Senate Democrats

Republican Leaders Clueless On The Consequences Of Default

On Morning Joe today former Minnesota Governor Tim Pawlenty and RNC Chair Reince Preibus claimed that there was no way to know the consequences of a failure to raise the debt limit.  While they may be at a loss to explain the consequences of a failure to raise the debt limit, many business leaders and fellow Republicans know the dire consequences of a failure to raise the debt limit.

 

REPUBLICAN POLITICIANS DON’T KNOW WHAT THE IMPACT OF DEFAULT WOULD BE…

Pawlenty Said Republicans Shouldn’t Raise the Debt Ceiling, Had No Idea What the Consequences Would Be.

Question: President Obama has stepped into the deficit talks, meeting separately with Senate leaders Harry Reid and Mitch McConnell at the white house to try to offset a federal debt increase. How do you think the president is handling this issue?

Pawlenty: We don’t know. The real test is coming up as the deadline approaches. Right now, as judged by outcomes, the answer is we haven’t done anything yet. The debt ceiling is going to be a fork in the road. My view is that the Republicans shouldn’t raise it. If they do, they need to get something permanent and structural and meaningful, the constitutional amendment, spending caps, and changes in the near term.

Scarborough: what’s the impact if it’s not raised?

Pawlenty: Well, we don’t know that.

Scarborough: Well, I don’t know what’s going to happen to me if I jump off a cliff. But I think I’ll go splat. [MSNBC, 6/28/11]

RNC Chair Reince Preibus Said We Don’t Know What Could Happen If We Default.

Scarborough: What do you believe, though? Do you believe that if we don’t raise the debt ceiling the economy will just keep chugging along normally or do you believe it will cause a financial crisis?

Preibus: You know, I don’t know, because we’ve never been there before, Joe. [MSNBC, 6/28/11]

 

Rep. Ron Paul: Bankruptcy Could Be Cure For U.S. Debt. “Rep. Ron Paul (R-Texas) said Monday that bankruptcy could be the best solution for the United States to address its mounting debt. … ‘Are we going to experience — are you predicting in essence — if bankruptcy is the cure for Greece, is it also the cure for the United States?’ asked host Jan Mickelson. ‘Absolutely,’ Paul responded.”  [The Hill, 6/28/11]

 

…THEY SHOULD HEED THE WARNINGS OF BUSINESS LEADERS AND FELLOW REPUBLICANS…

Warren Buffett Said It Would Be Congress’ “Most Asinine Act” Ever To Fail To Raise Debt Limit. “Warren Buffett said he expects the Congress to raise the nation’s debt ceiling before it expires in mid-May, and said it would be that body’s “most asinine act” ever if it failed. Speaking on Saturday at Berkshire Hathaway’s annual shareholder meeting in Omaha, Nebraska, Buffett said imposing a debt ceiling was a mistake in the first place.” [Reuters, 4/30/11]

 

Bernanke: Failure To Raise Debt Limit “Could Cause Severe Disruptions In Financial Markets.” In a speech, Federal Reserve Chairman Bernanke said “Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation. The current level of the debt and near-term borrowing needs reflect spending and revenue choices that have already been approved by the current and previous Congresses and Administrations of both political parties. Failing to raise the debt limit would require the federal government to delay or renege on payments for obligations already entered into. In particular, even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of U.S. government debt, create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term. Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might well be a protracted period.” [Bernanke Remarks, 6/14/11]

James Baker, Reagan COS and Treasury Secretary, Supported Raising Debt Limit. In an Op-Ed,  Baker wrote: “Step No. 1 is to raise the debt limit in a way that generates confidence in the markets. That means including a restraint on spending. To accomplish this, the debt limit should be increased by an amount sufficient to service the U.S. debt for six months, provided that the proceeds from the increase are used to service debt obligations.” [Wall Street Journal, Baker Op-Ed, 6/17/11]

Chamber of Commerce President Tom Donohue Said Debt Ceiling Had To Be Raised. “‘We absolutely support the expansion of the debt,’ Chamber president Tom Donohue said. He added that officials should make a few gestures in the direction of spending cuts, but dismissed the brinksmanship as mainly political posturing. ‘We’ve got to do the debt ceiling,’ he said. ‘There’ll be a lot of political carrying on, but it will be done.’” [Washington Post, 1/12/11]

 

Former McCain Adviser Douglas Holtz Eakin: Congress Has To Raise The Debt Limit. “The former director of the Congressional Budget Office, and chief economic policy adviser to John McCain during the 2008 presidential campaign, says Congress has to raise the debt limit, and soon. ‘I think that ultimately Congress has to raise the debt limit,’ Doug Holtz-Eakin told me after moderating an event on Capitol Hill. “We have to be good stewards of the nation’s credit rating [and] doing it sooner is better than later.’” [TPM, 4/26/11]

 

JP Morgan Chase CEO Jamie Dimon: Default on Debt Would Be “Catastrophic.” “The head of a major Wall Street company echoed White House officials Wednesday, warning that a default on America’s debts would be ‘catastrophic.’ Speaking at an event hosted by the U.S. Chamber of Commerce, Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said America has a ‘moral obligation’ to ensure it pays its debts on time. ‘This chatter about not meeting our obligations, I just don’t understand it,’ he said. ‘It’s a moral obligation to ourselves. … They should know that the United States is good for its money. Period.’” [The Hill, 3/30/11]

 

Fitch Ratings Agency: Failure To Raise Debt Ceiling Would “Threaten The Still Fragile Financial Stability In The US And The World As A Whole.” According to the Financial Times, the ratings agency Fitch said “‘Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US’s triple-A status,’ said David Riley, head of sovereign ratings at Fitch. ‘More importantly, default by the world’s largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still fragile financial stability in the US and the world as a whole.’” [Financial Times, 6/8/11]

 

CBO Director Called Failure To Raise Debt Limit “A Dangerous Gamble.” At a Roundtable,  CBO Director Elmendorf said “It is a dangerous gamble because any government that has borrowed as much as ours has borrowed and will need to borrow as much as ours will need to borrow cannot take the views of its creditors lightly. Even a small increase in the perceived risk of Treasuries would be very expensive for the countries.” Talking Points Memo, 6/14/11]

Larry Kudlow: It Would Be “Catastrophe” If Debt Ceiling Not Raised. “Kudlow said it would be a ‘catastrophe’ if we failed to raise the debt ceiling — and noted that he was ‘very worried’ about it. When I noted that some don’t think failing to raise the debt ceiling would be a big deal, he said: ‘Those people would be wrong. I just want to tell you; the idea that we can’t sell bonds to pay the interest on our debt is an utter disaster, Matt. Trust me on this, my friend. This is much different than the government shutdown. The government shutdown you know, we go on until tomorrow. We furlough unessential workers, but the social security checks get paid, right? If you can’t sell more bonds after the ceiling is reached, the social security checks do not get paid, okay — nothing gets paid.’” [Daily Caller, 4/13/11]

…BECAUSE THE CONSEQUENCES ARE DIRE.

Default Crisis Could Cost U.S. 640,000 Jobs. The centrist think tank Third Way reported, “J.P. Morgan estimates that higher Treasury rates would cause our GDP to decrease by 1%.  For every 1% change in GDP growth, there is an estimated 0.46% change in total employment, according to economist William Seyfried. Using his estimation, the U.S. would shed 640,000 jobs.” They added, “this is a conservative estimate as default is a ‘black swan’ event that has no American precedent.” [Third Way, May 2011]

 

J.P. Morgan: Default Would Slow Economic Growth By At Least 1%. J.P. Morgan wrote, “if Treasury yields were to rise 50 bp as we project, GDP would likely be reduced by about 0.4%. In addition, the equity market would likely sell off sharply in response to a technical default, as it did on the day that Congress initially failed to pass TARP in September 2008. On that day, the S&P 500 fell 9%; using this as a rough guide, we estimate that a decline of a similar magnitude on a sustained basis in the aftermath of a default would take an additional 0.5% off of GDP growth due to lower consumption. Thus, the quantifiable effects of a default alone would likely take about 1% off of GDP growth, and the ultimate damage could be far greater.” [J.P. Morgan, 4/19/11]

 

Treasury: “Every American, Whether They’re Buying A House Or Buying A Car Or Just Paying Off Their Credit Card Bills, Will Have To Experience Higher Interest Rates.” In a May Senate hearing, Deputy Treasury Secretary Neal S. Wolin testified, “I think it is absolutely unthinkable that we would not raise the debt ceiling in order to make good on obligations that Congresses and presidents of the past have — have made… the real implications with respect to funding rates and interest rates that will affect not just the U.S. government, ironically, which has its own set of fiscal implications, but also individuals… every American, whether they’re buying a house or buying a car or just paying off their credit card bills, will have to experience higher interest rates, which will have very real effects on their — on their pocketbooks.  But I think more broadly, the effects on wealth and so forth, people’s balances in their — in their mutual fund accounts and so forth, all will be put in jeopardy in ways that are unthinkable.  And so the implications are enormous. It is something that we think of as a — as enormous risk.” [Senate Committee on Banking, Housing and Urban Affairs, 5/12/11]

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