Matthew Zames, chairman of a Treasury Department advisory panel and a managing director at JPMorgan Chase & Co. (JPM), said failure to raise the nation’s $14.3 trillion debt limit could be “catastrophic.”
By now, you’ve heard of the debt ceiling. It’s basically the ability of the Treasury Department to issue new bonds to finance the United States’ deficit spending and to pay the interest on its existing debt.
And as you’ve probably heard, we’re reaching our limit.
“Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis,” Zames, chairman of the Treasury Borrowing Advisory Committee, wrote in a letter to Treasury Secretary Timothy F. Geithner.
A crisis stemming from failing to raise the debt ceiling could increase the Treasury’s long-term funding costs and “the burden on the American taxpayer,” Zames wrote. A default by the Treasury, “or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating.”
The impact of not raising the debt ceiling would have far reaching effects. From the very real possibility of Social Security checks not being issued on Main Street to foreign investors dumping Treasury bills en masse, the result would be similar to one of those commercials advising you to check your credit report.
Only this wouldn’t be a joke, and it wouldn’t be funny.
Congress is facing a vote as early as next month on raising the debt ceiling. The Treasury projects that it will hit the cap on May 16, though it could use emergency measures to avoid default until about July 8.
The advisory committee includes representatives from firms including Goldman Sachs Group Inc. (GS), Bank of America Corp. (BAC), Morgan Stanley (MS) and Soros Fund Management LLC. Zames’s letter, dated yesterday, was released by the Treasury Department today.
But many Republicans, and some Democrats, first want a commitment to cut the budget deficits and start lowering federal debt.
In exchange for raising the debt limit — long a routine move allowing the Treasury Department to borrow more money — House Republicans will demand further concessions to shrink the government, Cantor said.
“There comes at times leverage moments, a time when the president will capitulate to what the American people want right now,” he said. “They don’t want to raise taxes, they don’t want borrowing to continue out of control.”
And therein lies the problem, since the decision on raising the debt limit needs to be made long before we can expect any meaningful discussion of deficit reduction.
Here’s hoping that the debate over raising the ceiling will be worthy of both Wall Street and Main Street.
