Failure To Hike Debt Limit Would Have Consequences Congress and the White House have turned their attention to the need to raise the debt limit. Some in Congress are balking at the idea of once again raising the limit. That has some observers worried about the possibility of a U.S. default in the financial markets.
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Failure To Hike Debt Limit Would Have Consequences

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Failure To Hike Debt Limit Would Have Consequences


As we've just heard, the looming fight over raising the debt limit has lots of people worried, from Washington to Wall Street. Some are even predicting calamity.

NPR's John Ydstie reports.

JOHN YDSTIE: Treasury Secretary Timothy Geithner reported last week that the U.S. government will reach the current debt limit of $14.3 trillion no later than May 16th of this year. That means the government will not be able to borrow additional amounts - a big problem for a nation that borrows 40 cents of every dollar it spends.

Republicans have vowed to use the vote on raising the debt ceiling to force further cuts in government spending. But Federal Reserve Chairman Ben Bernanke warns that failing to raise the debt limit would mean the country would face default.

Mr. BEN BERNANKE (Federal Reserve Chairman): And if the United States defaulted, it would have extraordinarily bad consequences for our financial system and it would mean that we would face higher interest rates essentially indefinitely because creditors wouldn't trust us to make our interest payments.

YDSTIE: A default would have such dire effects that it would likely spark another financial crisis, like the one we're just recovering from, says Bernanke.

Mr. BERNANKE: It would be an extremely dangerous and very likely recovery-ending event.

YDSTIE: Similar warnings have come from people like President Bush's Treasury secretary, Henry Paulson. Jamie Dimon, chairman of the giant Wall Street bank JPMorgan Chase, says not raising the debt ceiling would be catastrophic.

There's some irony in the Obama administration's heightened rhetoric about the dangers of not raising the debt limit. After all, then-Senator Barack Obama voted no the last time Congress was called on to do so. Yesterday, White House Press Secretary Jay Carney said the president now regrets that vote.

Mr. JAY CARNEY (White House Press Secretary): He realizes now that raising the debt ceiling is so important to the health of this economy and the global economy that it is not a vote that even when you are protesting an administration's policies you can play around with.

YDSTIE: But economist Brian Reidl takes issue with the dire warnings.

Mr. BRIAN REIDL (Heritage Foundation): There is more than enough money in current tax revenues to pay the interest on the debt.

YDSTIE: Reidl is a research fellow in budget policy at the conservative Heritage Foundation. He takes the position of many freshman House Republicans.

Mr. REIDL: If the debt limit is not raised, it means the federal government cannot borrow, and that essentially means that spending would have to come down to the level of tax revenues. But within that amount, there's more than enough money to pay the interest on the debt.

Mr. JOHN MAKIN (American Enterprise Institute): You can't cut spending fast enough to avoid raising the debt limit for very long.

YDSTIE: That's John Makin, a fellow at the American Enterprise Institute, and an advisor to the hedge fund Caxton Associates.

Mr. MAKIN: The amount of spending that would have to be cut out of the current year would be, I think, substantial and not practicable.

YDSTIE: And once the continuing resolution for 2011 hammered out last Friday is passed, making more cuts for this year may not be an option. Even Reidl acknowledges its unchartered territory.

But Makin says the U.S. will not stop paying interest on its debt and the world will not end on May 16.

Mr. MAKIN: The Treasury has reserves in the form of deposits at the Federal Reserve that can give them some leeway and time for negotiations.

YDSTIE: In fact, Treasury Secretary Geithner has outlined options for taking extraordinary measures and moving money around among government accounts that would put off a default until July 8. By that time, says Makin, it's likely the White House and Congress will work out a deal to further rein in government spending. Makin says he believes in the end the possibility of a government default is near zero.

John Ydstie, NPR News, Washington.

INSKEEP: As lawmakers move on to bigger battles, we are still learning about budget deal reached last Friday. So far we know the plan cuts about $38 billion.

MONTAGNE: Surveys show that Americans overwhelmingly oppose cutting almost anything except foreign aid. So it's no surprise that Congress took $8 billion from the State Department and other foreign programs, according to Reuters.

INSKEEP: Other funding is cut from the Departments of Labor, Education, and Health and Human Services. That includes money removed from health insurance, co-ops, as well as and the elimination of some Pell Grants for poor college students.

MONTAGNE: That last cut was actually sought by the Obama administration and serves as a reminder, however small, that the parties don't quite disagree on everything.

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