Impact of Default

Floor Speech

Mr. SCHUMER. Madam President, I rise today with just 9 days left until the United States hits the debt ceiling. Never before in our history have we failed to pay our bills, but in 9 days that possibility will reach our doorstep.

Even though defaulting on our debt could send our economy into a tailspin, even possibly another Great Depression, there are already those who are denying the impacts of default. The debt ceiling deniers try to claim that this won't be a big deal and that middle-class families won't be hurt. Well, these debt-ceiling deniers need a dose of debt-ceiling reality.

The truth is that failing to pay our bills on time would most probably be worse than in 2008 when Lehman Brothers and AIG went under and the economy went into a tailspin. We still haven't recovered from that debacle. To this day there are people out of work. There are middle-class families whose income is lower than it was then because of what happened in 2008.

Why could it be worse--in all likelihood would be worse? Because just as housing securities had to be marked down because of the Lehman crisis, if government bonds, which are much more widely held, have to be marked down in lower value, we could have a freeze where banks are not able to lend money.

What happened in 2008 was simple. Banks and other financial institutions had all these mortgage securities on their balance sheets. All of a sudden their value seemed to be a lot less, so the banks' balance sheets were in the red. That meant they couldn't lend money, and not just for long-term mortgages and car loans but also for overnight lines of credit. Businesses were shaken. Many businesses couldn't function. Wire transfers weren't allowed to be made, and the whole financial system came to a startling and devastating halt.

Now the effects would be worse, in all likelihood, and for this reason: Mortgage securities were widely held but not close to as widely held as U.S. Treasurys are. Imagine on the day of default or, God forbid, even a day or two before default, all of a sudden the markets determine--and they are mystical in some ways--that Treasurys should be written down significantly. There is a very real possibility that could--and not 5 percent but significantly higher than that; I would estimate a 30-, 40-, 50-percent chance--send us into a tailspin that might make the 2008 recession look like child's play.

How would that affect the average family? Well, if the United States defaults, middle-class family paychecks would be raided by higher interest rates on everyday expenses. Already interest rates on short-term Treasury bonds are creeping upward as the possibility of default looms over us. If we default, investors who always considered U.S. debt risk free will demand higher interest rates due to the heightened risk that they might not be paid. For the first time ever investors question whether the U.S. Government would honor its commitments.

The domino effect on interest rates that affect family budgets would be endless and cataclysmic. Credit card interest rates would go up, adding hundreds of dollars to monthly bills. Young families seeking to take out a mortgage on a new home would be faced with thousands of dollars in higher payments over the life of the mortgage. Many might not even buy that home, putting a crimp in one of the bright spots of our economy--the housing market. Someone wanting to take out a loan to buy a new car should prepare to pay hundreds or thousands of dollars more in higher interest rates. That means car sales would decline and automobile manufacturers could lay off people. Do you have privately held student loans? Prepare for monthly payments to shoot upward. Innocent families, millions of them--tens of millions--would be hit with thousands of dollars in additional bills through no fault of their own if U.S. Treasurys were devalued.

The damage doesn't stop there. If we default on our debt, the dollar loses value, and a trip to the gas station or the grocery store gets more expensive. The dollar won't go as far. Americans will have to shell out more for gas and for milk to feed their kids.

Think of the effect of a default on 10,000 baby boomers who are retiring each day. In 2011 the stock market lost 2,000 points. How much more might it lose now? We gained that back by the beginning of 2012, but that is no comfort to the thousands of people retiring every day. And when you are dealing with U.S. Treasurys--and these are not certainties, but these are possibilities--it could be a lot worse. You can check your 401(k) and see that political brinkmanship took a huge bite out of your retirement savings. Imagine the pain of saving wisely, making smart choices, only to have your retirement account and family budget wrecked by dangerous brinkmanship from tea party Republicans in Washington. If there were ever a governmental action that merited the words ``playing with fire,'' this is it.

The devastation doesn't end there. If we don't raise the debt ceiling, the Federal Government will be faced with impossible choices. Do we pay foreign debts--because if we don't, those countries won't lend to us anymore--or do we pay veterans' benefits? Do we make sure Social Security benefits go out or Medicare? Do we pay our troops? Do we fund border security? What do we pay for education? These are all tough choices.

Make no mistake about it. If the debt ceiling is not lifted, we can't meet all our obligations.

So the chances of this are not 80 percent, but they are close enough to 50 percent that anyone who risks this, particularly for this forlorn goal: we won't raise the debt ceiling unless we repeal ObamaCare--which we know isn't happening--it is madness. Risk the economy of the United States, the possibility of going through worse than what we went through in 2008 because you demand ObamaCare be repealed when we know it won't happen? Wow. I have rarely seen such madness coming out of legislators, but it is coming out of a few.

So the consequences of failing to raise the debt ceiling are crystal clear: interest rates on the middle-class expenses such as home mortgages, car loans, and student loans will shoot up. Housing markets, automobile markets, and others decline as many are laid off, and then others are laid off in a cyclical cycle. The dollar will lose its value, making everyday purchases more expensive, and the Federal Government faces terrible choices about who we pay--seniors, veterans, military, creditors. To risk these consequences would be a terrible mistake.

In conclusion, I come here with a simple plea--not to our tea party activist colleagues but to mainstream conservative Republican friends. Please help us avoid the default crash. Please help us avoid an economic apocalypse. We are ready to talk. We are ready to negotiate on anything. But first open the government and pay our bills. Then we can sit down and debate our differences. The future of our financial system, the future of millions of Americans, is at stake. We don't play around with that. We don't hold that hostage.

To my mainstream conservative Republican colleagues, please do the right thing. Let us pay our bills and take the threat of severe economic collapse off the table now.

I yield the floor.

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