“Not raising the debt ceiling quickly and unconditionally is economic malpractice that could derail a modest economic and jobs recovery,” said Christian E. Weller, senior fellow at CAP in “How the Debt Ceiling Fight Could Derail the Recovery.”
House Republicans conceded Friday to vote next week on a three-month extension of the debt limit. In return, they demand a budget that reduced spending.
“We must pay our bills and responsibly budget for our future,” said Majority Leader Eric Cantor (R-Virginia) in a statement Friday, according to the Huffington Post.
Republicans “will authorize a three month temporary debt limit increase to give the Senate and House time to pass a budget,” he continued. “Furthermore, if the Senate or House fails to pass a budget in that time, Members of Congress will not be paid by the American people for failing to do their jobs. No budget, no pay.”
Weller argues that if Congress were to refuse to raise the debt ceiling and, forcing the government to default on some of its debts, “investors will likely lose faith in the government.”
The result will be higher interest rates for Treasury bonds, which will translate into higher interest rates for other U.S. securities.
In fact, Weller estimates a 0.5 percent increase in Treasury bond rates will render a 0.66 percentage point uptick in mortgage rates.
With affordability as a key driver in the housing recovery, an increase in interest rates could deter buyers.
Weller suggests a 0.66 percentage point increase in mortgage rates could prevent between 41,000 and 48,000 new home sales in one year.
This anticipated decline is “equal to about two-thirds of the growth in new home sales seen in the 15 months from June 2011 to September 2012, when the housing market began its recovery,” Weller stated.
While this decline would be bad for the housing market itself, Weller argues the broader economy would suffer as well.
“The housing market accounts for only 3 percent or 4 percent of total U.S. spending, but it has a disproportionate importance to economic recovery,” Weller said.
The decline in home sales would prompt a reversal in the recent trend of rising prices in many markets across the country. Construction-related jobs would also take a hit, according to Weller.
Without raising the debt ceiling, the government could have reached the current debt ceiling as early as next month, and according to Weller, the negative impacts would be widespread, even if neglecting to raise the debt ceiling is temporary.
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