we will be looking longingly and nostalgically at the Carter Era. So because of all that, the biggest impediment we have today is the seeds of uncertainty sowed by the current administration.
LL: What do you worry about if Congress can't compromise?
Rep. Hensarling: What I shutter to think is what if we kick the can down the road again? We know what the classic definition of insanity is and that's doing the same thing over and over again and expecting a different result. Everybody I talk to that I believe are knowledgeable, are saying the window of opportunity as a nation to deal with this spending trajectory is closing in on us. We don't have decades.
At most we may have a few years. Just like we saw in September of 2008, the markets can move at a snap of the finger. And already under Obama's plan under these historically low interest rates we will be paying at the end of the budget window almost eight trillion dollars a year in interest payments alone! That's at today's historically low interest rates. If bond vigilantes turn against us, you can have an economic death spiral in the likes this nation has not seen since the Great Depression.
We can not let this moment pass. This is why there is a separate debt ceiling vote. This is a wake up call to Congress to stop the madness. I fear the President's position will continue to be "business as usual" and we ride on this bankruptcy road till we go off the cliff. Now in fairness to the President, he did not put us on the road to national bankruptcy but he is pressing on the accelerator and he shows no signs of turning around.
LL: News came out that next week the Republican leaders would bring what is being called a "clean debt bill" to the floor for a vote.
Rep. I don't know if I want to use the word "clean". I would say this is a naked debt ceiling increase. Secretary of Treasury has asked for this. Steny Hoyer has called for this. Bottom line, we want to end this spending trajectory. It is not sustainable and we want to make sure our children are not burdened with this massive debt.
A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
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