Moody’s chief economist says Congress must raise debt ceiling in time to avoid “devastating” recession

Dr. Mark Zandi, Chief Economist, Moody’s Analytics, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013. SOURCE: Joint Economic Committee

The chief economist for credit rating agency Moody’s urged Congress to raise the debt ceiling before mid-October, warning that failure to do so will result in a “devastating” and “severe” recession at a time when the government has run out of policy tools to adequately deal with such a serious economic slowdown.

Read more: Treasury Secretary Jack Lew warns U.S. will default on bills on Oct. 17th unless Congress raises debt ceiling

“If you don’t the debt limit in time, you will be opening an economic Pandora’s box. It will be devastating to the economy,” Zandi told lawmakers at a recent Joint Economic Committee hearing. “If you don’t do it in time, confidence will evaporate. Consumer confidence will sharply decline. Investor confidence, business confidence. Businesses will stop hiring. Consumers will stop spending. The stock market will fall significantly in value. Borrowing costs for businesses and households will rise.”

If the debt limit is not increased, Zandi estimated that the Treasury will have a $130 billion cash shortfall for the month of November. Multiplying that amount by 12 months, that figure grows to about $1.56 trillion, which Zandi estimated is about 9% of GDP that will be taken out of the U.S. economy if the Treasury is forced to default on the government’s bills.

Read more: Bernanke warns Feds can’t do much more to help the U.S. economy if fiscal showdown results in government shutdown or debt default

And because the Federal Reserve is already continuing its “highly accommodative” monetary policies by keeping interest rates near 0% and purchasing $85 billion worth of Treasury and agency mortgage-backed securities per month to keep borrowing costs low and stimulate consumer demand, Zandi said the U.S. government won’t have many tools at its disposal to help the economy recover from a severe recession.

“We’ll be in the middle of a very, very severe recession. I don’t see how we get out of it. There’s no monetary policy response in the current context. We’re already at a 0% interest rate. I just don’t see what policymakers will do,” said Zandi.

While Zandi concurred that the U.S. needs to fix its “significant and daunting” long-term fiscal problems, he urged Congress to avoid adding more fiscal austerity measures in the near-term as a condition to raising the debt ceiling.

“To address the debt limit, I would not add to the near-term fiscal austerity,” said Zandi. “You add up the effect of the spending cuts and the tax increases, it’s about 1.5% of GDP. That’s the most fiscal drag this economy’s had to digest since just after World War II during the war drawdowns.”

Had it not been for the spending cuts imposed as part of the 2011 Budget Control Act, the economy could have been growing at 3.5% instead of the current 2% of GDP.

“I think the fiscal austerity, the spending cuts and tax increases you speak of, in the near term, is over-done…I would smooth that in over a longer period of time to allow the private economy to digest that fiscal drag,” said Zandi. “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.”

On Thursday, Republican House Speaker John Boehner introduced a bill that would tie an increase to the debt limit to more spending cuts. The bill, if signed into law, would impose the type of fiscal austerity that Zandi said would slow the economic recovery.

Zandi said the U.S. economy in “on the verge of some very strong growth” if Congress can just increase the debt limit and pass a budget to avoid government shutdown in time.

“What I’m here to say is that you need to raise the debt limit. I mean, there’s no options. Otherwise, it’s disastrous and counter-productive to yur own goals because it’s going to result in a recession, bigger deficits, and raise the debt,” said Zandi. ” You can only put the gun to your head so many times before someone’s going to make a mistake and pull the trigger, and it’s to everyone’s detriment.”

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One Comment on “Moody’s chief economist says Congress must raise debt ceiling in time to avoid “devastating” recession

  1. Pingback: Conservative expert downplays need for debt limit increase, claims U.S. won't "default" as long as debt interests are paid | What The Folly?!

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