Casey Statement Following Meeting at the White House on Shutdown and Default Crisis

Washington DC – U.S. Senator Bob Casey (D-PA), a member of the Senate Finance Committee, made the following statement after a meeting with President Obama at the White House this afternoon.  The meeting lasted approximately an hour and a half.

“Following the meeting with the President as well as other developments, I am encouraged that we can move forward with a reasonable approach to our budget challenges, reopen the government and end the threat of default,” said Senator Casey.  “It is time to put an end to this shutdown which is causing real harm to Pennsylvanians.”

Today at the Senate Finance hearing with Treasury Secretary Lew, Senator Casey shared an excerpt of a letter from one of his constituents. He also handed the letter to the Vice President at the White House.  It reads “Besides our personal difficulties due to the budget impasse, my elderly parents live with the worry of when and if they will receive their Social Security checks. At 85 and 83, they should not have this uncertainty. These should be their golden years. It breaks my heart to hear my mother saying she can’t sleep and has a stomach ache from the worry about where our country is heading. Middle and low income family cannot afford another economic downturn, we are just barely recovering from the last one.”


Casey: The Economy Cannot Afford a Debt Crisis Manufactured by a Small Group in Tea Party

Treasury Secretary Jack Lew Testified before the Senate on the Risks of Default / Uncertainty Could Have Serious Consequences for Markets, Jobs, Seniors and Pennsylvania Families

Washington DC – Today, U.S. Senator Bob Casey (D-PA), a member of the Senate Finance Committee, made the following statement after Treasury Secretary Jack Lew testified on the risks of default.

“A manufactured debt crisis is wholly irresponsible and will have serious consequences for markets, jobs, seniors and middle class Pennsylvanians,” said Senator Casey. “It is simply unacceptable to allow a small group in the Tea Party to risk our nation’s economy with a game of reckless brinksmanship.  In the event of a catastrophic economic debacle, it will be middle class Pennsylvanians that will shoulder the consequences.  As Secretary Lew asked in his testimony ‘How can the United States choose whether to send Social Security checks to seniors or pay our benefits to our veterans? How can the United States choose whether to provide children with food assistance or meet our obligations to Medicare providers? … It is irresponsible and reckless to insist that we experience a forced default to learn how bad it is.’”

Fact sheet on Potential Consequences of Default  [DPCC 10/10/13]

The damage from even a very brief period of default would be serious and irreparable. A default would be an unprecedented event in American history that would breach the full faith and credit of the U.S. government. As a result investors would be less likely to purchase Treasury securities and those that do will demand higher interest rates to reflect the increased credit risk. By increasing borrowing costs and damaging economic growth, default would actually add to future deficits rather than decreasing them. [Bloomberg, 10/6/13; Treasury, 5/13/11; Treasury 1/14/13]

A default could do more serious and long-term damage to the economy than the collapse of Lehman Brothers. Goldman Sachs projected that a failure to alter the debt limit would “force the Treasury to rapidly eliminate the budget deficit… We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized).  The effect on quarterly growth rates could be even greater.”  A recent Treasury study noted, “Considering the experience of countries around the world that have defaulted on their debt… those consequences, including higher interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”  [Goldman Sachs, 10/5/13; Bloomberg, 10/6/13; Treasury, 10/3/13; Washington Post, 10/7/13; Center for Budget and Policy Priorities, 1/4/13; New York Times, 1/17/13; ]

  • A default by the world’s reserve currency would threaten the solvency of banks, institutional investors, mutual funds and other financial institutions. Such an event could potentially be more damaging that the collapse of Lehman Brothers.  The outstanding obligations of the United States are currently 23 times the amount owed by Lehman Brothers back when it filed for bankruptcy in 2008.  That event triggered the financial crisis that caused the stock market to lose half of its value over five months and helped to trigger the worst recession since the Great Depression. [Bloomberg, 10/6/13]
  • A default could have serious consequences for trading on Wall Street. Wall Street computers are programmed to automatically pass along U.S. government payments to bond holders and might not check to see if those payments have actually been made, forcing big banks to shell out their own cash to pay interest on debts that aren’t theirs or causing dealers to avoid the Treasury market altogether.  This makes it harder to trade U.S. debt and drains the banking system. Or, defaulted bonds could be prohibited from trading, causing $120 billion to disappear from the Treasury market on October 24thalone. [CNN, 10/7/13]
  • Tim Bitsberger, former Treasury official under Bush: “If we miss an interest payment, that would blow Lehman out of the water.  Lehman was an isolated company, and now we are talking about the U.S. government.” [Bloomberg, 10/6/13]

US banks are already filling ATMs with extra cash and preparing for default panic.  Three of the country’s top 10 banks are implementing a playbook of strategies last used during the August 2011 debt limit standoff.  One bank has admitted to delivering 20-30% more cash to their ATMs in preparation for en masse withdrawals and consumer panic.  [Financial Times, 10/4/13]

The Middle Class would be the immediate victims of default. Even a short-term default would have serious repercussions for middle class families:

  • Jobs Lost: A conservative estimate from 2011 projected that a 1% decline in GDP from a default would cause our economy to shed roughly 640,000 jobs.  A more recent analysis from Goldman Sachs estimated the size of the fiscal tightening caused by default would be roughly 4.2% of GDP, while the impact on GDP “growth rates could be even larger.”  [Third Way, 5/11; Goldman Sachs, 10/5/13] 
  • Retirement Savings Hammered: The violent market reaction could dramatically shrink the value of the S&P 500 index. The average 401k could lose thousands of dollars. A 2011 projection found that a 6.3% loss in the S&P would cost a portfolio worth about $140,000 approximately $8,800.  According to newer data, an equivalent hit could cost the average person in his or her 50’s who has been saving for 2o-30 years as much as $11,000.  Deutsche Bank recently found that brinksmanship over whether we will pay our bills could lead to a 3-4% decline in the S&P 500, while a default could cause as much as a 45% drop. [Third Way, 5/11; EBRI, 12/12; Business Insider, 10/7/13]
  • Mortgage Payments Hiked: After the 2011 showdown, mortgage spreads jumped by 70 basis points, which would have added about $100 per month to the cost of an typical mortgage. Estimates showed that a default would have increased the lifetime cost on a new home loan of $221,900 by almost $25,000. [Third Way, 5/11; Treasury, 10/13]
  • Disrupted Payments: The U.S. government makes roughly 80 million separate payments per month that would be threatened by a default. These payments include Social Security, Medicare, Medicaid, military salaries, veterans benefits, and many others. Delayed or disrupted payments would prevent 57.5 million Americans from receiving Social Security benefits in a timely manner and interfere with payments to 3.4 million veterans. [Treasury, 8/26/13; JEC, 9/13]
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