Debt ceiling fight could lead to a financial crisis [UPDATED]Published 10:03am Thursday, October 10, 2013 Updated 12:05pm Thursday, October 10, 2013
Washington — National news reports have been filled with the words “debt ceiling” in recent weeks. But a poll this week by the National Journal suggests that most people don’t understand the borrowing limit at the heart of the current congressional standoff.
The government is shut down because Congress hasn’t passed any spending bills into law.
At issue are demands by some Republicans in the House that the Affordable Care Act be repealed or delayed — something President Barack Obama and the Democratic leaders in the Senate won’t agree to.
But the unanswered phones and dark federal offices are nothing compared to what could happen if Congress refuses to raise the debt ceiling, said Steve Bell, who spent 25 years as a top Republican staffer in the Senate.
“A government shutdown is like stubbing your toe,” said Bell, a senior director at the Bipartisan Policy Center in Washington. “It hurts. It’s annoying. You may walk a little limp for a couple of days but it’s stubbing your toe. The failure to meet our debt obligations would be like a serious heart attack.”
The U.S. Treasury Department warns that it will run out of accounting measures to raise more cash by Oct. 17.
If the debt ceiling isn’t raised, the real trouble will start a few days later. Between Oct. 22 and Nov. 1, Bell said, “the Treasury will run out of money to pay its debts.”
The federal government’s lack of cash will become apparent when contractors working for federal departments try to seek payment.
“The computer there says, ‘yep, this is the right number and the right job number’ and send it onto the computer at Treasury,” Bell said. “The Treasury computer says ‘yes, this the right job number and the right order number, but I can’t pay it right now because I don’t have any money.’ “
At that point, the Treasury Department would only be able to pay the government’s bills with the cash coming in every day, which is highly variable due to fluctuating tax receipts.
That will somewhat work, but only initially, said Stan Collender, a Democrat who was a staffer for the House and Senate Budget committees.
“There may be a short-term delay in getting paid for some, but that will get bigger and bigger as time goes on,” he said.
The real pain will come when markets react.
If payments are delayed, even if the United States pays its debts, investors may see the country as a riskier investment and demand higher interest rates.
At that point, Collender said, Americans will notice.
“If you’re trying to get a car loan or a student loan or a home mortgage or anything like that where you’re borrowing money, the interest rates will almost certainly be higher when this happens or after this happens than it would have been if the government had simply just made its payments on time,” he said.
Bell said bank lending would likely dry up due to those higher interest rates, and the stock market would likely plunge as consumers cut back on spending.
Unemployment would rise.
Pretty soon, Bell said, the nation’s economy would look a lot like the 2008 financial crisis — or worse.
“You think it was bad five years ago? My own opinion is if we were going to go into a situation where the United States didn’t pay its debts on time and in full, that that really would be a minor event compared to this,” he said.
Bell said raising the debt limit by itself doesn’t have anything to do with how much the government spends.