- Treasury Secretary Janet Yellen issued her most dire warning yet about the debt ceiling.
- “Default will open the foundations on which our financial system is built,” Yellen said.
- President Joe Biden and congressional leaders are scheduled to discuss the debt ceiling on Tuesday afternoon.
Janet Yellen, US Secretary of the Treasury, during a press conference at the Treasury Department in Washington, D.C., United States, on Tuesday, April 11, 2023.
Eric Lee | bloomberg | Getty Images
WASHINGTON — Treasury Secretary Janet Yellen on Tuesday issued her strongest warning yet about the debt ceiling, urging Congress to raise it immediately so the government avoids running out of cash by early June.
“Default will open the foundations of our financial system,” Yellen warned in prepared remarks. “It is highly conceivable that we would see a number of financial markets break – with panic around the world resulting in margin calls, run-outs and sales launches.”
Yellen, speaking at the Bankers Society Summit at America Capital, said the White House Council of Economic Advisers found that a default could lead to an economic downturn as bad as the Great Recession, with 8 million Americans losing jobs and plummeting stock market value. by about 45%.
She also pointed to a Moody’s Analytics report that found similar numbers with more than 7 million Americans out of work and $10 trillion in household wealth evaporating. Yellen also warned that breaching the debt ceiling could affect basic government services.
“If that sounds catastrophic – that’s because it is,” Yellen said. “Now, this crisis is entirely preventable. The solution is simple.”
Yellen’s words came hours before President Joe Biden was scheduled to meet with House Speaker Kevin McCarthy and other top congressional leaders to try to strike a deal before Biden leaves for the G7 summit in Japan. Staffers on both sides have been working daily since the two leaders met last week to try to reach a deal before June, when the federal government could run out of money. The leaders left the previous meeting with little progress.
Yellen reiterated the so-called June 1 date in her remarks and appealed to Congress for action.
“Our current best estimates underscore the urgency of this moment: Congress must act as quickly as possible.”
Raising the debt ceiling is necessary for the government to cover spending commitments approved by Congress and the president and to prevent default. Doing so does not allow for new spending. But House Republicans said they would not raise the limit if Biden and lawmakers did not agree to future spending cuts.
The Treasury secretary said a default would “breed economic and financial catastrophe” and erase the economic gains Americans have made since the coronavirus pandemic. Failure to do so would cause an “unprecedented economic and financial storm” that would immediately halt government payments to 66 million Social Security beneficiaries, and millions of veterans and military families.
“Default can cause widespread suffering as Americans lose the income they need to live,” Yellen said. “The resulting income shock could lead to a recession that would destroy many American jobs and businesses.”
Yellen also pointed out the ways defaults could disrupt everyday life: Air traffic controllers, law enforcement, border security, food safety, communications systems and national security are all at risk when the government stops paying federal employees and contractors.
“We are already seeing the effects of brinkmanship: investors are becoming more reluctant to hold government debt due in early June,” she said. The impasse has already increased the debt burden for American taxpayers.
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