Larry Summers, former U.S. Treasury Secretary, speaks during a session on the second day of the World Economic Forum Annual Meeting 2011 in Davos, Switzerland. Photographer: Tomohiro Ohsumi/Bloomberg
By Juliann Francis - Jul 16, 2011 11:00 PM CT
A U.S. debt default would cause panic throughout the financial system and long-term uncertainty, former Treasury Secretary Larry Summers told CNN.
“It seems to me an unthinkable financial risk to take,” Summers said in an interview on today’s “Fareed Zakaria GPS” program. It would cause “a cascade that makes Lehman Brothers look like a very small event.”
The bankruptcy of Lehman Brothers Holdings Inc. (LEHMQ) in September 2008 was the biggest in U.S history and was followed by a collapse of credit markets and a 43 percent decline in the S&P 500.
In 16 days, the U.S. will begin to default on its debt obligations unless Congress and President Barack Obama can agree on a deal to raise the debt ceiling. Obama has been trying to break an impasse over whether to include cuts in entitlement programs and tax increases in the deal.
Summers said a potential default makes him worry about “runs on banks, runs on money market funds,” exchanges facing “the prospect of collapse, institutions that had been built over decades” being “swept away.”
“The ability to carry on routine financial business -- to clear checks, to pay bills, to meet obligations would be lost,” he said.
“It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said.
To contact the reporter on this story: Juliann Francis in Washington at jfrancis31@bloomberg.net To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
Jamie Dimon Says Debt Default by U.S. Would Be ‘Catastrophic’
James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg
By Rebecca Christie and Dawn Kopecki - Mar 30, 2011 11:00 PM CT
JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.
“If the United States actually defaults on our debt it would be catastrophic,” Dimon, 55, said at a U.S. Chamber of Commerce event in Washington yesterday, when asked what may happen if the U.S. fails to increase its $14.29 trillion debt limit.
The government will reach its legal debt limit between April 15 and May 31 if Congress doesn’t act, the U.S. Treasury Department said March 1. The department, which may provide an updated timeline in early April, has said it could get an extra eight weeks before it exhausts emergency steps to avoid breaching the limit.
“The Treasury is on track to bump into the debt ceiling in the second half of May,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Our own estimates suggest that they will need to start using accounting gimmicks in late May, and will exhaust the normal bag of debt- ceiling tricks at some point in July.”
Dimon, who’s also chairman of New York-based JPMorgan, the second-biggest U.S. bank by assets, said the U.S. would be “crazy” to leave the debit-limit question unresolved and that market participants eventually would need to take “drastic action.”
‘Snowballing’
“Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing,” Dimon said. “All short-term financing would disappear.”
U.S. Senator Marco Rubio, a Florida Republican, has said he won’t approve a debt-limit increase without a range of tax-and- spending reforms.
“We need to use the debt limit itself as the way to ensure that America’s debt limit begins to decline, not always go up,” Rubio said in a March 29 television interview with Fox News. “How about the debt limit starting to go down? These are the kinds of things that I hope we’ll focus on.”
Treasury Secretary Timothy F. Geithner has said the nation will suffer “catastrophic damage” if it loses investors’ confidence. He also has said it would be “unworkable” to give priority to payments on the national debt over other government obligations, as proposed by U.S. Senator Pat Toomey, a Pennsylvania Republican.
To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net Dawn Kopecki in Washington at dkopecki@bloomberg.net To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net David Scheer at dscheer@bloomberg.net
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