Treasury warns of catastrophic consequences if debt ceiling isn’t raised

Photo by Flickr user Tyler Merbler

The U.S Treasury warns that a failure to raise the debt ceiling would have devastating economic consequences that could lead to a recession as severe, or worse, than the events of 2008.

The agency released a report Thursday morning that details possible effects of a failure to raise the debt ceiling in an attempt to urge lawmakers to reach a deal before the Oct. 17 default deadline.

The report warned of catastrophic consequences of a debt limit impasse and said “not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation”
The Treasury described the negative economic effects of the 2011 debt ceiling debate on household and business confidence, financial markets, the equity market, the stock market and investors’ willingness to lend to the financial and housing markets. The department warned that the current government shutdown could further weaken the U.S. economy in the face of a debt ceiling debate similar to 2011.

“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” said Treasury Secretary Jacob J. Lew in a statement accompanying the report. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need — a self-inflicted wound harming families and businesses.”

A failure to raise the debt ceiling would have devastating economic consequences and “would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression,” concluded the report.

So are there any options for the U.S. government if Congress does not raise the debt ceiling by Oct. 17? The New York Times reported today that “economists and investors have quietly begun to explore the options the White House might have in the event Congress fails to act.”

The most notable option involves President Obama invoking the 14th Amendment and issuing an executive order that forces the federal government to continue borrowing. However, in December 2012, the White House dismissed that option. The Times also reported that this option raises constitutionality questions and could ultimately fail to calm the economic downturn because the questionable legality would create more uncertainty.