Transcript: Q&A with Rep. Carolyn Maloney on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee – Sept. 18, 2013

Partial transcript of Q&A with Rep. Carolyn Maloney (D-N.Y.) on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013:

Rep. Carolyn Maloney (D-N.Y.):
…This morning, President Obama urged CEOs to call on Congress to avoid the debt ceiling showdown and the damage it would do to business and the economy. He described the financial brinksmanship that was taking place – he called it terrifying and that it shouldn’t be tied to ideological arguments, which is what’s happening in Congress.

In a general sense, do you have any reports…of the damage that it did to our economy in the ’70s and the other times that we’ve just gone up to the brink and how harmful is it?

And this uncertainty certainly has a terrible impact on businesses. Sen. [Amy] Klobuchar talked about the letters that came in from American business urging us to work together and avert it in the past. And we don’t seem to have the same type of voices from American business now as we’ve had in the past, and why do you think that is – that American business isn’t weighing in with the letters and the phone calls that we’ve got in the past? Maybe they just believe that it’s not going to happen – your point, Mr. Zandi. In a general sense, your response to this.

David Malpass, President of Encima Global LLC:
…My sense is the markets have examined carefully the actual dynamics of debt payments since the – during the 2011 incident. And so what I’m seeing and hearing right now is no real market concern about either a default or a technical default. So my thought would be that there’s going to be less of a market reaction throughout this period because in a way we went through the experience in August of 2011.

Dr. Mark Zandi, Chief Economist, Moody’s Analytics:
I think we’ve become de-sensitized. We’ve gone down this path a number of times.

Rep. Carolyn Maloney (D-N.Y.):
Same old, same old.

Dr. Mark Zandi, Chief Economist, Moody’s Analytics:
Yeah, and each time we have the brinksmanship, there’s vitriol, we hit each other over the head, but at the end of the day when it comes down to brass tax, we come to an agreement. And there’s 100% certainty right now that that’s the movie that we’re going to see.

If we don’t – I, in fact, would argue – in a couple of weeks – say, we get into the early part of October and no one is fashioning a narrative or storyline with respect to how this is going to work out, then the markets will start to react. They’re going to say, “How’s this all going to play out?” And then a couple or three days before D-Day, whenever that is, Oct. 18th or Oct. 21st, the market’s going to react very violently.

So it’s going to be “I’m okay” and then it’s going to be “I’m not okay”, and then you’re not going to be able to get that back in the box.

David Malpass, President of Encima Global LLC:
If I may, we should note that in July and August of 2011, the bond market reacted actually favorably to the risk of default, meaning the yields fell sharply during that period of time. So from a bond market standpoint, it tends to run into the Treasury market. The bigger risk is of a stalemate in Washington.

Dr. Mark Zandi, Chief Economist, Moody’s Analytics:
Now, just a point of clarification, just a very important one, the Treasury yields fell. Every other yield rose. So borrowing costs to businesses, borrowing costs to consumers, the households because of higher mortgage rates because the spread’s wide because of this concern.

Rep. Carolyn Maloney (D-N.Y.):
Chairman Brady also talked about tying deficit reduction to any of these negotiations. But tying it together creates another type of uncertainty for businesses and investors, and this uncertainty would jeopardize economic growth. But we do need to reduce the deficit and Sen. Warner has been so effective in pointing out in his studies also. But have we swung the pendulum too far?

We’ve achieved $2.4 trillion in deficit reduction. The CBO came out with a study last week saying that sequestration was costing 1.7 million jobs in one year, and that the severe cuts are hurting the economic growth that then expands the economy.

And so the whole type of indiscriminate spending – I tell you, I just got out of an election in New York City, and I’ve never seen it so bad. 45% of the population is near poverty line or at poverty line. People are afraid of not being able to stay in their apartments because of the recession, downturn in the economy…The $40 billion…cuts in the SNAP [Supplemental Nutrition Assistance Program] Program where people don’t even have the food they need. Is the cuts getting too close? Some people think it should be a 1 to 1 but it’s now more like a 4 to 1 of spending cut to revenue increases and is this – how much more deficit reduction is needed to put the nation on a sustainable fiscal path and how should we balance between spending cuts and revenue increases? Have we reached a point where we’re overall hurting the economy? I’d like to ask Dr. Zandi. He’s an economist who gets fired if he’s wrong… [Laughter]

Dr. Mark Zandi, Chief Economist, Moody’s Analytics:
…I think the fiscal austerity, the spending cuts and tax increases that you speak of, in the near-term is over-done. If I were king for the day, I would smooth that in over a longer period of time to allow the private economy to digest that fiscal drag.

So we’re navigating through it. It’s painful. Our economy is very lackluster. Unemployment is still very high. It’s not coming down quickly enough in large part because of the austerity. But nonetheless, I think ideally it would be better to smooth that in over time.

Clearly, we need to bring down the deficits. We need to get the deficits down at least to stabilize the debt to GDP ratio. But we’re doing that awfully quickly and taking a big chance in the process.

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