Economists warn of peril on US debt ceiling inaction

Wed Jul 13, 2011 5:36pm EDT

Related Topics

* Don't "play games" with markets on debt, Johnson says

* Acting soon on debt ceiling "essential," Desai says

* Bachmann holds firm against raising debt ceiling

By Kevin Drawbaugh

WASHINGTON, July 13 (Reuters) - No one knows exactly what would happen in a U.S. government debt default, but economists agreed on Wednesday that it would be best not to find out.

"You cannot play games with something this serious," Simon Johnson, former chief economist of the International Monetary Fund, said at a congressional hearing.

"Other countries that have tried to play these kinds of games with the financial market usually end up getting burned.

"Why would you want to take that risk?" asked Johnson, now a professor at the Massachusetts Institute of Technology.

At a time of sluggish economic recovery and fragility in global financial markets due to the EU debt crisis, economists at the hearing stressed the importance of the United States remaining a safe haven for international investors.

Nevertheless, with an Aug. 2 default deadline nearing and no debt ceiling deal in sight, some Republicans on Wednesday again displayed a willingness to roll the dice on default.

Republican Representative Louie Gohmert called for an end to "fearmongering" over possible delays in Social Security and other benefit payments from a default.

Representative Michele Bachmann, seeking Tea Party support in her bid for the Republican presidential nomination, said again that she would vote against raising the debt ceiling.

President Barack Obama and congressional leaders gathered for a fourth day in a row on Wednesday in search of a deficit deal that would allow an agreement on raising the debt ceiling.

Harvard University Law and Finance Professor Mihir Desai said at the hearing that federal payments could stop in a default, which he said would be "extremely problematic."

"But it can also become a broader manifestation of a system that appears broken to the rest of the world and that is where we run into significant problems," he said.

"I think it's very important that this particular deadline is not ignored. It is essential that we act now."

Desai and Johnson appeared as witnesses at an unusual joint hearing of the Senate Finance Committee and the tax-writing House of Representatives Ways & Means Committee.

The session was primarily focused on aspects of a possible comprehensive tax reform in the near future, but questions about the debt ceiling debate arose repeatedly.

"There's a big elephant in this room and it's called debt ceiling," said Democratic Representative Charles Rangel.

"Until we get that out of the way, it will be impossible for us to, in a bipartisan way, deal with" tax reform.

(Additional reporting by Andy Sullivan; Editing by Cynthia Osterman)

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