Geithner Says Failure to Raise Debt Limit Would Make Recent Financial Crisis Look "Modest In Comparison"

ABC News’ Matthew Jaffe reports:

A government shutdown looms at the end of this week if Congress cannot reach a funding agreement, but lawmakers face an even bigger challenge next month: raising the country’s debt ceiling.

The Obama administration has warned lawmakers that they must raise the country’s current debt limit of $14.29 trillion before May 16 or risk “catastrophic” consequences, according to Treasury Secretary Tim Geithner. In fact, Geithner said Tuesday, the consequences of default would make the recent financial crisis appear “modest in comparison.”

“The consequences of that would be catastrophic to the United States,” Geithner told a Senate Appropriations subcommittee. “Default by the United States would precipitate a crisis worse than the one we just went through. I think it would make the crisis we went through look modest in comparison. It would force us of course to cut critical payments to our seniors and it would be a reckless, irresponsible act to this country. I find it inconceivable that the Congress would not act to increase the limit.”

“If we take no additional actions, we run out of room on May 16,” he noted. “There are a series of measures that my predecessors have used in the past that Congress has authorized that would give Congress a little more time, but those measures don’t buy us nearly as much time as they did in the past because our debt and deficits are so large now. So those would buy us an additional few weeks if Congress doesn’t act. Now of course even resorting to those measures does create some risk of adding to uncertainty in markets so you’d rather not do that, but we will do everything we can to make sure that we meet our obligations and of course encourage Congress to act in a timely manner.”

The Treasury boss emphasized that if lawmakers do not raise the debt ceiling, it would be “deeply irresponsible” and cause a number of “inconceivable” consequences such as a dramatic rise in unemployment.

“It would be catastrophic. I mean, if you call into question the willingness of the government of the United States to meet its obligations, you will shake the basic foundation of the entire global financial system,” he warned. “It is inconceivable that America would do that. And of course I am totally confident that Congress will act to avoid that.”

“But again, think about it in a direct sense what it does is it will raise dramatically the borrowing costs permanently for all Americans. Every business for a very long period time would face a much higher cost of borrowing. Every family would face a much higher cost of borrowing. Unemployment would rise dramatically. Thousands if not hundreds of thousands of businesses would fail. And of course you would shake the confidence of the world in US financial assets and Treasuries. It would be a deeply irresponsible act, again inconceivable.”

However, 23 Republican senators have said they will not vote to raise the country’s debt ceiling unless the White House agrees to tackle entitlement programs in the ongoing budget talks.

“Unless we do something important about the debt, I don’t believe there will be a single Republican senator voting to raise the debt ceiling,” the top GOP senator Mitch McConnell told the Wall Street Journal last month.

In fact, even one Democrat senator – West Virginia’s Joe Manchin – said he will vote against raising the debt ceiling unless his vote is linked to a plan to fix the nation’s soaring deficits.

“We must get our fiscal house in order,” Manchin said last month. “We must be honest about what we value and what we need to spend your taxpayer dollars on – not what just sounds good. I have never put together a budget – be it my family's or as governor – that was based on how much we wanted to spend, but on what we had. That is why I will vote against raising the debt ceiling unless the vote is linked to a real budget plan that begins to fix our fiscal mess.”

The nation’s deficits have soared in recent years as the administration took widespread actions to rescue the country from the prospect of a second Great Depression. In February the federal government racked up an all-time record of red ink: $222.5 billion in a single month.

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