The first face-to-face talks between President Barack Obama and congressional leaders failed to break the budget logjam as a partial U.S. government shutdown entered its third day.

The Oval Office meeting yesterday evening ended with both sides reiterating their positions and the points they've been making for days, raising the prospect of a prolonged standoff over the government shutdown and raising the U.S. debt limit.

Democrats, including Obama, say Republicans must end the shutdown and raise the debt ceiling as a precondition to talks on broader budgetary disputes. Republicans want to use the fiscal deadlines to extract changes to Obama's health-care law.

“They will not negotiate,” House Speaker John Boehner, an Ohio Republican, said after the hour-long meeting with Obama and other congressional leaders. “We had a nice conversation, a polite conversation, but at some point we've got to allow the process our founders gave us to work out.”

Neither side budged yesterday. The first government shutdown since 1996 and the debt-limit debate continued to merge into a messy month of standoffs.

House Republicans plan to advance a debt-limit bill while the government is shuttered, resurrecting an approach that included a long list of party priorities, according to a Republican lawmaker and two leadership aides who asked for anonymity to discuss the strategy.

Democrats, including Obama, said Boehner should just allow a vote on funding the government and rely on support from Democrats and a group of House Republicans willing to accept a funding extension through Nov. 15 at the spending levels Republicans prefer.

“The moderates need to muscle up here,” Senator Claire McCaskill, a Missouri Democrat, said on MSNBC today. “Boehner really needs to show some courage” in the face of Republicans “afraid of someone running against them from the right.”

U.S. stocks retreated for a second day and Treasuries fell as the partial shutdown entered a third day. The Standard & Poor's 500 Index fell 0.3 percent at 9:38 a.m. in New York, and 10-year Treasury yields rose 1.4 basis points to 2.63 percent and the cost of insuring the debt climbed to a six-month high.

Markets should be “concerned” about the possibility of default, Obama said on CNBC yesterday after meeting with chief executives of financial-services companies including Lloyd Blankfein of Goldman Sachs Group Inc. and Brian Moynihan of Bank of America Corp.

'In Trouble'

“This time's different,” Obama said. “When you have a situation in which a faction is willing potentially to default on U.S. government obligations then we are in trouble.”

After the meeting with top lawmakers, the White House said in a statement that Obama reiterated his unwillingness to negotiate on a short-term spending bill or the debt ceiling.

“The president remains hopeful that common sense will prevail, and that Congress will not only do its job to reopen the government, but also act to pay the bills it has racked up and spare the nation from a devastating default,” according to the statement.

Senate Majority Leader Harry Reid, a Nevada Democrat, said after the meeting that his party is willing to talk about spending programs. “My friend John Boehner, I repeat, cannot take yes for an answer,” Reid said. “One thing we made clear in that meeting, we are locked in tight on Obamacare.”

The partial shutdown put about 800,000 federal employees out of work and shuttered many government functions, including infant nutrition aid, national parks and Internal Revenue Service audits. Other services, such as air-traffic control and Social Security benefits, were operating.

A one-week partial shutdown would probably shave 0.1 percentage point from economic growth, according to the median estimate of economists surveyed by Bloomberg, with the costs accelerating if the closing persists.

The effects of failing to raise the $16.7 trillion debt ceiling would be even bigger. The government will run out of borrowing authority Oct. 17, according to the Treasury Department, leaving only cash to pay the bills.

That stockpile will disappear by Oct. 31 at the latest, according to the Congressional Budget Office, leaving the U.S. unable to pay promised benefits, salaries and interest.

Political Leverage

As the stalemate wears on, both sides are grasping for political leverage.

Republicans found theirs on the Mall in Washington, where they criticized the barricades erected by the National Park Service around the World War II memorial.

House leaders proposed five bills yesterday to reopen specific parts of the government. They picked politically popular agencies, forcing Democrats to choose between their party's position against a piecemeal approach and specific programs they support.

The bills would reopen national parks, provide funding for the National Institutes of Health, let Washington's city government spend its own money, fund the Department of Veterans Affairs and pay National Guard and Reserve forces.

The Washington, parks and NIH bills passed yesterday with bipartisan support. The other measures are set for votes today.

“It is the small steps that can often move us toward a consensus,” said Representative Jack Kingston, a Georgia Republican.

Senate Democrats said they wouldn't pick and choose federal agencies to reopen, and the White House issued veto threats against all the bills.

Democrats, meanwhile, tried to take advantage of the split among House Republicans. The party is divided between hard-liners aligned with Senator Ted Cruz of Texas who are seeking concessions on the health law and others who back a bill to reopen the government without conditions.

At least 20 Republicans have said they would support the Senate-passed plan. They haven't aligned with Democrats on procedural votes to force Boehner's hand.

One of those, Representative Peter King, a New York Republican, said in an interview yesterday that he made his case privately to Boehner, who asked for more time.

“I think the plan is for the Cruz Republicans to exhaust themselves,” King said.

Representative Jeb Hensarling, chairman of the House Financial Services Committee, described a delay of the individual mandate to purchase health insurance as the “bare minimum” Republicans should accept as part of the spending bill. And, he said, the party should attach other conditions to the debt ceiling.

Spending Trajectory

“What's going to hurt our economy is our failure to deal with our spending trajectory, which is going to bankrupt us,” the Texas Republican said in an interview. “Anything that has ever passed for fiscal responsibility in Washington, D.C., has almost exclusively been attached to a debt ceiling.”

Unlike past fiscal feuds, this dispute is more about the health law than the amount of government spending. Democrats say they have already made a concession by accepting spending levels set under the across-the-board cuts known as sequestration, which went into effect earlier this year and were part of the deal to avoid a 2011 default.

The U.S. budget deficit in June was 4.3 percent of gross domestic product, down from 10.1 percent in February 2010 and the narrowest since November 2008, when Obama was elected to his first term, according to data compiled by Bloomberg from the Treasury Department and the Bureau of Economic Analysis.

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Obama Meeting Fails to End Budget Dispute

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