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All of a sudden, Congress is full of debt ceiling solutions

With the deadline approaching, the House and Senate are going down two different paths in search of a deal to raise the debt ceiling. Here is a rundown of what they are considering.

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“Treasury has been very clear about what it will and won’t do,” says Jay Powell, former undersecretary of the Treasury with the first Bush administration, now a scholar at the Bipartisan Policy Center in Washington, who addressed the closed House caucus meeting on Friday.

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The Bipartisan Policy Center's report signals that, while the US should have enough revenues to service the debt, the government would be forced to default on domestic spending obligations, such as Social Security checks. While that would not be a default on the debt itself, it still could affect the government's credit ratings, feeding mounting concerns that the government is incapable of agreeing on a sustainable fiscal path

Indeed, members of Congress were battered this week with warnings from credit-rating agencies that the threat of a downgrade of the US’s top credit rating is likely if the the US doesn't get its fiscal house in order. On Friday, Standard & Poor’s extended that warning to powerful financial firms “with direct links to, or reliance on, the federal government.”

The prospect of a downgrade – and a likely hike in interest rates and the cost of servicing the $14.3 trillion US debt – rattled lawmakers on both sides of the aisle. Freshman Rep. Mike Kelly (R) of Pennsylvania, who owns a Chevrolet Cadillac dealership in Butler, Pa., recalls trying to sell cars with interest rates at 21 percent. “I know how devastating climbing interest rates can be,” he says.

But the message from these warnings is not that Republicans have to cave in to demands for deep spending cuts, he adds. “Moody’s warned that even if you raise the debt ceiling, if you don’t substantially change what you’re doing, you could still risk default,” he adds.

It’s not clear yet how many freshmen House Republicans will refuse to vote to raise the debt limit under any circumstances. Many won their seats on a pledge to oppose raising the debt limit.

“I came to Washington for a reason – to cut spending so that future generations are not saddled with debt,” says freshman Rep. Chip Cravaack (R) of Minnesota. “It’s up to the president and Secretary Geithner to decide what bills get paid.”

But conservatives say that a framework to lower debt in the longer run, such as a balanced budget amendment, could muster enough Republican votes to pass an increase in the debt ceiling.

“Promises to cut spending and caps are important, but they are not enforceable,” says Brian Straessle, communications director for the House Republican Study Committee. “You cannot bind a future Congress unless you have a constitutional amendment.”

Meanwhile House Democrats, who also met in a closed meeting on Friday, emerged committed to pushing for a “grand bargain” promising savings of $4 trillion over 10 years. Republicans are balking at the inclusion of some $1 trillion of tax increases in that package – a position Democrats describe as reckless.

“We can’t default on our obligations,” said Rep. Jim McGovern (D) of Massachusetts, after Friday’s caucus meeting. “Many in the Republican Party are behaving recklessly. Their behavior is a real danger to our economy.”

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