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Senate raises debt ceiling again to help U.S. economy escape another disaster

If the government ever fails to prevent a default, the impact on the consumer could be incredible

Government and money concept
Photo (c) Douglas Rissing - Getty Images
The U.S. economy got another 11th-hour reprieve late Thursday. The U.S. Senate voted to raise the debt ceiling limit by $48 billion, avoiding the fate predicted by Treasury Secretary Janet Yellen that the U.S. would likely face a financial crisis if lawmakers did nothing. Yellen previously said not raising the debt ceiling could cause interest rates to rise quickly, leading to millions of lost jobs and a possible recession.

The Treasury Secretary wasn’t alone in her fears. The nation’s largest lender -- JPMorgan Chase -- had reportedly been working on plans for weeks that would have gone into effect if the U.S. economy fell into default mode. According to an exclusive report by Reuters, the bank was preparing to address everything possible -- the repo and money markets, client contracts, its capital ratios, and how ratings agencies would react.

"This is like the third time we've had to do this, it is a potentially catastrophic event," Chief Executive Jamie Dimon told Reuters. "Every single time this comes up, it gets fixed, but we should never even get this close. I just think this whole thing is mistaken and one day we should just have a bipartisan bill and get rid of the debt ceiling. It's all politics.”

Everything could fall apart if a default happens for real

The Senate has had to keep the economy from going into freefall mode twice in the last month. But if it ever fails to catch another default in the nick of time, consumers need to hold on tight.

“This economic scenario is cataclysmic,” warned Moody’s Analytics in a new report. If it does happen, the firm stated that it could be comparable to the loss consumers suffered during the 2008 financial crisis.

At the top of that snowball effect would be the potential loss of nearly 6 million jobs, causing the unemployment rate to surge to close to 9%. The White House says even the possibility of a default is scary and would impact both markets and consumers. 

“Just the threat of one—would have a devastating impact on our economy,” White House advisors wrote in a blog post on Wednesday. They noted that if a default happens, one thing consumers could feel the sting of is mortgage rates. In the run-up to and aftermath of the 2011 debt ceiling crisis, mortgage rates rose by between 0.7 and 0.8 percentage points, causing a family who took out a $250,000 30-year fixed-rate mortgage to be on the hook for more than $30,000 in additional interest payments over the life of the loan. 

Rates for auto loans, personal loans, and other consumer financial products also rose in the wake of the 2011 crisis, and these increases often lasted for months. If another default acts anything like the Great Recession of 2008, it could take years for consumers to regain their financial footing. Nearly half of consumers who were adults in 2007 say their financial condition failed to improve for at least 10 years afterward. 

“That recession was marked by the collapse of the housing market, a wave of home foreclosures, and a financial crisis that nearly brought down the world economy,” said Investopedia’s Caleb Silver.

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