Political Posturing on Default Could Cost Billions

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Lawmakers received a stark warning last week from a host of prominent economic and federal policy experts: The mere prospect of a U.S. default could raise interest rates, forcing taxpayers to pay many billions of dollars more on the government’s borrowed funds.

Douglas Elmendorf, director of the Congressional Budget Office, said an interest rate increase of just a tenth of one percent could cost taxpayers $130 billion over 10 years. And Federal Reserve Chairman Ben Bernanke, who spoke last week at a conference sponsored by the Committee for a Responsible Federal Budget (CRFB), warned that “failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation.”

Invoking the Hippocratic oath, Bernanke admonished lawmakers to first “do no harm.” Any suspension of payments on the Treasury’s debts would likely cause interest rates to rise, “slowing the recovery and, perversely, worsening the deficit problem.”

The CRFB conference included numerous other budget and economic experts who expressed concern about partisan gridlock and the nation’s unsustainable fiscal path.

External links:
Remarks of Chairman Ben Bernanke at the Annual Conference of the Committee for a Responsible Federal Budget
CRFB Conference Participants
Video of CRFB Conference
CBO Director Douglas Elmendorf’s Remarks With Reporters (Video)
Elmendorf Presentation to the New York Federal Reserve: Federal Budget Math: We Can’t Repeat the Past

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