Debt committee calls it quits without a deal

NEW YORK (CNNMoney) -- Well, it's official. The congressional debt committee is so over.

To no one's surprise, the bipartisan panel called it quits on Monday without reaching any agreement on debt reduction, let alone the $4 trillion "grand bargain" that budget experts say is needed at a minimum to get a handle on the country's long-term fiscal problems.

In order to stave off an automatic "sequester" of spending cuts, the committee at least needed to come up with a $1.2 trillion deal. But apparently even that was too much to ask.

"Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve," Sen. Patty Murray and Rep. Jeb Hensarling, co-chairs of the super committee, said in a statement.

Partly in anticipation of the announcement, stocks took a beating on Monday, with the Dow ending the day down 2%.

The upshot of the committee's failure to broker a deal is this: Congress has forfeited yet another opportunity to address the country's long-term fiscal problems before they get out of hand.

The hope, of course, was that the super committee -- given extraordinary and unprecedented powers -- would tackle the tough problems facing the country's budget, such as rising health costs and an unwieldy tax code no one likes.

But many said all along that the committee was set up to fail before it even held its first meeting in September.

Congressional leaders handpicked the members, and they chose mostly partisan defenders of the realm, including several who sat on President Obama's 2010 fiscal commission and voted against that panel's $4 trillion debt reduction plan.

The differences that divided the debt committee are the same that divide all of Congress: How best to raise more tax revenue and curb spending on social entitlement programs.

Republicans and Democrats on the committee both said they had offered proposals that demonstrate serious compromise on key points.

But, time and again, the response from the other side of the aisle was "not enough." That is, when one side wasn't accusing the other of not telling the truth.

The market response: Over the longer term, the consequences of a super committee failure are not entirely clear yet.

Markets already had very low expectations for the group, which was born from a last-minute deal struck during the confidence-crushing debt-ceiling fight this summer. That debate forced investors to consider for the first time whether Congress would actually let the world's most creditworthy country default on its debt just to make a political point.

Congress narrowly averted a catastrophe, but the country lost its pristine credit rating anyway when Standard & Poor's issued a downgrade largely because of the "political brinksmanship." Stock markets recoiled in dramatic fashion -- plunging in the immediate aftermath of the downgrade.

But soon after, stocks bounced back. And interest rates on U.S. Treasuries never rose; in fact, they fell because of the turmoil.

So how investors will respond to the super committee's failure is hard to predict.

Stock strategists said investors had been assuming a minimum $1.2 trillion deal would get done. And they expected that a no-deal scenario could roil stocks at least for a short while. Monday seemed to bear that out. U.S. stocks spent all day in the red, with the Dow at one point falling by more than 300 points.

But in the weeks ahead, the concerns over Europe's debt are still likely to loom larger. A swift downgrade is not a given. And Treasuries are expected again to withstand the news, since bond investors still see the United States as a safe haven relative to Europe, at least for now. Indeed, Treasury rates actually fell on Monday.

Market response and credit rating agencies might be much harsher if lawmakers dismantle or amend the $1.2 trillion "trigger" in across-the-board spending cuts set to go into effect in January 2013.

The 2013 cuts are supposed to be evenly divided between defense and nondefense spending with a few exemptions: namely, Social Security and programs geared to aid low-income Americans, such as Medicaid. Medicare cuts would also be limited.

The problems remain: One consequence of the super committee failure is crystal clear: Congress will have to debate debt reduction repeatedly until it figures out how to slow the growth in the country's debt.

Having squandered several opportunities in the past year alone, it's not clear how many more lawmakers will have before the markets start demanding more of them.

And the debate will get especially heated at the end of 2012. That is when the Bush-era tax cuts expire. They have been a major sticking point dividing members of the super committee, even though both parties have signaled that they want to extend them for most Americans (the Democrats) if not all of them (the Republicans).