Orszag: Panic needed before debt ceiling boost

WASHINGTON (CNNMoney) -- A former White House budget chief said Thursday that Congress won't reach a deal to raise the nation's ability to borrow until the financial markets panic.

Peter Orszag, who used to run the Office of Management and Budget for President Obama, said he believes that Congress has no appetite to raise the debt ceiling -- just as they had no political will to pass the 2008 bailout package to banks to save the financial system.

"We won't get to that kind of conceptual agreement until we get some kind of turbulence in the bond market," said Orszag, who now works as a Citigroup (C, Fortune 500) vice chairman of global banking. He spoke at the Peter G. Peterson Institute for International Economics.

Orszag predicted that, perhaps as early as July, financial markets will start to seriously worry about the United States' ability to pay its debts. He predicted the cost of making loans would jump between a quarter to half percentage point before congressional leaders get serious and reach a deal.

"That's the kind of force that I think will be required in order to bring the parties together," Orszag said.

Treasury Secretary Timothy Geithner has said the debt ceiling, a cap on total federal government debt, must be raised by Aug. 2 to prevent the country from defaulting on its bonds.

Debt ceiling vote will be meaningless

A bipartisan group of lawmakers, led by Vice President Joseph Biden, are negotiating a compromise that would both raise the debt ceiling and cut budget deficits. Republicans have said any deal to raise the cap on borrowing must be tied to budget cuts that ease the mounting federal deficit.

Orszag said that his view of a final deal to raise the debt ceiling will be heavy on top line targets and big numbers, but light on policy. He also blamed a polarized political environment for the lack of action so far on the debt ceiling and other pressing fiscal issues.

"It's become increasingly difficult to legislate in a polarized political environment," Orszag said, which is why he believes the markets will need to panic before Congress moves forward.

Orszag pins the blame of a more polarized Congress on a more polarized U.S. population. He said that more like-minded people are moving into neighborhoods with like-minded people, making communities more solidly Democratic or Republican. That gives their lawmakers less incentive to work together and cut deals.