Treasury: Debt Ceiling Could Mean Worse Times Than Great Recession

Treasury says even the prospect of a default could rattle a fragile economy.

U.S. Treasury Secretary Jack Lew speaks to reporters in Athens, Greece, Sunday, July 21, 2013.
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Just as the nation is working its way out of the worst recession since the 1930s, comes the prospect of even tougher times. According to the Treasury Department, hitting the debt ceiling could create a downturn even worse than the Great Recession.

In a new report, the Treasury Department emphasizes potential outcomes of a default, and they are bleak: "A default would be unprecedented and has the potential to be catastrophic." Among the potential outcomes are the freezing of credit markets, rapidly spiking interest rates, and global economic consequences.

Together, the outcomes of another debt ceiling debacle could trigger "a financial crisis and recession that could echo the events of 2008 or worse."

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The nation will hit the debt ceiling on Oct. 17, according to the Treasury Department. If Congress cannot reach a deal to raise that ceiling before then, the nation would then default on its financial obligations.

The report looks at the effects of the last debt ceiling standoff, in summer 2011. Though the nation did not default at that time, even the prospect of default shook the national economy. Consumer confidence fell by 22 percent that summer and did not recover for nearly six months. Likewise, the S&P 500 index plummeted by roughly 17 percent during the time of the showdown, and took several months to climb back to its former averages. Meanwhile, mortgage rates jumped, making homebuying more expensive.

As in 2011, even the possibility of default could hurt the U.S. economy, the Treasury stresses in its report.

The report declares it "impossible" to create precise estimates of a debt ceiling's effects and therefore contains no specific predictions. In part, predicting is difficult because a default would be unprecedented, and also because the economy is much changed from 2011's showdown. At that time, Europe's sovereign debt crises threatened markets worldwide, and a downgrade of the U.S. credit rating from Standard & Poor's also increased investor worries.

However, there are unique complications this time around as well, led by the current government shutdown. The Treasury predicts that, if the current government shutdown drags on and substantially weakens the economy, a debt ceiling showdown could have even more disastrous effects. In that case, "the weaker-than-expected economic expansion would be even more susceptible to the adverse effects from a debt ceiling impasse than prior to the shutdown."

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Treasury Secretary Jack Lew and the rest of the Obama administration are not the only people sounding the debt ceiling alarm.

"The economy would quickly fall into recession," Moody's Analytics Chief Economist Mark Zandi told the Senate Budget Committee in a Sept. 24 hearing . "[L]awmakers should not become complacent, thinking that breaching the debt limit is somehow all right. It is not. There will be a violent reaction in financial markets if policymakers fail to act in time."

During past debt limit scares, the media considered a number of extraordinary measures: minting a trillion-dollar coin, for example, or having President Barack Obama invoke the 14th amendment and declare the debt limit unconstitutional. However, Treasury officials told reporters Thursday morning the administration believes the only way around this crisis is for Congress to raise the limit.

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