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Insider games

Chris Farrell May 31, 2011

There’s a vote tonight (Tuesday evening) on raising the federal government’s debt limit ceiling. House Republicans are bringing up the vote even though “everyone knows” it won’t pass.

According to the New York Times, Republican leaders “have privately assured Wall Street executives that this is a show intended to make the point to Mr. Obama that an increase cannot pass absent his agreement to rein in domestic programs. “Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.

I don’t get the joke. The Chinese stock market has dropped into bear market territory. The European sovereign debt crisis overhangs the global economy. Growth in the U.S. is slowing. The unemployment rate is 9%. The U.S. economy is fragile. So is the global economy.

And Washington insiders are joking with the debt limit and full faith and credit of the federal government?

Yes, investors have been steadfast in their belief that Washington will strike a deal raising the debt limit. It’s one reason why the interest rate on U.S. Treasury securities remains so low. But what if sentiment changes overnight?

In that case, interest rates would soar. Rising rates would hit the economy hard. Retirement portfolios would tank. Businesses and households would batten down the financial hatches, conserving cash, unsure how bad the economy could get. “It would be a disaster all around,” says V.V. Chari, economist at the University of Minnesota.

I agree with Bruce Bartlett, the savvy fiscal monitor.:

It’s reckless because failure to raise the debt limit not only threatens a default that could potentially roil the entire world financial system, but would potentially deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees, and shortchange savers who depend on interest income.

It isn’t a risk worth taking–no joke..

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