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With no deal on debt, stocks sink on Wall Street

By Chip Cutter

AP Business Writer

POSTED:
LAST UPDATED: 12:00 p.m. HST, Jul 25, 2011


NEW YORK >> The debt showdown in Washington is rattling the stock market again.

Stocks fell Monday after Republican and Democratic leaders offered competing proposals to avoid a catastrophic default on the U.S. government's debt.

Lawmakers hoped to reach a compromise on raising the country's borrowing limit late Sunday, but those talks stalled. President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.

If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.

Most traders expect the White House and Capitol Hill to come up with a last-minute deal. Yet there are still uncertainties about higher taxes or changes to government spending that could affect corporate profits. Investors also worry that the government may only come up with a short-term fix that could still trigger a credit rating downgrade.

"We're thinking this is going to be resolved," said Rob Lutts, president and chief investment officer of Cabot Money Management. "The question: Is it resolved from a standpoint of a long-term solution or a stop-gap measure?"

The Dow Jones industrial average fell 88.36 points, or 0.7 percent, to close at 12,592.80. The Dow had been down as many as 145 points earlier.

The Standard & Poor's 500 index fell 7.59, or 0.6 percent, to 1,337.43. The Nasdaq composite index fell 16.03, or 0.6 percent, to 2,842.80.

Stock trading has varied widely in July because of concerns over debt problems in the U.S. and Europe. The Dow has alternated between gains and losses over the past nine trading days. The VIX, a measure of volatility in U.S. stock prices, has risen 16 percent in July.

Many investors are afraid to buy stocks because of concerns about the budget impasse in Washington. Trading volume, or the number of shares bought and sold, has fallen 22 percent on the New York Stock Exchange in July compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily trading volume since December 2007.

House Republicans drafted legislation Monday to avert a threatened Aug. 2 government default — but along lines the White House has already dismissed. 

"This is a city where compromise is becoming a dirty word," Obama lamented as congressional leaders groped for a way out of a looming crisis.

In stinging remarks a short while later on the Senate floor, the Republican leader, Mitch McConnell of Kentucky, urged the president to reconsider his position rather "than veto the country into default."

According to a GOP aide familiar with the emerging House bill, it would provide for an immediate $1 trillion increase in the government's $14.3 trillion debt limit in exchange for $1.2 trillion in cuts in federal spending.

The measure also envisions Congress approving a second round of spending cuts of $1.8 trillion or more in 2012, passage of which would trigger an additional $1.6 trillion in increased borrowing authority.

While the bill marked a retreat from legislation that conservatives muscled through the House last week, the two-step approach runs afoul of Obama's insistence that lawmakers solve the current crisis in a way that avoids a politically charged rerun next year in the middle of the 2012 election campaign.

Without signed legislation by day's end on Aug. 2, the Treasury will be unable to pay all its bills, possibly triggering an unprecedented default that officials warn could harm an economy struggling to recover from the worst recession in decades.

That deadline has set off an epic clash between the two parties, each side maneuvering for public approval and political leverage in advance of next year's elections with the White House and control of Congress at stake.

House conservatives, many of them backed by tea party organizations, have provided the political muscle for the Republican drive to cut spending deeply in return for raising the debt limit.

But two rank-and-file Republicans said their constituents were voicing concerns other than the rising federal debt.

Rep. Tom Rooney, R-Fla., said his office is getting calls from constituents saying, "If I don't get my Social Security check, it's your fault."

Rep. Tom Reed, a New York freshman, said many of his constituents are telling him to stand firm in his drive to cut spending. "But I will admit there's some anxiety in the district" about Social Security and other programs, he added.

As House Speaker John Boehner readied his legislation, Senate Democratic leaders called a news conference to announce their own next steps.

The Democrats' measure would cut $2.7 trillion in federal spending and raise the debt limit by $2.4 trillion in one step — enough borrowing authority to meet Obama's bottom-line demand.

The cuts include $1.2 trillion from across a range of hundreds of government programs and $1 trillion in savings assumed to derive from the end of the wars in Afghanistan and Iraq. The legislation also assumes creation of a special joint congressional committee to recommend additional savings with a guaranteed vote by Congress by the end of 2011.

In the maneuvering it appeared another of the president's long-held conditions appeared to be in danger of rejection.

Neither Boehner's measure nor the one Reid was drafting included additional revenue, according to officials in both parties.

In remarks during the day, the president renewed his call for a balanced approach to cutting deficits that includes both spending cuts and higher revenue.

The wealthy and big corporations have to "pay their fair share, too," he said.

In addition to a two-step approach to raising the debt limit, the House measure would require lawmakers in both houses to vote later this year on a constitutional amendment requiring a balanced federal budget.

An earlier bill, passed in the House last week but then scuttled in the Senate, would have required Congress to approve an amendment and send it to the states for ratification.

That same bill would have made $6 trillion in spending cuts in exchange for raising the debt limit.

Obama promised to veto that bill even before the House voted on it.

The day's developments followed a weekend that veered between brinkmanship and bipartisan negotiations.

After Boehner broke off compromise talks with Obama late Friday the president called the top four congressional leaders to the White House for a Saturday morning session.

That set the stage for fresh negotiations involving leadership aides — talks that Republicans later said had neared agreement on a two-step process that Obama has rejected.

Those efforts evidently were set back when Reid and House Democratic leader Nancy Pelosi met with Obama at the White House Sunday evening, and the Senate leader issued a statement saying talks had broken down over a Republican insistence on a short-term bill.

___

Associated Press writers Andrew Taylor, Alan Fram, Ben Feller and Jim Kuhnhenn contributed to this story. 






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