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House passes the Full Faith and Credit Act, Obama promises to veto

May 10, 2013

Anonymous_Roadsign_Falling_rocksYesterday the Full Faith and Credit Act was passed by the House of Representatives (HR 807). The bill passed by a vote of 221 to 207 (SD Rep Noem Voted Yea). This legislation represents the ongoing debt ceiling battle. According to the Daily Beast this bill will do the following:

…would empower the U.S. Treasury to pay down all interest payments on the national debt in the event of a confrontation over raising the debt ceiling. In other words, the link between debt ceiling and the risk of default would be removed. The bill would also ensure that the Social Security Administration could access its own trust fund to pay social security benefits and disability payments on time by allowing the treasury to issue debt specifically tied to these benefits.

Every Democrat in the House voted against this bill. Obama has promised to veto this legislation if it reaches his office. Democrats are taking the stance that American taxpayers cannot prioritize their debt so why should government. Well, actually Americans DO prioritize their bills when running against their personal debt limit, but that distraction move from Obama is little more than a political trick.

At risk here is the credit rating for the United States. As Representative Delaney (D-MD) states in a Washington Post oped:

An institution that borrows on a non-prioritized basis would never contemplate borrowing on a prioritized basis. Doing so would undermine its standing in the bond market and suggest that it is not worthy of its strong credit rating. This type of self-imposed downgrade would materially affect its financial prospects.

I agree with Representative Delaney that a prioritization of debt will create a credit downgrade for the US in the event the debt ceiling is looming. However that is only true IF the debt ceiling is looming! If congress can find ways to reduce spending and stay well under the debt ceiling this bill has no impact. I believe the true intent of this bill is to incentivize Congress into reducing spending before the debt ceiling is reached. It will also remove Social Security as a political tool to be used during debt ceiling negotiations.

Personally I think there are better ways for Congress to tackle the debt ceiling issue (cut spending). However this move may well allow fiscal conservatives in Congress to push for the spending reduction that are actually needed. It will be interesting to see if the Republicans in the Senate will get this one passed.

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