Panel on Debt Limit Default Paints Bleak Picture for U.S. Economy
Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, hosted a bipartisan panel discussion on the implications of a U.S. debt limit default on the American economy and global financial markets.
The panel, entitled “On the Brink: Implications of U.S. Default on the Economy and Global Financial Markets” painted a bleak picture about how defaulting on the debt could adversely affect the U.S. economy, financial stability, investors and consumers.
Moderated by Nela Richardson, Senior Economic Analyst for Bloomberg Government, panelists included:
At the panel, Ranking Member Waters made the following statement:
Good afternoon. I’m very pleased to welcome you all to this important forum on the implications of a U.S. debt default on the American economy and global financial markets.
As Ranking Member of the Financial Services Committee, I appreciate the importance of raising the U.S. debt limit, and the real implications a default will have on our businesses, our economy and our way of life.
I’d like to thank our panelists for joining us here today as well as our moderator, Nela Richardson Senior Economic Analyst for Bloomberg Government. I have no doubt this will be a robust discussion.
My goal today is to hear directly from our panelists on how the failure of Congress to raise the debt ceiling could affect the U.S. economy, financial stability, investors and consumers – particularly as our economy continues to suffer from the continued government shutdown.
I believe holding the full faith and credit of the United States hostage sets a bad precedent that can have global implications. As many of you know, the mere threat of default has already caused instability and uncertainty that is sending shockwaves and volatility through the financial markets.
Businesses have already started to cut back, and are reconsidering spending and hiring. J.C. Penny, Wal Mart and Sears have already canceled large holiday orders amid falling demand.
Consumer confidence has sunk to its lowest level since 2008. And many potential homebuyers – now unsure about what the future will hold – have held up on purchasing a home.
Defaulting on our obligations will exacerbate all these problems and could affect the underpinnings of the entire financial system. A default could possibly trigger a financial crisis reminiscent of the days following the failure of Lehman Brothers.
Only this time, it could be far worse.
If the U.S. defaults on its debt, lending – the lifeblood of our economy— would dry up. The dollar’s value could drop and we could see dramatic increases in interest rates on everything from mortgages and auto loans to credit cards.
If Congress cannot do its job in a timely manner, in the future, the government’s ability to pay its debts will be looked upon with uncertainty by investors and the markets – leading to higher borrowing costs in the future and an increase our nation’s deficit.
Every US corporation and municipality would likely see their borrowing costs climb as well.
And a default on our debt could reverse the slow but positive progress on reducing unemployment.
But worst of all, we could see another dramatic loss of wealth for working Americans.
History tells us that even the threat of default can send shockwaves through our financial system. In 2011, just the prospect of defaulting on our debt caused a drop in consumer and business confidence, a 17 percent decline in the S&P 500 index of equity prices, and increased volatility in the stock market.
In total, American families saw a $2.4 trillion dollar decline in household wealth and an $800 billion dollar drop in retirement assets.
And, of course, we received a downgrade in U.S. government debt.
While 2011’s hostage crisis showed us the very serious consequences debt limit brinksmanship, no one knows with certainty the full extent of the damage to the economy should the U.S. actually default on its debts. We have heard speculation ranging from the bad to the catastrophic.
And we are hearing the concerns from actors in all parts of the economy -- from Wall Street CEOs and the U.S. Chamber of Commerce to small business owners and prominent conservative economists. They are all concerned with the significant damage that could result from a debt ceiling standoff. Warren Buffett, Ben Bernanke, Hank Paulson, and the heads of the nation’s largest financial institutions have been outspoken about the need to stop playing politics with the ability of the United States to pay its bills.
Just this weekend, Christine Lagarde, head of the International Monetary Fund, said that U.S. default would – quote – “mean massive disruption the world over. And we would be at risk of tipping yet again into a recession.”
Obviously, this is a critical issue with enormous implications. I welcome today’s discussion so we can better understand from those on the front lines of this crisis – banks, financial institutions, and others in the financial services industry – exactly how this will impact their businesses and the broader economy.
And now, I am very pleased to introduce our moderator for today’s panel, Nela Richardson.
Ms. Richardson is a Senior Finance Analyst with Bloomberg Government where she conducts research on financial regulation, housing and derivatives.
Previously, she was a research economist at the Commodity Futures Trading Commission, a senior economist at Freddie Mac and a graduate intern at the Federal Reserve Board of Governors. She was also a researcher at Harvard’s Joint Center for Housing Studies.
Ms. Richardson has taught economics and finance courses at both the University of Maryland and the John Hopkins Carey School of Business.
She received a PhD from the University of Maryland and has degrees from the University of Pennsylvania and Indiana University.
Please welcome Nela Richardson.