[Senate Hearing 113-193]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 113-193


     IMPACT OF A DEFAULT ON FINANCIAL STABILITY AND ECONOMIC GROWTH

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 DISCUSSING THE FINANCIAL MARKETS AND POTENTIAL ECONOMIC IMPACTS OF A 
 DEFAULT IF THE STATUTORY DEBT LIMIT IS NOT RAISED AND THE TREASURY IS 
    UNABLE TO FULFILL THE FINANCIAL OBLIGATIONS OF THE UNITED STATES

                               __________

                            OCTOBER 10, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs





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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

                      Elisha Tuku, Senior Counsel

                      Krishna Patel, FDIC Detailee

                  Greg Dean, Republican Chief Counsel

             Mike Lee, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)



















                            C O N T E N T S

                              ----------                              

                       THURSDAY, OCTOBER 10, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Reed.................................................     3
    Senator Menendez.............................................     3
    Senator Toomey...............................................     5
    Senator Brown................................................     6
    Senator Warner...............................................     7

                               WITNESSES

Frank Keating, President and Chief Executive Officer, American 
  Bankers Association............................................     7
    Prepared statement...........................................    37
    Response to written questions of:
        Senator Coburn...........................................    53
Kenneth E. Bentsen, Jr., President, Securities Industry and 
  Financial Markets Association..................................     8
    Response to written questions of:
    Prepared statement...........................................    39
        Senator Coburn...........................................    54
Gary Thomas, 2013 President, National Association of 
  Realtors'...........................................    10
    Prepared statement...........................................    42
    Response to written questions of:
        Senator Coburn...........................................    55
Paul Schott Stevens, President and CEO, Investment Company 
  Institute......................................................    12
    Prepared statement...........................................    46
    Response to written questions of:
        Senator Coburn...........................................    56

                                 (iii)

 
     IMPACT OF A DEFAULT ON FINANCIAL STABILITY AND ECONOMIC GROWTH

                              ----------                              


                       THURSDAY, OCTOBER 10, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    This Committee has many important issues to consider and 
plenty of challenges our constituents want us to solve together 
on a bipartisan basis. However, we find ourselves on Day 10 of 
a Government shutdown that is costing taxpayers money. In 
addition, the shutdown drags down our economic recovery with 
each passing day. This unnecessary shutdown does nothing to 
address our long-term fiscal challenges and is certainly not 
promoting job creation in the short term.
    If that were not bad enough, we have only 1 week left 
before we reach our Nation's debt limit. If Congress does not 
act soon, the United States will fail to pay its bills in full 
and on time by choice for the first time in history. I do not 
favor making the United States into a deadbeat Nation, which 
would be the consequence if we do not raise the debt ceiling. 
While we must work to address our long-term fiscal issues, a 
default on our debt will not reduce our deficit. And there is 
little to nothing Congress could do after the fact to repair 
the damage that would be felt for generations.
    It is important to remember the mere threat of a default 
can have significant costs. During the last major debate on the 
debt limit in 2011, the uncertainty and delays in raising the 
debt ceiling cost taxpayers about $1.3 billion for that fiscal 
year, according to GAO. Over a 10-year window, the taxpayer 
cost could be as high as $18.9 billion.
    So today, before it is too late, we will hear from our 
witnesses about the kind of impacts we should expect if the 
United States defaults. We will hear what this could mean not 
only for the financial system, but also for American families' 
ability to pay their bills, small businesses' ability to create 
jobs, and current, as well as future, retirees' ability to 
protect their life savings.
    It is time to stop playing this foolish game of chicken 
with our economic recovery, and it is time for Congress to 
focus on addressing the real problems our constituents sent us 
to Washington to solve. To do that, we must first raise the 
debt limit.
    With that, I recognize Ranking Member Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman, and thank you to 
our witnesses for appearing today to present your thoughts on 
this important topic.
    While there has been a lot of recent attention on what 
happens if the debt limit is not increased, there has been less 
attention on our larger, wider, real debt crisis. The statutory 
debt limit is currently $16.7 trillion. Since 2009, the debt 
limit has been increased by $5.4 trillion. CBO projects that 
debt subject to the debt limit will reach $25 trillion within 
10 years. The statutory debt limit is a symptom of our fiscal 
problems and must be addressed.
    Since we have already focused on the impact of failing to 
lift the debt ceiling, I would like to focus on the debt 
itself. According to recent Treasury figures, the gross debt 
has increased $6.1 trillion since 2009. Deficits are projected 
to be the norm as our aging population and rising health care 
costs push spending higher. Unless we make significant reforms 
to entitlement programs, they will crowd out all other 
Government spending from infrastructure to defense. Failure to 
improve these programs also threatens them with insolvency, 
which will happen within a generation if we do not act now.
    In recent years, we have made important progress in some 
areas of fiscal policy. For example, we have begun to actually 
make Federal agencies go through their budgets to identify and 
eliminate waste and to identify fraud and abuse and set 
priorities and learn to do more with less. But the mid- and 
long-term projections from CBO show that our debt crisis is 
only going to get worse if we do not substantively deal with 
the fiscal policies that we have, thus far, far failed to 
address, namely, entitlement reform and pro-growth tax reform.
    The Committee for a Responsible Federal Budget recently 
noted that most of the deficit reduction agreements made since 
1980 have been accompanied by a debt ceiling increase. I joined 
fellow members of the Finance Committee recently in sending a 
letter to Secretary Lew suggesting that we again use the debt 
limit as an opportunity to bring lasting reforms and debt 
reduction to our Nation.
    As a member of the Bowles-Simpson Fiscal Commission and the 
Gang of Six, I know there has been a lot of work done on this 
issue and that both sides can find common ground. Tax reform is 
an equally important component in getting the debt under 
control. The current Tax Code is inefficient and burdensome. We 
need to dramatically simplify our Tax Code, reducing rates for 
all taxpayers so that we can create economic growth.
    I am interested in the thoughts of our panel on how the 
current Tax Code affects investment. The debt ceiling debate 
creates an opening for real progress in these areas. Now is the 
time to work together on solutions that reduce our deficits and 
move our economy forward. It is time to make these hard 
decisions.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who would like to give brief 
opening statements? Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman. I 
think this is a very important hearing. We are on the verge of 
doing something that I think is not only unwise policy but 
flies in the face of the Constitution. The Fourteenth Amendment 
particularly says:

        The validity of the public debt of the United States, 
        authorized by law, including debts incurred for payment of 
        pensions and bounties for services in suppressing insurrection 
        or rebellion, shall not be questioned.

We are certainly questioning that as we lead up to this crisis.
    And so this is not a trivial matter. Our forefathers, our 
predecessors, recognized the importance of paying the debt on 
time every time and enshrined it in the Constitution, and we 
are on the verge of breaching that sacred commitment that we 
have all taken. That is the oath we take. And I think everyone 
is in favor of long-term, wise policies, et cetera, but we are 
talking about within a few days breaching and defaulting on the 
debt.
    I could not agree more with Governor Keating's comments in 
the Washington Post, and thank you for being here, Governor 
Keating. In his words:

        Using the debt ceiling as leverage in the deficit debate is 
        unwise and dangerous. Citizens nationwide are frustrated with 
        the political stalemate in Washington, but our Nation's 
        financial integrity should not be used as a bargaining chip.

    I absolutely agree, and thank you for that statement, 
Governor.
    What we potentially could do is set off a financial chain 
reaction that would go from market to market to market with 
unknown and perhaps catastrophic consequences. And anyone who 
was here in 2007, 2008, and 2009 and saw the collapse of Lehman 
and the bankruptcy, which everyone assumed, at least in the 
Treasury, could be self-contained, could be worked out, was a 
minor sort of blip on the scene, understands the potential 
consequences in multiple markets--overnight Treasury markets, 
mutual fund markets, et cetera.
    Already we are seeing credit default swaps increase, 
European banks reporting they have jumped to 150 million euros 
from about 1.6 million euros in recent months. A huge spike. 
Rates are going up on short-term Treasury bills. I just saw 
today that the Hong Kong Stock Exchange has basically 
downgraded already Treasuries as collateral, at least the 
short-term Treasuries as collateral. So you can see the ripple 
effect as this goes out. We have to raise the debt ceiling to 
avoid default, and we have to do it promptly.
    Thank you.
    Chairman Johnson. Anybody else? Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Chairman, first of all, I appreciate your leadership in 
having this extraordinarily timely hearing, and I think the 
question of default is a question of both what happens at home 
and abroad for us as America. And I hope my colleagues across 
the aisle, and particularly in the House of Representatives, 
would agree that defaulting on the Nation's debt would cause 
tremendous harm to American families, businesses, and to the 
global economy and would, in my view, dramatically weaken 
America's standing in the world, not just in its respect and 
stature but in ways that have consequential economic 
significance to us here at home. And I would also hope that 
they agree that these are outcomes no one wants to see.
    I would say to our friends particularly in the House of 
Representatives, who are threatening default, let us stop 
lurching from one manufactured crisis to another manufactured 
crisis and stop threatening to default on the Nation's 
obligations. And I understand they have policy priorities, 
although I am never quite sure which one it is that we are 
talking about. First it was about ending Obamacare, which was 
passed by the Congress, signed by the President, affirmed by 
the Supreme Court, which is the final voice of what is the law 
of the land, and then reaffirmed by the American people in the 
reelection of the President, where there were two clear 
choices.
    Then it was about the medical device tax. Now I hear about 
debt. And in that respect, I know that this debt ceiling was 
raised by President Reagan 18 times, by President Bush 9 times, 
and the second President Bush 7 times. So evidently, you know, 
during those periods of time, there were 34 times in which the 
debt ceiling was raised.
    So I know there are other policy priorities people want to 
achieve. I want to achieve comprehensive immigration reform. It 
does not mean I am willing to shut down the Government until 
the House of Representatives does what I want. I mean, it just 
does not make sense to the American people as a way of doing 
business.
    You know, we ask countries around the world to actually 
pursue fiscal structural reforms because we think it is in our 
interest at the end of the day. And then we ultimately look at 
the costs of a default, and I say to myself, `How do we have 
standing in the world to be able to pursue those policies that 
promote economic opportunity here at home?'
    And I think the harm from default would take not just a 
short term to recover from, but I think it could take a decade 
to recover from. I think it sees an immediate drop in economic 
growth, an increase in the amount of our Federal budget spent 
on paying interest, money that comes directly out of the 
taxpayers' pockets. Mortgage interest would rise; home values 
could very well plummet at a time in which we are finally 
getting recovery in the housing market. Student loans and 
credit cards would become more expensive. Companies around the 
country would see the cost of borrowing spike, seriously 
harming their ability to invest and create jobs. Millions of 
American families would see their savings for retirement or a 
home or their children's college education decimated. And the 
U.S. dollar, which is the final point I will make--and I think 
about this in my other role as the Chairman of the Senate 
Foreign Relations Committee--the U.S. dollar is the world's 
most important reserve currency. And U.S. Treasuries are a safe 
haven where investors know they can put their money in times of 
crisis and uncertainty.
    And this value to the world strengthens our economy and 
lowers interest rates for American consumers, businesses, and 
governments at every level. Why is that something we are 
willing to risk over a political tactic? I cannot understand 
it, and I hope that better senses will come shortly to the 
Congress.
    Thank you, Mr. Chairman.
    Chairman Johnson. Anyone? Senator Toomey.

             STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman. I just want to 
make a brief point in response to my colleagues from Rhode 
Island and New Jersey.
    I could not agree more with the sentiment about the 
importance of the fact that the U.S. dollar is the world's 
reserve currency. The importance of the U.S. Treasury 
securities simply cannot be overstated as an investment 
vehicle, as a benchmark for credit markets around the world, as 
a source of safe and secure investment.
    I hope as we have this discussion we can be honest and 
candid about what we are really talking about here. As we all 
know, if we do not raise the debt ceiling sometime soon, then 
at some point we are going to have disruptive consequences 
because tax revenue is only 85 percent of all the money that we 
are planning to spend. It is not 100 percent. And that means 
the other 15 percent has got to be borrowed. And if it is not, 
then you have to make sudden and very, very unfortunate 
decisions about which things get cut. That is very disruptive. 
It is not where we want to go. And so I hope the President will 
agree to actually address the underlying problems that got us 
here so that we can avoid this.
    Having said that, there is absolutely no circumstances 
under which we should ever tolerate choosing willfully to make 
sure that a missed payment would include a missed payment on a 
Treasury security precisely because of the uniquely important 
role that Treasury securities play.
    And so I was disappointed that the Treasury Secretary at a 
recent hearing refused to acknowledge the obvious--it is 
obvious to me; maybe I should not consider it so obvious--that 
he would not choose to default on a U.S. Treasury security 
precisely because of the unique role that these instruments 
play. But I hope we would agree that that would be the most 
disruptive of the very unfortunate and disruptive options that 
would be available.
    So that is the context in which we are having this 
discussion. I thoroughly agree with the comments of the Ranking 
Member that at some point it is just irresponsible to not deal 
with the underlying problem that gives rise to the need for all 
of this debt. And, frankly, it is not clear to me why this 
Administration should be the first Administration in modern 
history to simply refuse to have a discussion about how we got 
here at a moment like this.
    Thank you, Mr. Chairman.
    Chairman Johnson. I would like to remind my colleagues that 
the record will be open for the next 7 days for additional 
statements and other materials.
    Senator Brown. Mr. Chairman?
    Chairman Johnson. Yes.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. My guess is that 
what you just said was a suggestion that we not do opening 
statements, but I will--that really just went over my head, Mr. 
Chairman. I did not notice.
    Thank you. I have a few comments, and I will not talk for 
more than 2 or 3 minutes. Five years ago, we were dealing with 
the financial crisis. We could be on the brink of another one, 
this one self-inflicted, as Governor Keating mentioned in his 
comments that Senator Reed mentioned.
    In 2008, banks' funding dried up in the overnight repo 
market because of worries about their collateral and their 
creditworthiness. In 2010, we did not enact reforms that 
perhaps we should have to the repo markets. Regulators are 
working on it, but they are still vulnerable.
    I sent letters yesterday to the two triparty repo clearing 
banks--Bank of New York Mellon and JPMorgan--that were in the 
middle of the short-term funding problems for Bear Stearns, 
Lehman Brothers, and AIG. I asked them what effect a default 
would have on the triparty repo market where 85 percent of the 
market is backed by U.S. Treasuries or U.S. agencies' 
securities. We are already seeing issues in the financial 
market.
    The Wall Street Journal reported that the cost of using 
short-term Treasuries as collateral has already increased. The 
world's largest money manager, as we all know, reportedly sold 
off its Treasury holdings and maturity in late October. 
Treasury Secretary Lew testified in front of Senator Menendez 
and Senator Toomey and me and others that yields on short-term 
Treasuries at Tuesday's auction nearly tripled from the week 
before.
    We also saw in that hearing where some are setting up a 
construct where Government, Treasury, the President has to 
choose between paying off bond holders, paying off Chinese 
investors and Wall Street investors, choosing between that and 
Medicare, veterans' benefits, funding everyday government in 
this country--a choice that no one, absolutely no one should 
inflict upon our Government. It has never been done before.
    This week, I spent a lot of time this week calling 
community bankers and business people and hospital 
administrators and people running major research institutions 
in my State, mostly, I assume, Republicans, although I do not 
know their political affiliation. Most of them were incredulous 
that we would even be thinking of this prioritization of--if we 
reach the debt limit that we would prioritize even thinking 
about making these choices between paying Wall Street and 
paying Main Street, if you will. They cannot believe we are in 
a position that some are saying we should not raise the debt 
limit and inflict a crisis on themselves. I think Governor 
Keating's comments say exactly that. It would be unwise and 
dangerous to do this. We have no business moving our country in 
this direction.
    Mr. Chairman, thank you.
    Chairman Johnson. Are there any other--I would like to--
Senator Warner.

              STATEMENT OF SENATOR MARK R. WARNER

    Senator Warner. Less than a minute. I just have to say that 
this notion of prioritization, we are in uncharted territory. 
We do not know what would happen. Why would we take that risk? 
Again, respectfully, any list of prioritization which has 
Social Security or Medicare and the military may or may not 
work. But the thing that I find stunning is--and when I get to 
our questions, I will ask Governor Keating this. As a former 
Governor--and there are other Governors here--none of those 
prioritization lists include the pass-throughs that help fund 
State budgets, local budgets, hospitals. So you could 
potentially have a circumstance where perhaps America does not 
default, but every State and every locality either is in an 
immediate budget crisis or they would have to default, and the 
ripple effect is, again, unprecedented.
    Thank you, Mr. Chairman.
    Chairman Johnson. I would like to now introduce our 
witnesses that are here with us today.
    Mr. Frank Keating is the President and CEO of the American 
Bankers Association. Previously he served as Governor of 
Oklahoma.
    Mr. Ken Bentsen is the president of the Securities Industry 
and Financial Markets Association. He previously served as a 
Congressman for the 25th District of Texas.
    Mr. Gary Thomas is the President of the National 
Association of Realtors'. He has been in the real 
estate business for more than 35 years.
    And, finally, Mr. Paul Schott Stevens is the President and 
CEO of the Investment Company Institute. Previously he served 
as Special Assistant for National Security Affairs to President 
Reagan.
    Mr. Keating, you may proceed.

   STATEMENT OF FRANK KEATING, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, AMERICAN BANKERS ASSOCIATION

    Mr. Keating. Chairman Johnson and Ranking Member Crapo, I 
am Frank Keating, President and CEO of the American Bankers 
Association. As noted, I previously served two terms as 
Governor of the State of Oklahoma and recently was a member of 
the Bipartisan Policy Center's Debt Reduction Task Force.
    I appreciate the opportunity to be here to discuss the need 
to raise the debt ceiling and the consequences of failing to do 
so.
    Let me be very clear: We need to meet our obligations and 
not create any uncertainty that we will do so--on time, every 
time. In this country, our word is our bond. The respect and 
admiration that the United States and its institutions inspire 
around the world are based on the certainty that when our 
Nation makes a promise, we keep it.
    Ordinary Americans will bear the brunt of the damage if our 
leaders do not prevent the United States from defaulting on its 
debt for the first, the very first time in its history. We are 
much closer to disaster this year than we were 2 years ago when 
the debt ceiling standoff caused economic uncertainty to spike, 
consumer confidence to plummet, and stock prices to spiral 
downward--all because of the perceived risk of the United 
States defaulting on its domestic and international debt 
obligations. The 2011 debt standoff cost taxpayers close to $20 
billion as nervous investors demanded higher interest on U.S. 
Treasury bonds to account for the risk of a Government default. 
If our Nation defaults on its nearly $17 trillion in debt, the 
harm is likely to be measured in hundreds of billions of 
dollars.
    Even the slightest uptick in Treasury interest rates would 
cascade throughout the economy. It would raise the costs for 
taxpayers to service our country's debt and would raise the 
borrowing cost for businesses, meaning job losses and price 
increases. Default would be a blow to retirement funds, leaving 
fewer resources available for our retirees. For banks, which 
hold $3 trillion in Treasury, agency, and mortgage-backed 
securities, the sharp decline in value of those securities 
would translate into fewer resources available for mortgages, 
business, auto, credit card, and student loans.
    If Congress fails to act and we hit the debt ceiling, we 
will set off a chain of events that will impact all Americans. 
The consequences would not be easily reversed, and the 
repercussions could linger for years, providing a constant drag 
on our economy.
    Default would also put the United States in the category of 
reckless debtor nations that have broken their word in the 
markets, which include Argentina, Venezuela, and Cameroon. 
Defaults left those countries financial pariahs and debilitated 
their economies.
    The answer to managing our debt is not to simply stop 
making our payments on money already spent. We should never 
inject uncertainty into the markets that we as a country will 
not keep our word and pay the debts that we owe. We must pay 
our bills on time and in full; then we must carefully manage 
our future spending and bring down our debt to a sustainable 
level.
    No one takes our national debt more seriously than I do. As 
a Republican Governor, working with my entire 8 years a 
Democrat House and a Democrat Senate, I balance my State's 
budget 8 years running and worked with colleagues from both 
sides of the aisle to ensure that our State honored its debts 
and expanded its economy.
    Later, I joined the Bipartisan Policy Center's Debt 
Reduction Task Force, which endorsed in a bipartisan way 
painful but necessary measures to put the country's fiscal 
house in order. I urge Members of this Committee and the full 
Senate and House to engage in a bipartisan way to find long-
term solutions to our growing debt levels.
    If confidence is lost in our country's willingness to pay 
its bills on time, we will have lost something that may be 
impossible to regain: the world's trust.
    Thank you. I would be happy to answer any questions you 
might have.
    Chairman Johnson. Thank you.
    Mr. Bentsen, you may proceed.

  STATEMENT OF KENNETH E. BENTSEN, JR., PRESIDENT, SECURITIES 
           INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr. Bentsen. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, my name is Ken Bentsen, and I am the 
president of the Securities Industry and Financial Markets 
Association. Thank you for the invitation to testify today 
regarding the risks associated with a default on the Nation's 
public debt. Given the important role U.S. Treasury debt plays 
as a world currency and store of value, any such default would 
negatively impact the economy and certainly disrupt the 
operations of our financial markets. Indeed, the market has 
already signaled increasing concerns regarding the public debt 
limit, resulting in dramatic pricing effects on the short end 
of the Treasury market and repurchase agreements, or repos. 
Investors are voting with their wallets and their feet.
    While we firmly believe that the time is long overdue for 
the Administration and Congress to come together and develop 
long-term solutions to our very real fiscal challenges, 
voluntarily defaulting on the Nation's debt obligations should 
not be an option for policymakers to consider.
    Should Congress fail to raise the debt limit and the 
Treasury is unable to meet interest and principal payments 
coming due, it would trigger a series of events which 
inevitably would lead to American taxpayers paying more to 
finance our debt. Even a short-term failure to fulfill our 
obligations would seriously impair market operations and could 
have significant consequences to our fragile economic recovery.
    Since the threat of default first arose in the summer of 
2011, SIFMA has been engaged with its members in developing 
scenarios to better understand the consequences of a failure to 
pay on Treasury securities. Based on our work, we do, in fact, 
believe that market participants are operationally prepared to 
deal with the scenarios that a Treasury failure to pay would 
present. However, as you know, a default by the U.S. Government 
would be unprecedented and the consequences for the market and 
the economy would be dangerously unpredictable, so no amount of 
planning can identify and mitigate all of the potential short- 
and long-term consequences of a default.
    While we assume that any missed payments will eventually be 
made, the impact of missed payments on the broader market for 
Treasury securities may impact the price of Treasury 
securities, which could impact the value of collateral held at 
clearinghouses and central counterparties. Further, it is 
entirely possible that for purposes of any escrow, collateral, 
or margin agreements involving such securities, the defaulted 
securities could be deemed non-eligible and subject to 
replacement, resulting in a drain of liquidity.
    Since filing our written testimony just yesterday, market 
participants have continued to meet and review enhancements 
that could mitigate operational risks that have been 
identified, particularly in the repo market. It is important to 
avoid disruptions in the Treasury repo market, and market 
participants continue to review ways to improve overall 
resiliency.
    Treasuries are the world's safest asset and the most widely 
used collateral for both risk mitigation and financing. 
Shrinkage in the financing market would further pressure rates 
as haircuts or discounts on Treasuries would increase--raising 
costs, reducing the financing capability, and disrupting 
collateral markets because of margin calls throughout the 
financial system that would reflect the overall repricing of 
Treasury collateral.
    Given the significant uncertainty surrounding a failure to 
pay, market participants and SIFMA have developed a playbook 
this is intended to provide key market participants and service 
providers a forum to share information about the latest 
developments including decisions from the Treasury, the 
Administration, and Congress and the status of the 
infrastructure and settlement providers. Of particular concern 
to market participants is an early indication from Treasury 
that securities will be extended and whether processes are 
being--or can be--delayed. It is important for the market to 
know as early as possible if Treasury intends to extend the 
payment date of any due interest and principal. Treasury 
securities are traded in a global market with the global 
trading day beginning in Asia at 8 p.m. Eastern Standard Time. 
Market participants normally run their own internal processes 
prior to the Asia open in order to provide a clear cutoff to 
reflect positions on their books and records. Failure to 
provide early indications of intention could further obfuscate 
positions and could cause trading confusion in the Asian 
markets. The disruption to pricing and trading behavior is 
impossible to predict.
    U.S. debt obligations are the currency of the global 
financial markets and the real economy, and their soundness 
should not be questioned. No amount of planning can anticipate 
all the potential consequences of a default. Short- and long-
term consequences to the taxpayer can be anticipated, but the 
further limits on the ability to transfer, sell, finance, and 
post as collateral defaulted securities would only serve to 
undermine investor confidence and hurt our fragile economic 
recovery. SIFMA and its member firms have frequently called on 
Congress and the Administration to work together to put our 
fiscal house in order, but unnecessarily triggering a voluntary 
default will result in dramatic, and possibly permanent, damage 
to our economy and markets in ways both anticipated and 
unanticipated and must be avoided.
    Again, SIFMA appreciates the opportunity to testify today, 
and I look forward to answering your questions.
    Chairman Johnson. Thank you.
    Mr. Thomas, you may proceed.

STATEMENT OF GARY THOMAS, 2013 PRESIDENT, NATIONAL ASSOCIATION 
                    OF REALTORS'

    Mr. Thomas. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, on behalf of the 1 million 
members of the National Association of Realtors', 
whose members practice in all areas of residential and 
commercial real estate, thank you for the opportunity to share 
our concerns about the potential economic consequences of not 
raising the statutory limit on our Nation's debt before the 
limit is breached.
    I am Gary Thomas, President of the National Association of 
Realtors'. I have more than 35 years of experience 
in the real estate business, and I am the broker-owner of 
Evergreen Realty in Villa Park, California.
    It is no secret that real estate is a cornerstone of our 
Nation's economy, representing roughly 18 percent of our 
Nation's gross domestic policy. As the housing market has 
recovered from the Great Recession, it has substantially 
contributed to our Nation's economic growth, especially since 
2011. Home sales, housing prices, and residential construction 
are all on the upswing.
    For example, home sales were 13.2 percent higher in August 
2013 than a year earlier, with 5.48 million homes sold. Home 
prices have increased 15 percent, pushing up the value of 
household real estate to $18.6 trillion at the end of the 
second quarter of this year. These key housing indicators have 
been supported by low mortgage rates and improved consumer 
confidence.
    With that being said, the housing market has not fully 
recovered. Maintaining momentum in the housing market is 
particularly crucial right now. The housing recovery could 
stall if the debt limit is not addressed. A default or even the 
perceived threat of a default could undermine the distinct 
economic advantage that has taken us centuries to build, 
undermining our financial stability and raising costs today and 
for generations of Americans to come. It is impossible to 
predict the exact economic impact in the event our Nation is 
unable to pay its creditors. However, the significant economic 
disruptions that resulted from the 2011 debt ceiling impasse 
provide a useful guide. Financial market disruption, reduced 
consumer and business confidence, and slower job growth all 
happened when the debt limit was not increased until the very 
last minute.
    In the event of a default, a series of events would occur, 
causing a domino effect, resulting in higher mortgage rates and 
increasing the cost of buying a home. Historically, an increase 
in the mortgage rates of 1 percentage point reduces home sales 
by roughly 350,000 to 450,000. This would wipe out any increase 
in home sales predicted in 2014. A decline in home sales would 
also have a broader impact on our national economy. Roughly 
700,000 to 900,000 fewer jobs would be created as a result of a 
1-percentage-point increase in the mortgage rates.
    As a selling broker, I want to bring this down to a 
personal level to highlight the impact on my clients. For a 
borrower earning $60,000 a year and taking out a $200,000 
mortgage, that 1-percent increase would raise the monthly 
principal and interest payment by nearly 10 percent. Any 
decrease in a consumer's disposable income has broad economic 
ripple effects. Higher mortgage rates and lower consumer 
confidence are both likely to follow in the event of a default.
    Again, if we look back to the debt ceiling debate of 2011, 
consumer confidence plummeted 22 percent following the impasse. 
Thankfully, our economy has been able to bounce back from the 
2011 debt ceiling debate. But the impasse prolonged the housing 
downturn. The result is the real estate market did not begin to 
turn around in earnest until 2012.
    As the housing market heals, mortgage rates have increased 
from historically unprecedented lows. Moreover, meager 
increases in family income have squeezed the affordability of 
homes. Affordability has plunged 18 percent to the lowest level 
since 2006. With consumer sentiment already facing headwinds 
from rising interest rates, the recent Government shutdown will 
likely be an additional blow to consumer confidence and our 
economic recovery. U.S. economic expansion will be even more 
susceptible to the adverse effects from a debt ceiling impasse.
    We have already experienced the negative economic 
consequences from even the prospect of a default during the 
debt ceiling impasse of 2011. Let us not repeat this mistake 
again. More importantly, let us not allow a debt limit impasse 
lead to the United States defaulting on its debt.
    Thank you for the opportunity to share our thoughts, and we 
look forward to working with Congress and the Administration on 
efforts to address the challenges still facing this Nation's 
housing market and overall economy.
    Chairman Johnson. Thank you.
    Mr. Stevens, you may proceed.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CEO, INVESTMENT 
                       COMPANY INSTITUTE

    Mr. Stevens. Chairman Johnson, Ranking Member Crapo, 
Members of the Committee, thank you for the opportunity to 
appear before you once again.
    I am pleased to have the opportunity to testify on behalf 
of the Investment Company Institute, its member funds, and the 
90 million American investors that they serve. Today members of 
ICI manage in excess of $15 trillion in total assets.
    Funds and their investors have a very significant stake in 
the stability and predictability of the market for U.S. 
Treasury securities. The most recent ICI data show that, as of 
June 30, registered funds held more than $1.7 trillion in 
securities issued by the Treasury and by U.S. Government 
agencies. That accounts for more than 10 percent of fund 
assets.
    Now, U.S. Treasuries, as the Committee knows, trade in the 
deepest, most liquid market in the world. Treasury securities 
have always been regarded as providing the ``risk-free rate of 
return,'' a key factor in pricing other assets, including 
corporate and municipal bonds, stocks, and real estate.
    But today that notion of the risk-free rate is in serious 
jeopardy. Today Washington, the Federal Government, is itself 
the single greatest source of risk to the global financial 
system.
    The immediate threat to financial stability is, of course, 
the looming stalemate over the Federal debt ceiling, but we 
must not lose sight of the longer-term hazards our Nation faces 
if we fail to take decisive action to contain the growth of our 
national debt. After all, there are two things that 
individuals, households, businesses, or nations must do to 
maintain a high level of creditworthiness: they must pay their 
bills on time when they come due, and they must avoid taking on 
more debt than they can reasonably afford to service and to 
repay.
    For our Nation, ignoring either of these principles will be 
ruinous. A Treasury default likely precipitates a sudden crisis 
and a degradation of the United States' financial and economic 
standing. But failure to bring our debt under control will be 
equally destructive and on current trends is even more likely.
    What makes the Treasury market so deep and so liquid is the 
certainty of investors that the U.S. Treasury will pay its 
obligations, on time and in full, when interest or principal 
comes due. One Treasury misses or delays a payment, investors 
will learn a lesson that cannot be unlearned: Treasury 
securities are no longer as good as cash.
    The future risk of missed payments will be priced into the 
interest rates that investors demand. We already can see early 
signs of these concerns developing in the market as the October 
17th deadline approaches. And should the Treasury default, the 
effects would quickly spill beyond the Treasury markets and 
into the broader economy. Multiple shocks--cash shortfalls for 
holders of defaulted Treasuries, higher interest rates, 
diminished confidence, and pressure on the dollar--would be 
likely to undermine economic activity. The impact would persist 
well beyond any resolution of the debt ceiling and repair of 
the default.
    Now, let me stress that default is by no means uniquely a 
problem for mutual funds or other registered investment 
companies. Nothing about their structure makes them any more 
vulnerable than any other investment vehicle. Because the 
health of the Treasury market underpins virtually all financial 
markets, the damage of a default--or even of a second near miss 
in a little over 2 years' time--will be visited upon every 
American who saves, invests, borrows, or has any stake in the 
economy.
    Now, with our focus on the debt ceiling, it is easy to lose 
sight of the other looming risk: the unsustainable long-term 
growth in our national debt. The tax and spending bargains 
reached so painfully in the last 3 years have slowed the growth 
of debt for the short term. But the Congressional Budget 
Office's latest projections show that that progress will be 
short-lived. By 2018, the debt held by the public will be 
rising as a share of GDP. By 2038, under current law and 
budgetary policies, Federal debt held by the public will reach 
108 percent of GDP.
    Now, these scenarios and our long-term debt trends do not 
promise a bright future for the economy or the Nation. So I 
have two unequivocal messages today.
    First, no one should take lightly the prospect of a default 
on United States debt obligations. The credit of the United 
States emphatically must not be put into question.
    Second, those who dismiss or minimize our current budget 
problems are also playing with fire. The risks they are taking 
may be less immediate, but they are no less consequential; and 
the longer the Nation delays action, the larger and more 
difficult the necessary corrective measures become.
    Thank you, Mr. Chairman. I look forward to your questions.
    Chairman Johnson. Thank you all for your testimony.
    We will now begin asking questions of our witnesses. Will 
the clerk please put 5 minutes on the clock for each Member?
    This question is for the full panel. No matter where you 
stand on fiscal issues or even health care, should Congress 
seriously entertain a default on our debt? And what do you 
believe is the most troubling long-term impact if the United 
States does not pay its bills on time? Mr. Keating, let us 
start with you.
    Mr. Keating. Well, as noted by my fellow panelists, if the 
United States defaults on its debts, a little bit or a lot is 
calamitous. And we have to think in perspective what has 
occurred over the course of the last number of years. From 
1789, when George Washington became President and our Republic 
was established, to the year 2000, the national debt was $5 
trillion. According to the Bipartisan Policy Center, our 
Rivlin-Domenici panel, between 2000 and 2009, that national 
debt roughly doubled, a little bit less than doubled. Now it is 
going to double again.
    So the figures are scalding, and I am sure that the 
congressional panel as well as Simpson-Bowles--and I know 
Rivlin-Domenici found the same thing. In the year 2020, it will 
be $1 trillion a year just to pay the interest on the debt. By 
the year 2025, every cent of Federal tax revenue will go to 
Social Security, Medicare, Medicaid, and interest on the debt.
    What is required, as noted, is to get through the default 
period because it will obviously dramatically raise interest 
rates and create real havoc in the community bank environment, 
most particularly, the ability to borrow money and to lend 
money, and then sit down aggressively and in a bipartisan 
fashion to focus on this runaway train.
    In 1950, the average person retired at 62 and died at 69, 
or 65 and 69. Today the average person retires at 62 and dies 
at 80. So all the actuarial tables are off. We are, mercifully, 
living a lot longer, which is causing huge stresses in our 
ability to provide for the elderly in the United States, and it 
will continue to deepen and darken over the course of the next 
20 years.
    Chairman Johnson. Mr. Bentsen?
    Mr. Bentsen. I would say two things. One is voluntarily 
defaulting on the debt is just something that to me does not 
make any logical sense. It will create huge operational 
problems in the financial markets that will permeate across the 
markets. As pointed out, Treasuries are a reference rate. 
Treasuries are used in escrows. It will affect municipal bond 
issues that have been defeased by every State in the Union. It 
will have dramatic consequences on liquidity and could create 
certain liquidity crises if it were to go on for some period of 
time, even with potential work-arounds to deal with defaulted 
coupons.
    But the other thing I would say is, with respect to the 
long-term fiscal condition, to default voluntarily would make 
resolving the long-term fiscal imbalances just that much more 
difficult. So it seems to me that it does not make any sense to 
do so if you do not have to.
    Chairman Johnson. Mr. Thomas.
    Mr. Thomas. From the real estate perspective, I think that 
we would fall back into a deeper recession. There is no doubt 
in my mind that that would happen. If we reached a debt ceiling 
impasse, the default on U.S. debt could be very long lasting. 
Interest rates would undoubtedly rise, meaning less people 
could afford to buy or refinance homes. Housing prices would 
plummet again, and you would have a catastrophe in the real 
estate industry, which would lead the economy back into a deep 
recession, if not a depression.
    So it also raises the rate at which we would borrow and 
would make it more difficult for us to meet our debts on into 
the future. So I do not see any possibility of it being a good 
outcome. It is going to be disastrous.
    Chairman Johnson. Mr. Stevens.
    Mr. Stevens. Mr. Chairman, I think the key element here is 
confidence. We are the biggest borrower in the world. We have 
to engender confidence in those people who are lending us 
money. The Treasury's history of repayments and the smooth 
operating of the Treasury market has created that high level of 
confidence that permits us to borrow at very, very low rates.
    I do not think it is in the interest of the American people 
to do anything to give our investors less confidence in the 
United States, and that would include either failing to repay 
or, as I said in my testimony, amassing so much debt that it is 
not going to be supportable.
    Chairman Johnson. Mr. Stevens, some in Congress have 
proposed that payments to bond holders should be prioritized in 
the event of a default. Is this a workable, long-term solution?
    Mr. Stevens. Well, to go back to my previous answer, I 
think it to some degree misses the point. If you are a 
household and you are depending upon the bank for continuing 
financing and the bank learns that this month you are going to 
decide to pay these bills but not those bills, it does not 
engender greater confidence in the bank to continue to lend you 
money. And that is the key point. The money that you are lent, 
if you are lent any, is going to be much more expensive, and it 
makes the hole that you are in just that much deeper.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    I want to come back to basically what I talked about in my 
opening statement, which is the fact that while we debate the 
consequences and the circumstances surrounding the debt ceiling 
battle we are having in the Senate and the House right now, the 
real issue that we need to be focused on--and I agree with all 
the comments about the seriousness of the consequences that 
would occur if we do not pay our debts. I understand that. But 
it seems to me that the real threat of default that the United 
States is facing is the debt crisis that we are facing.
    I look back--I mean, we all know that one credit rating 
agency has already downgraded the United States, the good faith 
and credit of the United States. They did not downgrade it over 
a debt ceiling. They downgraded it because they lost confidence 
that we are willing to deal with our debt. And that is the 
issue that I believe we need to focus on.
    CBO has recently stated that if we continue our current 
path, at some point investors would begin to doubt the 
Government's willingness or ability to pay U.S. debt 
obligations. I think at some point--and I think some point 
soon--another credit rating agency is going to become convinced 
that we will not deal with our debt crisis.
    And so the question I have to the panel is: Is the threat 
of default that each of you have talked about, default on our 
U.S. Treasury obligations, is that threat greater because of 
the fight we are having in Washington right now over whether 
the debt ceiling will be extended? Or is it not far greater 
over the fact that we cannot get into negotiations to resolve 
our entitlement spending and to reform our Tax Code?
    Mr. Stevens, I know you mentioned this in your comments, so 
let me start with you on this end.
    Mr. Stevens. Well, Senator, as I said in my oral statement, 
I think creditworthiness depends upon two things: it depends 
upon paying your bills on time, and it also depends on not 
racking up so much debt that you cannot support it. And so it 
is a combination of the two things. I do not think you can have 
one without the other if you really want to maintain a good 
credit rating.
    Senator Crapo. Mr. Thomas?
    Mr. Thomas. I would agree. I think you have to attack both, 
but you have to do it in a deliberate manner that does not 
upset the international marketplace. So I think we have to deal 
with the debt ceiling first and then go on to really the 
looming question, the elephant in the middle of the room, and 
that is the entire debt.
    Senator Crapo. Mr. Bentsen?
    Mr. Bentsen. Senator, the two are certainly linked, but it 
seems to me that, just as you would if you were going through, 
say, a corporate restructuring, if you were going to go through 
a fiscal restructuring of the United States to repair fiscal 
imbalances over the long run, you are still going to need to 
access the credit markets and the capital markets to do so. And 
so you would not want to do anything that impairs your ability 
to access the credit markets to get on a glidepath wherever the 
policymakers want to take fiscal policy.
    So while I do think they are linked, no question, and they 
both need to be resolved, you do have one that is in front of 
the other. And so I think you want to be careful not to make 
the longer-term job any more difficult by not addressing the 
short-term issue.
    Senator Crapo. Mr. Keating?
    Mr. Keating. Well, I agree with Ken Bentsen. There are two 
issues, but they are interlinked. In the case of, let us say, 
for me as a community banker, if you came to me and you said, 
``I would like to borrow some money, but I am not sure I can 
pay it back,'' I assure you that the interest rate would be 
considerably higher, if I made the loan at all. If you said, 
``I will not pay it back,'' or ``I have not paid back my other 
loans,'' I would not make the loan at all.
    So that is a reality that faces families, and that is a 
reality that faces the United States. But a big part of our 
debt, the reason we cannot pay our bills or the reason we will 
not pay our bills is entitlements. So they are linked together, 
and as I said, mercifully, our families are living longer, but 
that is a huge actuarial challenge that we have not prepared 
for.
    Senator Crapo. Thank you. I am not going to ask another 
question, but I will conclude with a comment, and that is, I 
understand the linkage. There is another aspect of the linkage 
here. We just had a hearing about an hour ago with Secretary 
Jack Lew, Secretary of the Treasury, and in my questioning of 
him, I asked him whether or not the real threat we faced was 
not the long-term debt crisis and that that was a greater 
threat to our creditworthiness. And in his answer to me, he 
said, you know, we have been making some progress on our long-
term debt crisis over the last couple of years. He admitted 
that we have not touched entitlements, have not touched tax 
reform. But he said, you know, we have in the last couple of 
years started to make some progress.
    I pointed out to him and I will point out to you, that 
progress came in 2011 when we were fighting over a debt ceiling 
increase and we adopted the Budget Control Act, which put into 
effect our ability to deal at least with discretionary 
spending. And although we can argue over whether that was done 
well or whether it could have been done better, the fact is 
that that debt ceiling increase was accompanied by some fiscal 
reforms, and that is what we are trying to achieve here today.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. Bentsen, if we default next week, even technically, 
your view, I believe, is that that will make our ability to do 
almost everything, including deal with the long-term 
entitlement problem, much more difficult. Is that fair?
    Mr. Bentsen. Yes, Senator. I mean, first of all, we are 
already seeing--and you commented on this in your opening 
statement, we are already seeing a risk premium being priced 
into the market today. So the short end of the Treasuries are 
up 30 basis points. It was a dramatic shift. Repo pricing is--
the haircuts of repos are going up. So the pricing effect is 
already taking effect--is already happening. If we miss a 
coupon, we would assume that that pricing effect will be 
exacerbated on that.
    But the other thing that we think would happen--and, again, 
our members are working to sort of war-game this out because no 
one has ever been through this, the documents are not 
structured for this, systems have never been set up for this. 
No one has ever thought that you would not pay Treasuries in 
the same way you would with a corporate debt offering or 
municipal debt offering. And while there are efforts being made 
to see if we get notice from Treasury that a coupon payment 
will be missed and extended to another day, how do you keep 
that Treasury security with the missed coupon payment 
transferable or pledgeable as collateral? You know, it is not 
entirely clear. We think that if it is done quickly and before 
the Asian markets open, it is possible. But you still have that 
coupon that is pulled out of the market, so there is some 
liquidity associated with that, and it is not clear when that 
would be paid. It is not clear whether it would be paid just 
through the stated interest date or whether interest would 
accrue. So you have potential lost income.
    And then if it is not clear whether those securities are no 
longer considered eligible collateral, what chain effect might 
occur, not just with ability to do a repo transaction, but 
whether or not if they are in a municipal defeasance escrow, 
whether they are pledged as collateral for swaps or any other 
type of transaction, whether counterparties would ask for 
replacement or whether escrows would have to be restructured.
    So it has a friction that can run across many parts of the 
market, and we think it would have a very negative effect.
    Senator Reed. In effect, what you are describing is a 
potential financial meltdown, perhaps worse than in 2008 with 
the collapse of Lehman Brothers, which required massive support 
by the Federal Government just to restore confidence and 
stabilize the Government. And, frankly, I do not know if that 
combination of factors today and the political forces here 
would be able to support such an effort. But, you know, you 
raise an excellent point, which is that everyone might have 
very good intentions of trying to manage through this crisis, 
but software systems, documents, legal requirements, 
uncertainty would be such that you could really paralyze the 
market. Liquidity could freeze, and you would have something 
that would make 2008 look like a walk in the park.
    Governor Keating, again, I think your comments about the 
impact of this--and sort of proportionality, that, you know, we 
are looking at a crisis that could trigger, ironically, worst 
deficit complications that could exacerbate those long-term 
trends even more dramatically as interest rates go up in 
response to uncertainty. But you have, I think, a particularly 
valuable point of view, representing bankers all across the 
country. The impact on Main Street, I mean, one of the issue 
with prioritization Senator Brown mentioned was we are not 
prioritizing between paying Federal debt and trivial expenses 
of the Government. We are talking about Social Security 
payments, Medicaid payments to States; States basically could 
start running into their own complications. And you were a 
Governor. If you were told by HHS that no Medicaid payments are 
going in, what do you do? Are you on the hook for it? What do 
your hospitals do? Do they declare bankruptcy because their 
covenants require that they receive a certain amount of income 
each month? In some cases, yes.
    Then we go down to Social Security benefits payments. Are 
we telling Social Security recipients that they are going to 
take a 5-percent haircut because we are going to pay debts or 
credit? And, frankly, as I read--you know, all of these 
constitutional advocates, as I read the Fourteenth Amendment, 
it does not make any distinction between types of debt. It says 
the ``public debt.'' And all this would be, I think, construed 
as public debt.
    So can you tell us on the street what your impression would 
be?
    Mr. Keating. The lay community, lending community, the 
borrowing community, the community banks, and even the large 
institutions that I work for are very alarmed because of the 
uncertainty, because of the panic, because of the potential for 
long-term destructive results. So if I were Secretary of the 
Treasury, if you were Secretary of the Treasury, and we had so 
many dollars, you would say, well, are we technically in 
default if we do not pay Social Security? I do not know. But I 
know we are technically in default if we do not pay all these 
bonds. So we have got to pay the bonds, and then we have got to 
continue to pay the bonds, the investments, the debt of the 
United States, you know, the coupons on Treasuries.
    But then what? At some point, you are going to run out of 
money. At some point, because of the fear in the marketplace, 
there will be less lending, there will be less borrowing, there 
will be less buying, there will be less tax revenue. And you 
are trying desperately to figure out who do you pay first. 
Well, of course, I would try to figure out who do I pay first. 
In that desperate situation, I think most of us would do that. 
But that is a crazy way to run the greatest economy the world 
has ever seen.
    I mean, in the history of the United States, it was after 
the Revolution that we had a very hard time--that is when 
Robert Morris, you know, the financier of the Revolution, made 
it very clear: We are not going to be able to pay our bills if 
we do not have access to credit. Otherwise, they are going to 
demand everything in specie; you better have gold and silver; 
otherwise, you know, nobody will deal with you. That was just a 
calamity about to physician, and we never defaulted, even in 
those days when we did not have anything.
    And here we are, the world's largest economy, and we are 
seriously contemplating that as a sensible, intelligent 
reaction to a political stalemate. Well, I hope not because it 
would--you know, when the United States--as I used to say in 
Oklahoma to my Democrat friends, if the USS Oklahoma goes down, 
we all go down together, Democrats and Republicans. If the USS 
United States goes down, we all go down together, Democrats and 
Republicans.
    Senator Reed. Thank you.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thanks to all 
our panelists. I know all of you agree that the debt limit 
should be extended because disruption would occur otherwise. I 
understand that. But I do think it is important to be precise 
about what we are talking about and what we are not talking 
about.
    For instance, Senator Reed started his comments saying, 
``If we default next week,'' so I sort of want to pick it up 
there. By default, am I correct, we mean nonpayment or late 
payment on U.S. Government securities. Is that right?
    [Witnesses nod affirmatively.]
    Senator Vitter. Does anybody disagree with that? That is 
what ``default'' means. And in light of all of your testimony 
about the impact of that, would you all agree that if the debt 
limit were not extended immediately--and I understand that you 
think it should be. If it were not, those payments should be 
top priority. Does anyone disagree with that?
    Mr. Stevens. Senator, I would respond this way: I do not in 
a sense disagree with what you are saying, but the premise is 
that there are other payments that are not going to be made. 
And I would just revert to what I had said. The effect of 
confidence in the Treasury markets will be significant even if 
we are paying off those Treasury securities. Even if we do not 
have a late payment of principal, even if we keep our interest 
rate payments current, if we are failing, if we are choosing 
and picking what other obligations the country has, that will 
be felt in the market even though you could say, well, those 
securities are not technically in default.
    Senator Vitter. I understand. I am not trying to trivialize 
this scenario. But I am trying to be more precise, because I 
think there has been a lot of loose language that actually is 
causing more premature disruption than necessary. So would 
anyone not prioritize those payments?
    Mr. Bentsen. Senator, what we have been told by the 
Treasury Department is that they do not have the operational 
capability to prioritize. I think that they make something 
like, I want to say, 4 million payments a day. And there is a 
question as to whether or not they can prioritize on that.
    But the other point I would make is if you--it is not clear 
what revenues are coming in, and everybody tries to estimate, 
Treasury tries to estimate, market observers try to estimate. 
But on the 17th, you have about $129 billion in T-bills coming 
due; the next week you have about $93 billion in T-bills coming 
due; the following week you have principal and interest payment 
on bonds coming due, and every week thereafter.
    So the point I would make is perhaps they could figure out 
how to do it operationally. I do not know their systems. That 
is just what they tell us. But there is a lot of debt coming 
due. Some can be rolled, some cannot be rolled because it would 
breach the debt limit. And so it does create quite a----
    Senator Vitter. Well, to respond, Treasury has two systems: 
one is for payments on security obligations; one is for 
everything else. I think your comment is possibly accurate 
about the second system for everything else. But there is a 
separate system for payments on security obligations. I do not 
think there is any question that they can pay those first if 
they want to.
    I am just suggesting that in a bad scenario that should be 
a priority. It can be a priority operationally. And if it were, 
those would be paid, and I do not think there is any question 
about revenue coming in covering it. I mean, for instance, 
Martin Feldstein has said, ``There really is no need for a 
default on the debt, even if the debt ceiling is not raised 
later this month. The U.S. Government collects enough in taxes 
each month to finance interest on the debt.''
    Now, again, I am not trying to trivialize this scenario, 
but I do think it is important to talk a little precisely about 
what we are talking about and what we are not talking about. 
And I do not think it is accurate to talk about if we default 
next week, because I do not think there is any need, any chance 
of defaulting next week.
    Does anyone disagree with that, defaulting on payments on 
Government securities?
    Mr. Thomas. Senator, I agree with you; however, let me tell 
you what is happening at the street level. The confidence of 
our buyers and sellers is waning very rapidly. We have 
transactions canceling right now. We have people not being able 
to get loans. We cannot get beyond where we are at. It is going 
to go backwards very, very fast.
    Yes, you could probably mechanically do all of this, but 
the confidence of the American people is going to be really in 
the toilet. I am sorry.
    Senator Vitter. Mr. Thomas, let me pick up on another 
comment of yours. In your testimony, you sort of bemoaned this 
episode in 2011 over the debt limit, said it was very 
disruptive; you know, we have recovered but it was disruptive.
    As Senator Crapo pointed out, that episode led to the BCA, 
led to the only spending and debt cuts in the recent past. Do 
you consider that positive outweighed by that episode?
    Mr. Thomas. If nothing else would have happened after that, 
then, yes, I would agree with you. If we did not have to come 
up to it and still had the same outcome by negotiating 
separately and got to the same point, then we would not have 
had a fall-off of the confidence at that time.
    Senator Vitter. Well, I will just end with this. I can 
guarantee, as somebody who was here and participating, that 
that would not have happened but for the deadline of the debt 
limit. I mean, no way, no how it would have happened. So I just 
want to underscore Senator Crapo's comment. There was what in 
my view is a distinct positive coming out of that, which is the 
only progress we have made on spending and debt in the recent 
past.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. I almost think 
we are in a surreal conversation.
    Let me ask the first question of this panel. Understanding 
your collective concerns and our collective concerns on the 
question of debt, is there any member of the panel who 
advocates as a way of reducing debt defaulting on the Nation's 
full faith and credit?
    Mr. Keating. No.
    Mr. Bentsen. No.
    Mr. Thomas. No.
    Mr. Stevens. No.
    Senator Menendez. All right. Second, when we talk about 
this concept about prioritizing, I think Americans should 
understand that that suggestion means that we would make sure 
we would pay China, Japan, Caribbean banking centers, Brazil, 
but we would not maybe get to paying Americans who rely on 
Social Security and Medicare, as well as the concept that for 
anyone who is a banker or anyone who works under the concept 
that if I make a loan or I make an investment, some will be 
paid and some will not, and so I was fortunate this time to be 
paid, but in the future I may not be fortunate to be paid. And 
the consequences that flow from that are inevitable.
    In that respect--and then, finally, to suggest that the way 
to reduce debt was the Budget Control Act--which I voted 
against because I did not see the willingness to include 
revenue as well as spending cuts, and I believe both must be 
achieved. But to have across-the-board cuts that the Chairman 
of the Joint Chiefs of Staff that, if it continues, will 
threaten the ability of the Defense Department to meet the 
challenges globally on multiple fronts, that really means that 
threatens the national security of the United States, where my 
colleagues go back to home to their State and rail against the 
consequences of sequester, even as they vote for it here, it is 
surreal.
    So my question is--Governor Keating, you mentioned in your 
testimony--and I think this is an important point to realize. 
If you could give us a sense, again, you know, just the 
potential for default, not the default itself but the potential 
for default actually cost taxpayers money. By waiting until the 
last minute to act and threatening to default, they cause 
investors and U.S. Treasury securities to demand higher 
interest rates. If I am going to look at greater risk, I am 
going to demand higher interest rates to offset the risk.
    Now, is it right that I read in your testimony that as a 
result of what happened in 2011 or the threat of default that 
it cost us $1.3 billion in fiscal year 2011?
    Mr. Keating. Well, I think the Bipartisan Policy Center's 
estimate was a $20 billion figure as a result of coming to the 
edge of the cliff and stepping back.
    Senator Menendez. Over the course of 10 years, yes.
    Mr. Keating. Right. Now, if you stepped over the cliff, the 
impact would have been and will be, obviously, far more 
uncertain, but most likely far more catastrophic.
    Senator Menendez. So $20 billion just for moving up to the 
deadline and not crossing over it, but $20 billion. So I do not 
understand how it is fiscally responsible for those who are 
driven fiscally to ultimately suggest that having the Nation 
cost $20 billion and not--and waiting until the last minute to 
meet its obligation is fiscally responsible.
    I also want to ask Mr. Bentsen, I understand a large share 
of the financial markets use Treasury securities as a benchmark 
for evaluation and pricing or as collateral in a wide variety 
of transactions. How would a default affect the market 
functionality in these basic areas?
    Mr. Bentsen. Well, Senator, I guess there are two things 
that you raise there. Treasury securities are a reference 
security, so mortgages, credit cards, auto loans, pricing on 
swaps, it is used across the financial sector both in the 
consumer and in the institutional or wholesale market. So if 
you are affecting prices of Treasuries, particularly short-term 
Treasuries, you are going to affect the price of those 
instruments, and that will pass through to the end users of 
those instruments.
    The second point would be that the repos and the like are 
used not just in financing between financial institutions and 
one another, but, for instance, municipal issuers, when they 
issue, do their initial debt pricing and debt offering, will 
often use repos in the short-term basis to invest their money 
before they put that money to work, whether it is building a 
road or a hospital, whatever they are doing for it.
    So, again, it is used across the financial system quite a 
bit, and they would be affected by the price and the risk and 
over the long-term concerns about counterparty risk.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and thanks for 
holding this hearing, and to the Ranking Member also and to 
this panel. Thank you very much for taking time to be here 
today. I think this is as critical of a hearing as we can have 
at this date and time.
    I was listening to an economist on TV this morning, and he 
talked about a lack of humility, honesty, and civility, but he 
was not talking about Congress. But he should have been--or he 
could have been. I look and watch what is going on here in 
Washington, D.C., and I think we do need a humble, civil, 
honest conversation about why we are here and why we are having 
the conversation today.
    We are here because we have not passed a budget here in 
Washington, D.C., in 5 years. That is why we are having this 
conversation. We have not passed an appropriations bill, not a 
single appropriations bill, in 5 years. I have not been here 
that long, but, boy, I certainly have not seen this process 
move. We now think CRs is the norm, that a continuing 
resolution is the norm. And I have staffers that have been here 
long enough that would tell me and have told me that this place 
would freak out under those scenarios years ago. But there are 
a lot of people here that I think perhaps have not been here 
since the last time we actually passed a budget or passed 
appropriations, and that is why we are here. That is why we are 
here, because we do not budget. We have no financial 
responsibility in thinking that that is actually a good thing 
to do.
    We are also, you know--and I am not telling you anything 
you do not already know--$17 trillion in debt--$17 trillion in 
debt and we want to add another $1 trillion to it. That is why 
we are here, because we think $1.1 trillion is OK. Add 
another--after $17 trillion.
    And, by the way, it does not end there. We are another--I 
do not know--$30 to $50 trillion in unfunded liabilities. And 
that is why we are here. That is why we are having this 
conversation, because we cannot control ourselves. We cannot 
control that. And I think that is a very honest conversation 
that this Committee and this Congress needs to have.
    We go back to Nevada, and Nevada is hurting. I do not know 
that I have to tell you this, but you know we are highest in 
unemployment--everybody has heard me say this--highest in 
bankruptcy, highest in foreclosures. We are in tough shape. I 
just got a letter here from the Governor, and he was talking--I 
think some of you may know about this, about how tough this 
shutdown is, has been, and will be for the State of Nevada, 
programs like child nutrition programs, SNAP benefits, 
unemployment insurance, dozens of other programs, and he says 
this undermines the economic security of Nevadans. I agree with 
that. And a default, that is due to an economic--that is due to 
a shutdown. A default would make matters even worse. And I am 
concerned. I am concerned about the direction that this country 
is going and obviously the effect that it has on my own State.
    If I can ask the Governor a question, you said that when 
you were Governor--and I hope it is fair to say you did a good 
job. And you said both Houses were Democrat at the time. Under 
what circumstances did you tell the leaders of the other party 
that you would not negotiate or you would not compromise? What 
were the scenarios that you had that would make you say that?
    Mr. Keating. Well, I come from a very bipartisan 
background. My grandfather was a Congressman-at-Large from 
Illinois, a Democrat. In Oklahoma, when I was in the House and 
Senate, Republicans, they sought us out with flashlights on 
Sunday nights. And as Governor, the legislature was 
overwhelmingly Democrat, but I had Oklahoma and Oklahoma State 
University economics departments examine why we were poor, and 
they came back and said you do not have Right to Work, the 
trial lawyers run this place, workers' comp is too expensive, 
the kids do not take hard enough courses in school, you have 
got a personal and corporate income tax, and you need to 
address that, the two economics departments of our 
universities.
    So I sat down with the pro tem and the speaker and said, 
``Here it is. This is not the Heritage Foundation.'' And we 
went through every one of those things, even a right-to-work 
vote in the constitution successfully, and got it all done, I 
mean together, because as I said, if we crashed and burned, 
Texas would laugh at us.
    [Laughter.]
    Mr. Keating. And, you know, who in the world would want 
that to happen? And I do not think the analogy to the Federal 
Government is misplaced.
    Senator Heller. Mr. Stevens, you talk about confidence, and 
I want to stick to confidence for a minute. What sense does it 
make to raise the debt ceiling and yet do so without any 
structural changes to this Government? Can you have confidence 
with just raising the debt ceiling?
    Mr. Stevens. I think there needs to be high seriousness 
about both of them in the near term to deal with that because 
it would be a hugely self-inflicted wound, but there needs to 
be very promptly attention to the longer problem, because as I 
said, they are linked in terms of what creates and builds 
confidence in the millions of people, thousands of institutions 
that we turn to to help finance the United States.
    Senator Heller. Thanks for your time.
    Mr. Chairman, thanks for allowing me to vent some of my 
frustrations.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    I was in the House of Representatives a dozen years ago 
with Congressman Bentsen and others when we got to a balanced 
budget with a budget surplus. Then looked what happened in 
2001, 2002, 2003, and 2004--an unpaid-for war, tax cuts that 
went overwhelmingly to the wealthiest people in this country, a 
Medicare benefit that was, shall I say, generous to the drug 
and insurance companies--and this budget surplus, the largest 
surplus in history, went to the largest deficit in history. So 
lectures about our big spending when some of us opposed a 
number of those actions is not necessarily welcome, but more 
importantly, never during that period did any of us say, well, 
if you do not stop this war or if you do not do this, we are 
going to shut the Government down or we are going to not honor 
our debts and obligations.
    You know, I appreciate Senator Heller saying that we need 
to do some of both, but first we need to pay our bills. And 
this is not running--this is not accruing war bills by passing 
a clean debt ceiling vote. It is paying the things that we--it 
is the American way. You pay your bills. And it is just so 
clear, and that is what pretty much everybody on this panel 
said.
    Let me talk about one issue in particular. I was downstairs 
2 hours ago listening to Secretary Lew at the Finance 
Committee, and he said, ``Every Thursday, we roll over''--and 
he actually said this in September, and I asked him about it. 
But he said in September, ``Every Thursday, we roll over 
approximately $100 billion in U.S. bills. If U.S. bond holders 
decided that they wanted to be repaid rather than continuing to 
roll over their investments, we could unexpectedly dissipate 
our entire balance.'' You know, it is really--like he said this 
morning, when I asked him about that, failing to roll over the 
debt would put us in a situation where we would be like a 
homeowner who 1 month has to pay the entire mortgage off 
instead of the monthly payment. And, obviously, Mr. Thomas 
gets--he is the one nodding the most vigorously of the four of 
you. Effectively the U.S. Government could face the same kind 
of funding crunch that Lehman had in 2008, the parallel's 
there.
    So my question is: You know, this discussion of 
uncertainty, and the uncertainty in our economy has always been 
there to a point, but never as endemic or as penetrating as 
this uncertainty we are facing this week and next week.
    Talk to me about this uncertainty. What do you think will 
happen if--you know, there is a debate on the 17th and all of 
that, but we do know that the 17th, because it is a Thursday, 
it is possible we could experience something that Secretary Lew 
alluded to, suggested. What do you think will happen or--each 
of you, what do you think will happen, or do we throw up our 
hands and really just not know what will happen come Thursday 
when this $100 billion is rolled over, connected or not to the 
actual debt ceiling?
    Do you want to start, Mr. Stevens, if you would, and go 
from there?
    Mr. Stevens. I appreciate all of the contingency planning 
and analysis that has gone into the what-ifs here. But, 
Senator, we should all be aware. We are in terra incognita. We 
really do not know what the impact would be. There will be lots 
of individual decisionmakers as holders of Treasury securities 
that would enter into whether we are able to roll our bills the 
next Thursday or what the rate would be that they are willing 
to lend us money at, and all of the knock-on effects. And that 
assumes, frankly, a fairly short duration default, if you will, 
or whatever the temporary measures are that are taken to avoid 
a technical default.
    If we entertain this idea over a longer period of time, I 
think there is no question but it will be cataclysmic.
    Senator Brown. Thank you.
    Mr. Thomas?
    Mr. Thomas. Yes, I think the problem is, even if we went 
right up to the precipice and then came to an agreement, the 
problem is to me, it is like a lender lending to my company and 
I come up to the deadline of a payment and say, ``I am not sure 
if I can make it or not. I will let you know by next 
Thursday.'' And then I do it again 2 years later. Eventually 
they are going to say, ``Well, I am not sure I want to continue 
to lend to you.'' So that is the problem I think we have. And I 
think that in any future, the rates have to go up. There is no 
doubt in my mind.
    Senator Brown. Congressman Bentsen?
    Mr. Bentsen. I guess a couple things I would say, Senator. 
First of all, we already know. We have empirical evidence, and 
that is in the pricing of the auction earlier this week. That 
is what is going on in the repo market right now. That is what 
is going on in certain investors moving out of short 
Treasuries. That is what is going in, as we understand it, with 
other funds that are moving out of what they believe will be 
affected CUSIPs or coupons coming up. So we already kind of 
know what is going to happen, at least in the short run.
    To Paul's comment, even with all the contingency planning 
that our members are doing around Treasury operations, we can 
do contingency planning. We can think what we know is going to 
happen. But we do not know. And so we will have to work our way 
through it, and we know we have deadlines like the Asian 
markets opening and what the reaction will be there.
    So, you know, we know what we know, we know what we do not 
know.
    Senator Brown. Thank you.
    Governor Keating?
    Mr. Keating. Well, who knows? But I would say empirically, 
just historically--yesterday, the market went up, probably 
because people said, well, everybody is going to get their act 
together, work in a bipartisan manner to fix the problem, no 
default. If we do default, I think for a time there will be the 
attitude on the part of the markets and banks, Well, they will 
fix it, so it is not going to be that bad.
    But then we get to our Argentina moment, our Cameroon 
moment, our Venezuela moment, which could very definitely 
happen if people conclude that this whole thing is a train 
wreck and they are not going to fix it.
    Senator Brown. Thank you.
    Mr. Stevens, I did not take high school Latin, but I know 
``terra incognita'' is a place we do not want to be.
    [Laughter.]
    Senator Brown. Thanks.
    Chairman Johnson. Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much. Thank you 
to our witnesses for appearing before our Committee. Perhaps 
because we are working so little on the Senate floor, we are 
having the debate about a debt ceiling increase here in the 
Committee, and so I think what you are getting from us is a 
number of statements kind of testing the waters, telling how we 
feel, and trying to find in my view some common ground to solve 
a problem.
    Let me pose this issue. The way I see this is I hate where 
we are. I like certainty. This makes me uncomfortable. We often 
complain about the uncertainty in the economy that Government 
provides. My guess is that folks who represent your industry 
have been in my office and have spoken to me about the 
uncertainty of the Tax Code, the regulatory environment. We 
know that is damaging to business, which means it is damaging 
to job creation, and this is one more instance of more 
uncertainty. This is not a good place to be. I understand that.
    I think the deficit and the debt is a defining issue for my 
generation. I think I have an obligation to my kids and 
grandkids and Americans that I have never met, will never meet, 
to do something during my time in Congress to get us on a path 
that lends itself to which we are working toward balancing the 
budget. I do not expect it to happen overnight, but I want to 
know that there is a path that we are following that lends 
itself toward a brighter future for future generations of 
Americans.
    And the issue that I face in trying to resolve how we come 
to resolve this is: What moments of leverage do we ever have in 
Congress? What is the moment in which we are so worried that 
Texas is going to laugh at us that we do something? We do not 
do things unless there is this moment that we come together 
fearing more dramatic consequences to force us to do things 
that apparently we are never willing to do on our own.
    We ought not be having this debate about raising the debt 
ceiling, is my point, except we never have the serious debate 
or any resolution of how do we solve our deficit problem in the 
absence of these moments.
    Do you have some suggestion, do you have any belief that 
Congress and the President will actually deal with this other 
issue? So if your advice to me and to us is raise the debt 
ceiling, OK, what is your advice to me about getting something 
done about the deficit that is not just prolonging? We have--I 
think what we are talking about here is the--we are 
demonstrating our willingness to pay our bills when we raise 
the debt ceiling, but we are doing nothing about our ability to 
pay our debts when we do that. How do we do both? How do we 
show the willingness--we demonstrate that we are willing to pay 
our bills, but in the longer term we demonstrate we have the 
ability to pay our bills? Do you want to indict Congress and 
the President to respond to that? It is the frustration I have. 
If we are never going to come together and solve the deficit 
problem unless we have a crisis, do you have to take advantage 
of the crisis? What do we do?
    Mr. Keating. Everybody is trying to flip coins here to see 
who takes that first. Well, Senator, if we raise the debt 
ceiling and then 6 weeks we are back at it again and 6 years we 
are back at it again, this will never be resolved sensibly, 
intelligently, and patriotically unless and until, with the 
President's leadership and with the good will of everyone in 
this room, Democrat and Republican alike, and recognize that in 
the year 2025 our latest estimate, every cent of Federal tax 
revenue will go to Social Security, Medicare, Medicaid, and 
interest on the debt. So it is the actuarial tables, and they 
have to be addressed. So to tie in the debt ceiling increase 
with some kind of long-term reduction in the long-term 
liability of the country is the only way to do it. And how do 
you do that? By bringing together men and women of good will, 
and that is everybody, in my judgment, in the Congress. I 
really believe that as an American citizen. Under the 
leadership of the President, shut the door, sit around the 
table, and say, OK, this is what we have got to do, here is the 
plan going forward. And the ideas I have heard from both sides 
of the aisle, whether it is chained CPI or a longevity index on 
Social Security, all that makes abundant good sense, and it has 
been presented to this body and to the House and to the public 
at large in a bipartisan way. So it cannot be that difficult.
    Mr. Bentsen. Senator, I would just say very quickly, you 
raise a very serious political question, and we are not 
political scientists, I guess. And it is a difficult question, 
no doubt about it.
    I guess what I would say is today the United States is not 
Greece, we are not Italy, we are not in a situation where--
while we do have a serious debt problem, no question about it, 
and long-term fiscal imbalance, we were able to access the 
credit markets because of an understanding of our ability to 
repay, the strength of our underlying economy, the fundamentals 
of the Nation's economy. We want to avoid, no question, getting 
into a situation down the road that would put us in a situation 
like Greece or other countries who either have to pay a 
tremendous premium on their debt or cannot sell their debt 
whatsoever to where there are no buyers. We obviously do not 
want to get to that situation.
    So, again, that is where I go back to my comment with 
Senator Crapo, is we are sort of in a two-part dance here or 
intertwined. We do not want to impair our ability today to fix 
our problems for tomorrow. We do not want to get to those 
problems tomorrow, so let us not create any more difficulty 
today. But I grant you, it is a difficult political question 
that you all are faced with to deal with.
    Senator Moran. I am not sure it is a political question. I 
mean, obviously how we work together is a political question, 
but there is a moral question here. There is an issue that is 
really important to the future of our country, and at what 
point in time do you get the leverage to force us to do things 
that cause us to come together and do things that not all of us 
want to do?
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. I also want to 
echo my thanks to everybody on this panel for being here today.
    Just a little editorial comment. I cannot tell you how many 
times in the State legislature and back here I have heard folks 
say, ``You need to run Government like a business.'' Now, I do 
not necessarily believe that, but I think there is some merit 
in it. And I guess when I look at my own farm, I ask myself, 
would I do this to my own farm, a business? And the answer to 
that is resoundingly, ``No.'' And I think that it is important 
for everybody to understand--I believe this to be true--I do 
not think there is anybody particularly proud of where we are 
at debt-wise in this country, whether you are Democrat or 
Republican. And I think there are ways we can address it, but 
not this way, not--and I know it has been used many times, not 
being held hostage. I think there are ways to do it through the 
budget process, which, by the way, has been particularly 
frustrating because there has been a minority that have held up 
the ability to go to budget conference. And, quite frankly, the 
majority needs to speak at some point, and I am not talking 
about Democrat-Republican majority. I am talking about the 
majority in this body needs to speak up and stop this kind of 
craziness.
    With that, let us get down to real life. I assume 
agriculture is still pretty big in Oklahoma, Governor, and so 
my question is: Operating loans are a pretty common thing. If 
we default, could you tell me what the impacts on somebody 
going to get an operating loan, whether it was in agriculture 
or other small business, would be?
    Mr. Keating. Well, we still have to eat, so hopefully the 
lending will be available and the borrowing will be available. 
But any time there is the chill, the panic of uncertainty, 
there is a pullback. And there will be a pullback.
    So we will all scramble around to try to do the best we can 
to find quality borrowers and quality lenders, and you will 
have commercial activity, but in the AG space particularly, 
there is, as you well know, real linkage between what happens 
in Washington and what happens in your farm or in my ranch. And 
we have to be sensitive to that. You know, those of us who are 
conservative may say this Government is too big, it is out of 
control, fine, but it is a reality of the marketplace right 
now. So that is long term. Whether it is a veteran's benefit or 
whether it is Social Security or Medicare or Medicaid 
reimbursement or in the AG space, commerce will not function 
efficiently and well in a climate of uncertainty or a climate 
of default. It just simply will not happen.
    Senator Tester. OK. Senator Warner talked a little bit 
about State and local governments, and I have only got a couple 
minutes left, so I will just throw it to anybody who wants to 
answer it. If you have thought about this issue, could you give 
me an idea on how a default might impact local and State 
governments?
    Mr. Bentsen. Senator, one thing in particular that could be 
of concern are State and local governments that have refunded 
outstanding debt, municipal or State debt, and defeased that 
debt using a Treasury escrow. They are already suffering right 
now because the State and local governments series, the 
``slug'' market, has been closed down as far as extraordinary 
measures. So that means their escrows are not as efficient as 
they might be, so that has cost them a little bit on that end. 
But the other thing that could happen is if an escrow is 
affected--a defeased escrow is affected by a Treasury security 
that is deemed non-eligible collateral, then that State and 
local government would be on the hook to make up any further 
shortfall in that escrow. So there could be a cash effect to 
State and local governments depending on how their escrow is 
structured.
    The only other thing I would say, to follow up on the 
Governor's comments, among the largest holders of Treasury 
securities are banks of all shapes and sizes. And if you affect 
the liquidity operations of a bank and their ability to pledge 
those securities, that is going to affect their ability to put 
money out on the street. So, you know, it may be far down the 
road and this could be short, but they ultimately are affected 
across the system.
    Senator Tester. Thanks. I think I will just close it out 
right there. I would say this: We have seen the worst recession 
since the 1930s. You guys felt it straight up. I know Gary 
Thomas has felt it in the housing industry in a big, big way, 
and our country has suffered for it. It would seem to me that 
certainty and predictability and confidence are huge if we are 
going to talk about growing this Government and growing the tax 
revenue that comes with that growth. And I just want to say I 
appreciate you guys standing up and telling it like it is very 
much, and I certainly appreciate you being here today. Thanks, 
guys.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you to all of you for your testimony.
    Mr. Thomas, your testimony laid out that just a 1-percent 
increase in real estate rates can have a dramatic impact: a lot 
fewer homes sold; a lot higher payment per month for those who 
buy, say, a $200,000 house, I think it was $120 per month more; 
a decrease of 700,000 to 900,000 jobs, and that is just in the 
real estate market. But that is a pretty significant part of 
our economy, home construction and home sales, so could one 
anticipate that there would be less revenue coming from that 
sector of the economy into the Federal Government if we 
continue on this path?
    Mr. Thomas. Well, absolutely. You would have less revenue 
coming into the Federal Government as well as the State 
governments, because, you know, you are not going to have the 
same revenue base because of that. And this is a 1-percent--we 
feel a 1-percent rate increase just because of this--it is not 
considering the rate increases we are going to have over time, 
which we are going to have. We have already seen that. But this 
is a bump in rates immediately because of the crisis.
    And so, you know, it is going to have a detrimental effect 
on the housing industry, which obviously has a detrimental 
effect on the overall economy because of the amount of GDP that 
the housing industry represents.
    Senator Merkley. Is it reasonable to assume that in other 
sectors of the economy, for example, car sales, higher interest 
rate on car loans, that we would see a similar impact, car lots 
would make less money, pay less in taxes, and people would be 
paying a lot more out of their budget for that next purchase?
    Mr. Thomas. Absolutely, because, you know, if you raise 
what it costs to purchase a home and the payments that you 
would have to make, whether it is rolling over an existing loan 
or purchasing a new home, it is that much less that they can 
spend on other items--cars, you know, groceries, gas, you name 
it. It impacts all of it.
    Senator Merkley. So it really seems like the path we are on 
right now is equivalent to creating a huge tax on the American 
economy, one that really hurts families across the board, hurts 
businesses, hurts employment, and yet we get nothing productive 
for--I mean, it is one thing if you have tax revenue that can 
do something valuable, build infrastructure, so on and so 
forth. In this case, it is like taxing families with no value, 
in fact damage.
    Mr. Thomas. We need to keep the economic growth that we are 
seeing right now intact and continue to grow. If we do not, we 
are going to fall backwards rapidly.
    Senator Merkley. I really hope this point gets through to 
all of the colleagues on Capitol Hill of how this impacts 
ordinary working families, that when there is this sort of 
dysfunction just here in this square mile of Capitol Hill, how 
people across America are hurt.
    I wanted to turn, Governor Keating, to an issue which is 
the potential impact on tier 1 capital that occurs if Treasury 
bonds basically drop in value because interest rates increase. 
Is that a concern of the industry?
    Mr. Keating. Well, it certainly is, and it is very much, 
Senator, a concern among the community banks out there, because 
whether it is Oregon or Massachusetts or Oklahoma or South 
Dakota, whatever the State might be, there are only so many 
places you can go to make up for the lost opportunity that the 
diminished value of the securities that you hold make you face. 
And so I think that--you know, I know my grandfather in 
Illinois, as a community banker, he had everybody in town on 
his board, every investor he could find. If he had to go out 
and get money quickly from some other source, particularly if 
people did not even know where Salem, Illinois, was, he would 
be very hard pressed. So this could create real issues for the 
community banking environment.
    Senator Merkley. I will just note, because my time is 
running out, that I am also concerned about the impact on 
repurchase agreements, or repo lending, that is very important 
to many institutions. It sounds to me like the path we are on 
can decrease revenues, and it can raise costs. Families that 
lose their job may be more likely to need food stamps, for 
example, the whole series of--so isn't it possible that in the 
name of reducing the deficit, this path could actually increase 
the deficit by decreasing revenues and increasing costs? Is 
that possible?
    [Witnesses nod affirmatively.]
    Senator Merkley. Would it be fair of me to call that kind 
of extraordinarily wrong-headed and destructive in a technical 
way?
    [Laughter.]
    Mr. Bentsen. Your word, Senator, I guess it would be.
    Senator Merkley. Thank you. I am out of time. I appreciate 
your testimony.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Thank you, Ranking 
Member. I appreciate your having this hearing. I appreciate 
your being here today.
    Mr. Keating, I read your article in the Washington Post 
that using the debt ceiling as leverage in the deficit debate 
is unwise and dangerous. You also noted that the respect and 
admiration of the United States and its institutions inspire 
around the world are based on the certainty that when our 
Nation makes a promise, we keep it. And I take it from what I 
have heard here today that all of you agree with that same 
sentiment. I had read yours, Mr. Bentsen, that it is 
unacceptable for Congress to ever voluntarily default on the 
debt and that continual short-term extensions of the debt limit 
increase unnecessary market uncertainty and raise questions 
about our Nation's creditworthiness. So I think we are all on 
the same page here, and I agree, I think that makes sense.
    But here is my question: If the very prospect of a default 
costs us money and costs us our good name, I do not understand 
why we keep voluntarily raising the prospect of default with 
all these votes on the debt limit. Congress already controls 
the size of the debt. It gets to decide how much the Government 
taxes and how much it spends. So don't you think it would be 
better if Congress replaces the arbitrary debt limit with the 
commitment that Treasury can borrow exactly as much as it needs 
to pay our bills? Mr. Keating?
    Mr. Keating. Well, the technical issue, Senator, of how you 
change the process, if you change the process, will have to be 
resolved among and between you and your colleagues. There are 
probably many different approaches that make good sense.
    I think what me and my colleagues are saying is when it is 
all said and done, whether you scrap the debt ceiling process 
as it exists now, if you go to another structure, another 
system, if you include or do not include the President in the 
process, then, fine, I mean, just get it fixed. But I do not 
know what the very best solution would be. I just think it is 
very important to look for a solution that we do not do this 
every year, every 2 years, or every 6 weeks.
    Senator Warren. So I think we are in the same place, Mr. 
Keating. We cannot do this every year, every 2 years, every 6 
weeks since what I hear you saying is the very threat is 
costing us money. It is costing us our good name in the 
marketplace. And the way we stop doing that, it seems to me, is 
to take responsibility for these debts. Does that make sense?
    Mr. Keating. You are right. I mean, they are our debts. We 
have to pay them off eventually.
    Senator Warren. We have got to pay them.
    Anybody disagree with that?
    Mr. Stevens. Senator, I would just say that so much of our 
spending is on autopilot already. If you look at the next 10 
years, mandatory spending, which does not get a vote here in 
the Congress, is 61 percent of outlays. Interest on the Federal 
debt is 11 percent of outlays. That is about three-quarters of 
all our spending.
    My worry is if there was not a gut check about increases in 
the debt, those numbers would simply get worse. If you are a 
household and you sit down with your spouse and you say, well, 
where are we? You have got to make a decision about whether you 
want the next credit card or the next purchase because at some 
point it gets unmanageable.
    Senator Warren. So, Mr. Stevens, I hear you saying in 
effect you want some accountability in the system. But it seems 
to me that accountability means that we want to reduce wasteful 
and unnecessary spending even if those votes are not 
politically popular. Accountability means voting to close tax 
loopholes so that wealthy individuals and big corporations are 
going to pay a fair share here. Accountability does not mean 
taking easy political votes and then turning around and 
grandstanding over whether or not we are going to raise the 
debt limit.
    The way I see it, I appreciate your thoughts on this and 
the importance of our not voting over and over and over on 
raising the possibility that we are not going to pay our debts 
as they come due. You know, a U.S. default is the economic 
equivalent of a nuclear bomb. But thanks to this arbitrary debt 
limit, we routinely arm that bomb and watch in horror then as 
the clock ticks down to zero. There has to be a better way to 
do this. And it seems to me the least we can do, the bare 
minimum we can do, is pass a long-term debt ceiling increase as 
quickly as possible.
    But, really, I think we should take this option off the 
table. The United States should honor its obligations and pay 
its bills in full and on time, period. Anything else, I think 
you have made clear, hurts our families, hurts our businesses, 
hurts our country. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Heitkamp.
    Senator Heitkamp. First off, I would like to thank the 
Chairman for holding this very important hearing. We are at 5 
percent. Five percent of the American people think we are doing 
a good job. Why would they believe anything we said about the 
consequences of the debt limit, of what we are doing here? And 
that is why it is so important they hear from you. That is why 
it is so important that you participate.
    You know, I am kind of new to this business, but I come 
with a dad who was a truck driver, but he had a saying: ``When 
you are in a hole, stop digging.'' Right?
    So what have we done? We have shut down Government, but 
unanimously, over in the House, passed a resolution saying we 
are going to pay everybody who is not working. Do you know how 
absurd that is to the Federal Government and to farmers in my 
State who had a huge natural disaster that they cannot report 
anything to the FSA? I mean, just think about that.
    And so there we are representing dysfunction, and now we 
are willing to take the greatest threat of all and jeopardize 
this economy and jeopardize this recovery, and I want to--
because we came here to listen to your thoughts, and I just 
want to kind of reiterate some of the wise things you have told 
us today.
    Mr. Bentsen, you said no amount of planning could take into 
consideration all the possible consequences. No amount of 
planning can take into consideration all the consequences. And 
I want to finish with a couple statements of yours, Mr. 
Stevens. Lessons cannot be unlearned. If we default, if we 
continue to do this, we will reap the whirlwind of the 
consequences of that. And, finally, more importantly, damages 
will be visited on every American if we do this.
    There are people in this body who honestly are trying to 
find a way forward to say it does not matter. This matters 
dramatically, and it matters not just to the livelihood and to 
the political popularity of this group and whether we are going 
to get, you know, a pox on all your houses. That should be most 
irrelevant. What should be relevant is the consequences on the 
American people. It is understanding that when you say we are 
going to pick and choose our debts that we are going to pay.
    You know, every American out there, when they look at their 
credit score--let us say I am going to buy a car. I always paid 
off my car loan, always late on my credit card. What is my 
credit rating? Do I tell the bank, hey, look, do not worry 
about all those credit cards I have not paid, because I always 
paid my bank loan, I always paid my car loan?
    That is not how it works in the real world, and they know 
it. They know that this is dysfunction that has to be 
addressed. And I agree with my friends and my colleagues on the 
other side that we have a debt and deficit problem, and anyone 
who wants to ignore that is not looking at facts, not looking 
at the statistics, Governor, that you have raised here. But we 
cannot do it. We had Bowles-Simpson. They said they want to 
negotiate. When have we heard this before? Bowles-Simpson, 
Super Committee. You know, and all along, all the ultimatums of 
we are not going to raise taxes or we are not going to touch 
entitlements--it is equal opportunity blame--have led us to 
this point where we are not functioning the way we need to 
function on behalf of the American people.
    You have been here and lots of great questions, but I just 
want to thank you, and I want to encourage you to continue to 
tell your story, continue to do what you are doing here, 
reiterating that we cannot let this happen, because I do not 
want to be here--I do not want to be here saying, ``I told you 
so.'' And you do not want to be here saying, ``I told you so.'' 
We want to stop this nonsense from happening. We want to abide 
by the full faith and credit of the American people because 
that is who we represent. It is not the American Government. It 
is the trust and the responsibility that we have to the 
American people.
    And so thank you so much. Continue your good work. I am 
almost out of time. I know there is no question there. I did 
not get a chance for an opening statement. But I do want to 
tell you how invaluable your work on this is and how important 
it is that you continue to ring the bell, that you continue to 
sound the alarm, because in the end it is not about us in this 
room. It is about people who are getting car loans. It is about 
people who are retiring. It is about people who want to finance 
a house and they cannot even go and get approval because now we 
are shut down. So if they saw the rates rising, so what is 
their chance? And that is who we are here to represent, those 
farmers that Senator Tester talked about.
    So thank you and continue your good work. It is so 
important that your voice get heard in the next couple days 
here.
    Chairman Johnson. I am told that Senator Schumer is on his 
way.
    Mr. Bentsen, GAO has said that the costs from the recent 
financial crisis may exceed $13 trillion, and some have 
suggested a default could be even worse. What would a default 
mean for investors, including both current retirees and future 
ones?
    Mr. Bentsen. Mr. Chairman, I think that in the case of 
current investors, if there was a default and coupon payments 
were missed, then at least immediately, you know, they would be 
out money for some period of time. It is not clear whether they 
would be paid accrued interest from the due date or the date of 
actual payment; and if they were not, then obviously they would 
have lost earnings associated with that.
    If they are holding Treasury securities at this point in 
time, as Treasury securities move down in price, then they 
would take a loss accordingly on that as well. So I think it is 
fair to say that current investors would certainly have 
negative consequences as a result of this.
    Chairman Johnson. Mr. Stevens, what do you think?
    Mr. Stevens. It will hurt in some fashion or other. 
Everyone who saves, everyone who invests, everyone who borrows, 
everyone who has a stake in the economy, not people of one 
category or another necessarily uniquely, but certainly 
retirees would be among those, people who are saving for 
longer-term purposes, institutions as well. The effects will 
be, I think, very, very broad cast.
    Chairman Johnson. Thank you.
    Senator Schumer?
    Senator Schumer. Well, thank you, Mr. Chairman. I 
appreciate the courtesy that the Committee always extends, and 
I apologize. As you can imagine, there is a lot going on. But 
thank you for holding this hearing. It is a very important 
hearing at a very crucial time, and I want to thank all our 
witnesses, and I want to thank Senator Crapo as well.
    First, I want to just make a few responses to some of the 
committees made earlier today, that the most urgent threat to 
our economy is overall debt, not debt limit. Well, I agree in 
the long run we are going to have to make serious adjustments 
to deal with our debt load. We have made some progress there. 
By the way, I would add middle-class incomes are declining in 
America. To me, that is a greater problem than our debt. If it 
happens for another 5 or 10 years, it is a different America.
    But having said that, I do not want to gainsay the 
importance of getting our deficit down, but we have made decent 
progress there.
    Mr. Stevens, I heard you spoke about confidence earlier. 
Well, it is safe to say investors have confidence in the 
ability of the United States to pay its obligations. If that 
changes, it is going to make our debt worse considerably. 
Interest rates will go up. It is going to make the country less 
strong. And I would argue that one of the best ways to increase 
our debt is to not pay our debt obligations, to not pay our 
bills, plain and simple. The two are not unrelated. They are 
very related.
    So I want to agree with Senator Menendez. It is mind-
boggling we are even discussing this here, but here we are just 
2 years after the last prolonged discussion about whether we 
would pay our debt, and we have to ask the question.
    So an important purpose of this hearing, Mr. Chairman, is 
to deal with the debt ceiling deniers. There are two types of 
debt ceiling deniers: one group generally confined to a small 
minority in the House that thinks default does not matter, that 
it is all a lie ginned up by the Obama administration. I have 
noticed that one of the people most quoted is Congressman Brown 
from Georgia who says it does not matter. This is the same man 
that said something to the effect a third of what he learned in 
medical school were lies. If we are having someone like that 
lead one party of this country or lead this country, we are in 
trouble.
    But there is a more sober group which has gained steam in 
the Senate over the last few weeks, and maybe that is more 
troubling. They think there is a magic solution that many 
members of this body have put forward as a way out of our 
predicament. ``We do not need to default,'' they say. ``We can 
pick and choose which payments to make, and if we prioritize 
paying interest on our debt, we would avoid default.''
    So, Mr. Bentsen and Mr. Stevens, I want to ask you to 
elaborate on prioritization a bit and the effects it could have 
on the market. Treasury Secretary Lew said prioritization is 
default by another name. I agree with that statement. But we 
have hundreds of billions of dollars of Treasury securities 
maturing between October 17th and the end of the month, $120 
billion October 17th, $93 billion October 24th, $89 billion 
October 31st. We rely on investors' willingness to roll over 
these debts as they mature.
    So, Mr. Stevens, you have talked a lot about confidence 
today. How confident can we be that investors will be willing 
to roll over these debts as we are actively deciding, if some 
of these folks had their way, that we will not repay some of 
our creditors?
    Mr. Stevens. Well, Senator, as I said, if you think about a 
household that relies upon the bank for financing on an ongoing 
basis, if the bank finds out that the household is choosing to 
pay some bills but not others, it does not inspire great 
confidence in the bank to continue to lend; and to the extent 
that it does, it is going to charge a higher interest rate. And 
I think that is the analogy. I honestly believe that the 
confidence of this vast market of lenders that we depend upon 
to finance debt at the level of almost $17 trillion will take a 
blow, irrespective of which bills we decide not to pay.
    Senator Schumer. And isn't it true we have never had this 
experience before except for one day where there was a mishap 
somewhere, that we have never had an active--that we have had 
an active decision made we are going to pay some debts and not 
others?
    Mr. Stevens. It is not an experiment we have run or should 
run.
    Senator Schumer. Well said. I yield back my remaining time.
    Chairman Johnson. Thank you again to all of our witnesses 
for being here today. This hearing is adjourned.
    [Whereupon, at 11:58 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                  PREPARED STATEMENT OF FRANK KEATING
                 President and Chief Executive Officer
                      American Bankers Association
                            October 10, 2013
    Chairman Johnson and Ranking Member Crapo, my name is Frank 
Keating, President and Chief Executive Officer of the American Bankers 
Association (ABA). The ABA is a 135-year old association that 
represents banks of all sizes and charters and is the voice for the 
Nation's $14 trillion banking industry and its two million employees. I 
also served as Governor of Oklahoma for two terms and as a member of 
the Bipartisan Policy Center's Debt Reduction Task Force.
    I appreciate the opportunity to be here to represent the ABA 
regarding the need to raise the debt ceiling and the consequences of 
failing to do so.
    Let me be very clear: we need to meet our obligations and not 
create any uncertainty that we will do so--on-time, every time. In this 
country, our word is our bond. The respect and admiration that the 
United States and its institutions inspire around the world are based 
on the certainty that when our Nation makes a promise, we keep it.
    Ordinary Americans will bear the brunt of the damage if our leaders 
do not prevent the United States from defaulting on its debt for the 
first time in history. We are much closer to disaster this year than we 
were just over 2 years ago when the debt-ceiling standoff caused 
economic uncertainty to spike, consumer confidence to plummet and stock 
prices to spiral downward--all because of the perceived risk of the 
United States defaulting on its domestic and international debt 
obligations. The Bipartisan Policy Center (of which I am a board 
member) estimated the 2011 debt standoff cost taxpayers close to $20 
billion as nervous investors demanded higher interest on U.S. Treasury 
bonds to account for the risk of Government default. If our Nation 
defaults on its nearly $17 trillion in debt, the harm is likely to be 
measured in hundreds of billions of dollars.
    Even the slightest uptick in Treasury interest rates would cascade 
through the economy. It would raise the costs for taxpayers to service 
our country's debt and would raise the cost of borrowing for 
businesses, meaning job losses and price increases. Default would be a 
blow to retirement funds, leaving fewer resources available for 
retirees. For banks, which hold $3 trillion in Treasury, agency and 
mortgage-backed securities, the sharp decline in value of those 
securities would translate into fewer resources available for 
mortgages, business, auto, credit card and student loans.
    If Congress fails to act and we hit the debt ceiling we will set 
off a chain of events that will cover our entire economy and impact all 
Americans. These impacts would not be easily reversible. The 
repercussions could linger for years, providing a constant drag on our 
economy.
    Default would also put the United States in the category of 
reckless debtor nations that have broken their word in the markets, 
including Argentina, Venezuela and Cameroon. Defaults left those 
countries financial pariahs and debilitated their economies.
    No one takes our national debt more seriously than I do. As a 
Republican Governor, I balanced my State's budget 8 years running and 
worked with colleagues from both sides of the aisle to ensure that 
Oklahoma honored its debts and expanded its economy. Later, I joined 
the Bipartisan Policy Center's Debt Reduction Task Force (also known as 
the Domenici-Rivlin commission), which endorsed painful but necessary 
measures to put the country's fiscal house in order. Rather than 
inflict damage upon ourselves by failing to pay our existing 
obligations, we should instead focus on reducing our future spending 
and bringing our debt to a sustainable path.
    Honoring U.S. Fiscal obligations is not a Republican or Democratic 
issue--it's the American thing to do. As George Washington said, ``No 
pecuniary consideration is more urgent than the regular redemption and 
discharge of the public debt; on none can delay be more injurious, or 
an economy of the time more valuable.''
    Since May, the Treasury has used extraordinary measures to keep us 
from hitting the debt limit. We have been lucky to avoid it thus far, 
but time is up. With the U.S. economy and our Nation's honor on the 
brink, our leaders must--in the spirit of patriotic compromise--do what 
it takes to make a deal.
    If confidence is lost in our country's willingness to pay its bills 
on time, we will have lost something that may be impossible to regain--
the world's trust.
The Debt Ceiling Must Be Raised To Pay What Our Country Has Already 
        Spent
    It is essential that Congress act to raise the debt ceiling and pay 
the debts it has already incurred to maintain our Nation's credibility. 
U.S. Treasuries are the world's risk-free assets and lifeblood of 
global financial markets. When times are tough, it is Treasuries that 
are the world's safe financial harbor. This is only possible because 
governments, businesses and investors around the world have 
unparalleled confidence in both our ability and willingness to pay out 
debts. Our country has been a huge beneficiary of this and we should 
never take it for granted. We need to manage carefully our debt levels, 
but we cannot inject doubt as to our willingness to meet our 
obligations.
    By raising the debt ceiling, Congress does not authorize any new 
spending, it simply commits to paying the bills it has already approved 
and money already spent. Paying our debts should not be confused with 
controlling future spending. Both must be done. At over 70 percent of 
GDP, there is no denying our overall debt level is too high. We need as 
a country to find a path forward that makes the most effective use out 
of the hard-earned tax dollars our citizens entrust to the Government 
to manage.
Default Will Have Severe Long-term Consequences
    Failing to raise the debt ceiling in time would be an unprecedented 
mistake that would have dire consequences for our economy. Even the 
prospect of a default has shown to be massively disruptive to our 
economy. The debt ceiling standoff in 2011 gave a clue to the potential 
damage. As I mentioned above, that event alone cost U.S. taxpayers 
nearly $20 billion in increased interest costs, all of which could and 
should have been avoided. The market today is already pushing short-
term Treasury rates up and credit default insurance spreads on 
Treasuries have widened.
    If the United States were to fail to pay its debts, even for a few 
days, the consequences would be many times worse. In the first 2 weeks 
of November alone $345 billion in U.S. Government bonds will come due. 
If we have not raised the debt ceiling by this point, the ability to 
roll over that debt and pay bond holders could be impaired. Interest 
rates would spike, as investors demand a higher premium for the risk 
they now take by holding our Government's debt.
    The inevitable increase in Treasury interest rates would cascade 
through the economy, directly impacting the lives of every American. 
Taxpayers will have to pay the higher government interest costs. Stocks 
would plummet, dealing a sharp blow to retirement funds. Borrowing 
costs for companies--both large and small--would rise, making 
businesses less willing and able to invest in new plants, buy equipment 
and hire additional workers. Because banks hold large portfolios of 
Treasury, agency and mortgage-backed securities, any rise in rates 
would create unrealized losses that would end up reducing capital 
ratios and limiting the supply of funds that could be lent to 
individuals wanting to buy a home, finance a new car or go to college.
    The short-term impacts will certainly knock the current economic 
recovery back on its heels. These consequences are not easily 
reversible and are likely to linger for years, providing a constant 
drag on our economy. While the failure to pay our country's bills on-
time would have the biggest cascading impact, failure to raise the 
ceiling would also reduce the available funds to pay salaries to our 
armed forces, retirees on Social Security, and thousands of other 
commitments we have already made.
A Sustainable Solution to Our Long-term Debt is Needed
    There should be a wholesome debate about how taxpayer dollars are 
spent in the future. We need to be sure that those precious tax dollars 
from hardworking American's are used in the most productive way. But we 
should not confuse the need to pay our bills for things that Congress 
has already approved and spent with the management of spending that is 
appropriate for the future. To use a credit card analogy, the decision 
about what to buy on credit tomorrow must take into account the debt we 
already owe, but that is never an excuse for not paying the current 
bill on time and in full.
    Markets, not Congress, truly determine our Government's ability to 
borrow. Our debt is already 70 percent of our GDP. While the sequester 
is expected to reduce debt-to-GDP for a few years, even it fails to 
arrest the longer-term upward trajectory. According to the 
Congressional Budget Office (CBO), by the year 2043 entitlement 
programs and debt service payments alone are projected to outstrip 
revenues. This means that there will be no funds at all for any 
discretionary spending. It is impossible to address the long-term 
sustainability of our debt without addressing the growing costs 
associated with our entitlement programs.
    The CBO predicts that in the next 25 years our debt will surpass 
100 percent of our GDP. This would put us in the same league as the 
fiscally unstable countries that led Europe into crisis. Already, the 
U.S. debt amounts to nearly $54,000 per person, and $148,000 per 
taxpayer. The interest payments alone on our debt will cost over $8,000 
per U.S. citizen in 2013.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Addressing future spending and bringing our debt down to 
sustainable levels must be done in a bipartisan way. My experience 
serving on the Domenici-Rivlin commission gives me hope that tough 
decisions can be made for the good of our country.
Conclusion
    The answer to managing our debt is not to simply stop making our 
payments on money already spent. We should never inject uncertainty 
into the markets that we as a country will not keep our word and pay 
the debts that we owe. We must pay our bills on-time and in full; then 
we must carefully manage our future spending so that we can begin to 
pay down our accumulated debt. I urge Members of this Committee and the 
full Senate and House to engage in a bipartisan way to find long-term 
solutions to our growing debt levels.
    Our role in the global economy is too important to flirt with 
danger of a default. Once trust is lost, it is difficult, if not 
impossible, to regain.
                                 ______
                                 
             PREPARED STATEMENT OF KENNETH E. BENTSEN, JR.
    President, Securities Industry and Financial Markets Association
                            October 10, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, my name is Ken Bentsen and I am President of the Securities 
Industry and Financial Markets Association (SIFMA).\1\ Thank you for 
the invitation to testify today regarding the risks associated with a 
default on the Nation's public debt. SIFMA appreciates the opportunity 
to provide input on consequences to the financial markets and the 
overall economy should the United States fail to make timely payments 
on any of its outstanding debt obligations. Given the important role 
U.S. Treasury debt plays as a world currency and store of value, any 
such default would likely negatively impact the economy and certainly 
disrupt the operations of our financial markets. Indeed market 
observers have already noted the effects of the current uncertainty 
regarding the public debt limit, including fairly dramatic pricing 
effects on the short end of the Treasury market and re-purchase 
agreements or repos. While we firmly believe that the time is long 
overdue for the Administration and the Congress to come together and 
develop long-term solutions to our very real fiscal challenges, 
voluntarily defaulting on the Nation's obligations should not be an 
option for policymakers to consider. Even a short-term failure to 
fulfill our obligations would seriously impair market operations and 
could have significant consequences to our fragile economic recovery.
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    \1\ The Securities Industry and Financial Markets Association 
(SIFMA) brings together the shared interests of hundreds of securities 
firms, banks and asset managers. SIFMA's mission is to support a strong 
financial industry, investor opportunity, capital formation, job 
creation and economic growth, while building trust and confidence in 
the financial markets. SIFMA, with offices in New York and Washington, 
D.C., is the U.S. regional member of the Global Financial Markets 
Association (GFMA). For more information, visit http://www.sifma.org.
---------------------------------------------------------------------------
    Should Congress fail to raise the debt limit and the Treasury is 
unable to meet interest and principal payments coming due, it would in 
effect trigger a series of events which inevitably would lead to 
American taxpayers paying more to finance our debt. We strongly urge 
the President and the Congress to come together and negotiate a 
workable solution to avoid these consequences.
    Since the threat of default first arose in the summer of 2011, 
SIFMA has been engaged with its members in developing scenarios to 
better understand the consequences of a failure to pay on Treasury 
securities. I would stress that while market participants believe that 
the likelihood of a default remains low, the industry also believes 
that, given the potential negative consequences, it is prudent from an 
individual member perspective as well as a broad market and economic 
perspective, to develop plans to further cooperation, coordination, and 
information sharing. Based on our work, we believe market participants 
are operationally prepared to deal with the scenarios that a Treasury 
failure to pay would present. Market participants have worked to 
develop reasonable assumptions and to prepare accordingly so that this 
important market continues to function. However, as you know, a default 
by the U.S. Government would be unprecedented and the consequences for 
the market and the economy would be dangerously unpredictable so no 
amount of planning can identify and mitigate all of the potential 
short- and long-term consequences of a default. But we are certain that 
one of the most significant consequences to the Nation would be a rise 
in Treasury's cost of funding as investors demand a default premium 
that will result in higher rates at auction to compensate for the 
additional risk.
    Working with SIFMA's broad membership from both the buy and sell 
side, as well as key operators of the settlement infrastructure of the 
Treasury market, SIFMA has developed scenarios based on a number of 
reasonable assumptions. Working through these scenarios, SIFMA 
developed possible approaches and noted questions and issues that could 
not be resolved. I would stress that over the course of the industry's 
consideration of the dangers of default, no scenario presents a clear 
cut answer. Indeed, the settlement arrangements for Treasury securities 
do not contemplate or recognize the possibility of a default and thus 
the ability to sell, finance, or post as collateral, defaulted 
Treasuries may be compromised. This ultimately could lead to a 
liquidity drain from the market. It is important to note that Treasury 
securities are a key factor in the daily financing of market operations 
with the U.S. Treasury repo market totaling between $1.2 and $1.9 
trillion daily. Undermining that market would have a deleterious effect 
on every market participant. I outline additional consequences below 
based on discussions among our members.
October 17 and Beyond
    The Secretary of the Treasury has stated that the Treasury will 
have exhausted all ``extraordinary measures'' by October 17, and that 
estimated cash on hand will be insufficient to meet current 
obligations. Significantly, Treasury has payments coming due of $120 
billion on October 17 and $93 billion on October 24, followed by 
additional principal and interest payments due every week thereafter.
Settlement Timeline and Impact on Payments
    Settlement and processing for daily transactions in Treasury 
securities takes place in the evening after the trading day in the U.S. 
Fedwire (the Federal Reserve service that provides transfer services 
for Treasury securities) normally runs its evening processing around 
7:00 pm eastern time, and other processes, including those of the 
clearing banks and DTCC's Fixed Income Clearing Corporation (FICC), run 
shortly after that. Should there be an announcement that Treasury will 
be postponing a payment due the following day because of an inability 
to pay, before these systems run, the systems should be able to adjust 
to reflect changed payments dates. Under this scenario, securities may 
be transferred and can be sold, financed and, if acceptable to a 
counterparty, used as collateral. However, we note that it is 
impossible to predict what overall impact on the market for these 
securities, on the price, on their acceptability as collateral in repo 
transactions or as to their acceptability as collateral throughout the 
global financial system since in effect Treasury would be acknowledging 
that it could not pay principal and/or interest when due.
    If a Treasury determination and announcement were delayed beyond 
the time when systems normally run, some processes may be delayed for a 
short-period in the evening. It is not clear how late systems can be 
held and the potential consequences of any delay on the opening of the 
trading day in Asia. An announcement of an intent to extend a payment 
beyond the current expected maturity after systems have been run (with 
the assumption that payments will be made the following day) would not 
be reflected in the evening's processing and would result in the 
inability to transfer further the security after the payment is missed 
on the following day. That is, certain Treasury securities may no 
longer be eligible collateral and may have limited ability to be 
pledged or sold.
    In addition, Treasury securities are traded in a global market with 
the global trading day beginning in Asia at 8:00 pm eastern time. 
Market participants normally run their own internal processes prior to 
the trading open in Asia in order to provide a clear cutoff to reflect 
positions in their books and records. Failure to provide early 
indications of intention could further confuse positions and could 
cause trading confusion in the Asian markets as it will be unclear 
whether certain securities will be paid in a timely manner. The 
disruption to pricing and trading behavior is impossible to predict.
Announcements from Treasury
    The timing of Treasury's announcement of its intention not to make 
a payment timely remains the key variable under all the scenarios our 
members reviewed. Given what we understand to be the limitations of the 
transfer mechanism for Treasury securities, failure to provide 
sufficient notification for a payment failure prevents the security 
from being further transferred. Holders of such a security may have 
limited opportunity to sell it, finance it through repo or post it as 
collateral.
    As noted above, as a result of a late notification, a Treasury 
security on which a payment is not made may not be further 
transferable. While we assume that the missed payments will eventually 
be made, while the payment remains unpaid the holder of the security 
that expected its payment may not be able to sell the security or to 
finance it in the repo market. Similarly, collateral and margin 
requirements at clearing houses and central counterparties may no 
longer be able to be met with these securities. Further, it is entirely 
possible that for purposes of any escrow, collateral or margin 
arrangement involving such securities could result in them being deemed 
non-eligible and subject to replacement. Essentially the holder would 
have a receivable from the Treasury that could not be further 
transferred and, overall we would expect some frictional decrease in 
liquidity in the market-liquidity that would be available for further 
investments, loans and important business development. The impact could 
be widespread. Counterparties might begin to question whether other 
counterparties would be able to replace ineligible collateral.
    Disruptions in the Treasury repo market would further impact price 
changes on Treasury securities. Treasuries are the world's safest asset 
and the most widely used collateral for both risk mitigation and 
financing. Shrinkage in the financing market would further pressure 
rates as haircuts on Treasuries would increase--thus reducing financing 
capability--and disrupt the collateral market because of margin calls 
throughout the financial system that would reflect the overall 
repricing of Treasury collateral.
Inability to Plan
    Our understanding is that Treasury will determine payments/
postponements on a day-by-day basis. Once Treasury fails to make a 
timely payment, markets will have to wait each day for Treasury's 
indications as to its intentions for payments due on the following 
days. If this were to continue for any length of time, market 
participants would need guidance on missed payments as well as future 
payments on additional securities. In addition, we understand that 
coupon payments that are not paid will ultimately be paid to the holder 
of record of the security on the day the payment should have been made. 
Uncertainty on that payment will continue until payment is finally made 
Clearly, securities that are coming due in the short-term would be less 
attractive to hold and may become harder to finance as doubts about the 
payment of interest and principal when due would be more prevalent. 
Even if the debt ceiling were raised at the last minute, experience 
from the 2011 event suggests that securities that may be the subject of 
a default in the near future will trade at a premium and will be more 
expensive to finance.
Municipal Funding Challenges
    Some specific issues arise with regard to the municipal securities 
market. A key interaction between municipal securities--the principal 
means by which State and local governments finance investment in 
schools, highways, airports, water and sewer systems, hospitals and 
other key infrastructure--and Treasury securities involves municipal 
refunding transactions. A refunding typically occurs when interest 
rates have fallen since a State or municipality issued long-term bonds, 
and a borrower is able to achieve interest cost savings by refinancing 
bonds at the current lower rates. When a refunding can be achieved 
before the old, higher-interest bonds can be redeemed early, the 
borrower invests the proceeds of the new, lower-interest bonds in 
Treasury securities, and the income earned from these investments is 
used to pay debt service on and eventually redeem the old bonds. When 
old, higher-interest bonds are fully backed by an escrow portfolio, 
they are said to be ``defeased'' or ``escrowed'' and treated as triple-
A rated.
    One issue involves a category of nonmarketable Treasury securities, 
State and Local Government Series (``SLGS''), special, customized 
securities sold by Treasury specifically for the purpose of funding 
State and local government escrow portfolios. The Treasury Department 
stopped selling SLGS on May 15, 2013 as the Government's debt 
outstanding approached the current debt ceiling, making it more 
difficult and costly for States and localities to refund outstanding 
bonds. An even bigger issue would arise if the Treasury defaulted on 
outstanding bonds which are backing defeased municipal bonds. Because 
defeased bonds are backed by the income from the escrow portfolio, a 
Treasury default would ``pass through'' to the municipal bond holders, 
calling into question the reliability of escrowed municipal securities 
in general.
Industry Playbook
    Given the significant uncertainty of the timing of a default and 
the uncertain impacts, market participants and SIFMA have developed a 
playbook this is intended to provide key market participants and 
service providers a forum to share information about the latest 
developments including decisions from the Treasury, the Administration 
and Congress and the status of the infrastructure and settlement 
providers. Of particular concern to market participants is whether an 
early indication from Treasury that securities will be extended has 
been made and, if not, whether processes are being--or can be--delayed. 
Our current playbook calls for an initial call with market participants 
at 2:00 pm eastern time to share the latest information and set in 
motion the later planned calls. The schedule suggests industry wide 
calls at 6:30 pm, 8:00 pm, 10:00 pm and 8:00 am eastern time the 
following morning in order to allow market participants to monitor in 
real time the impact on the settlement process. Without a resolution of 
the debt ceiling before the Treasury's expected limit of extraordinary 
measure on October 17, we expect to initiate this call protocol on 
October 16 as a Treasury bill is scheduled to mature on October 17. Of 
course, we maintain the ability to call the industry together at any 
time should events dictate.
Conclusion
    U.S. debt obligations are the currency of U.S. and global financial 
markets and the real economy and their soundness should not be 
questioned. No amount of planning can anticipate all the potential 
consequences of a default. Short- and long-term costs to the taxpayer 
can be anticipated but the further limits on the ability to transfer, 
sell, finance and post as collateral defaulted securities would only 
serve to undermine investor confidence and hurt our fragile economic 
recovery. SIFMA and its member firms have frequently called on Congress 
and the Administration to work together to put our fiscal house in 
order but unnecessarily triggering a historic default will result in 
dramatic, and possibly permanent, damage to our economy and markets in 
ways both anticipated and unanticipated, and must be avoided. Again, 
SIFMA appreciates the opportunity to testify today and I look forward 
to answering your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF GARY THOMAS
      2013 President, National Association of Realtors'
                            October 10, 2013
Introduction
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee; my name is Gary Thomas. I am a second generation real estate 
professional in Villa Park, California. I have been in the business for 
more than 35 years and have served the industry in countless roles. I 
currently serve as the 2013 President of the National Association of 
Realtors' (NAR).
    I am here to testify on behalf of the 1 million members of the 
National Association of Realtors'. We thank you for the 
opportunity to present our views on the potential economic consequences 
if Congress fails to raise the statutory limit on our Nation's debt 
before the limit is breached.
State of Housing
    It is no secret that real estate is a cornerstone of our Nation's 
economy. The housing sector accounts for roughly 18 percent of GDP and 
research has shown the social and financial benefits to all Americans. 
As our economy slowly improves from the Great Recession, the U.S. 
housing market will be key to this recovery. Our Nation will not return 
to full employment and robust economic health unless the real estate 
market makes a broad-based and lasting comeback. Fortunately, the U.S. 
housing market recently has shown some hopeful signs.
    Housing has been instrumental in pulling the economy out of the 
Great Recession, substantially contributing to our Nation's economic 
growth since 2011. Home sales, housing prices, and residential 
construction have increased during this time, supported by low mortgage 
rates and improved consumer confidence in both the housing market and 
overall economy. In the past 2 years, home prices have gone up 15 
percent, pushing up the value of household real estate to $18.6 
trillion at the end of the 2nd quarter of this year. Additionally, home 
sales were 13.2 percent higher in August 2013 than a year earlier with 
5.48 million homes sold, but were well below the 7.23 million homes 
sold in August 2005. Also, the residential construction industry has 
recovered almost half a million jobs of the 2.3 million lost during the 
recession; however, it still lags behind as a job creation engine.
Impact of a Default
    While these figures are promising, the housing market clearly 
remains far from healthy. Maintaining momentum in the housing market is 
particularly crucial right now. Sustaining the housing market rebound 
will increase economic and job growth, as it has in past U.S. economic 
recoveries. However, the momentum of the housing recovery will be in 
serious jeopardy if Congress is unable to move passed unnecessary 
political brinkmanship over raising the debt limit. A default, or even 
the perceived threat of a default, could result in a harsh and long-
lasting recession, which may be even more severe than the previous 
economic downturn.
    Congress must raise the $16.7 trillion Treasury debt limit before 
the middle of October 2013, which is when the Treasury will exhaust all 
its extraordinary measures to stay under the limit. At that point, 
incoming revenue would be the only way for the United States to finance 
its debt obligations. However, the Government is expected to experience 
a monthly deficit of $50 billion in FY2014, which will rapidly diminish 
any remaining cash the Treasury has on hand. If this occurs, the United 
States would be unable to meet its financial commitments and be in 
default on some or all of its obligations. Investor confidence along 
with consumer and business sentiment will likely fall sharply, placing 
both domestic and global financial markets into turmoil.
2011 Debt Ceiling Impasse
    Given that the United States has never defaulted on its debt 
obligations, it is impossible to predict the exact economic impact in 
the event our Nation is unable to pay its creditors. However, economic 
theory and evidence of significant economic disruptions resulting from 
the 2011 debt ceiling impasse, when Congress delayed raising the debt 
limit until the very last minute, can help illustrate the severity of 
an actual default.
    According to the U.S. Department of the Treasury, the political 
brinkmanship during the 2011 debt ceiling was responsible for financial 
market disruptions, reduced consumer and business confidence, and 
slower job growth. The debt ceiling stalemate ultimately led Standard & 
Poor's to downgrade our Nation's credit rating. Even though lawmakers 
were able to raise the debt limit before the Treasury expended its 
remaining cash on hand, political gridlock nearly caused our economic 
recovery to freeze. Furthermore, the Bipartisan Policy Center estimates 
that delays in raising the debt limit during 2011 led to higher 
borrowing costs for the Federal Government, which the Bipartisan Policy 
Center estimates will cost taxpayers an estimated $19 billion over the 
next 10 years.\1\
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    \1\ Bipartisan Policy Center. Debt Limit Analysis. By Steve Bell, 
Shai Akabas and Brian Collins. Available at: http://
bipartisanpolicy.org/sites/default/files/Debt%20Limit%
20Analysis%20Sept%202013.pdf.
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Higher Treasury Rates Mean Higher Mortgage Rates
    Long-term mortgage rates are closely linked to U.S. Treasury rates. 
As a result, an increase in U.S. Treasury rates would result in higher 
mortgage rates. In the event of a default, U.S. Treasury prices would 
fall and yields, which move inversely to prices, would rise. Both banks 
and borrowers would be sensitive to this change.
    Banks, which face requirements regarding the amount of capital they 
hold, would see declines in the value of one of their core capital 
assets--U.S. Treasury securities. Banks would likely restrict new 
lending in order to shore up capital and charge more for mortgages they 
originate. Borrowers would be impacted by both tighter credit standards 
and the compounding of higher rates.
    Historically, an increase in mortgage rates of 1 percentage point 
reduces home sales by roughly 350,000 to 450,000 units. That 
relationship might prove more robust in an environment of rising 
mortgage rates and bank tightening. For a borrower earning $60,000 and 
taking out a $200,000 mortgage, that 1 percentage point increase would 
raise the monthly payment by roughly $120 and could raise the borrower 
debt-to-income ratio (principle and interest only) from 27 percent to 
29 percent, enough to disqualify them from many lending programs and 
potentially under the terms of the qualified mortgage (QM) rule.\2\
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    \2\ For this example a 30-year fixed rate of 4.25 percent is 
assumed as well as a 5 percent down payment, 0.67 percent primary 
mortgage insurance, $70 monthly homeowner's insurance, and 1 percent 
real estate taxes.
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    Researchers at the Federal Reserve Bank of St. Louis found similar 
results in their analysis of trends in mortgage finance from 1940 
through 1960.\3\ According to the study's authors, 8.5 percent of the 
increase in home ownership from 45.5 percent to 62.5 percent was due to 
the 85 basis point decline in cost of mortgage credit during this 
period. African American, Latino Americans and first-time buyers who 
utilized low down payment loans are more susceptible to a tightening of 
credit and a resulting decline in ownership. Current homeowners seeking 
to trade up and baby boomers looking to traded own also would not be 
immune to the disruption as fewer qualified first-time buyers result in 
reduced demand for the homes they would sell before purchasing again.
---------------------------------------------------------------------------
    \3\ Federal Reserve Bank of St. Louis. Did Housing Policies Cause 
the Postwar Boom in Homeownership? By Matthew Chambers, Carlos Garriga 
and Don Schlagenhauf. Available at: http://research.stlouisfed.org/wp/
2012/2012-021.pdf.
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    A significant loss of home sales would have ramifications for the 
economy. Roughly 700,000 to 900,000 fewer jobs would be created as a 
result of a 1 percentage point increase in mortgage rates. This decline 
in industry and construction incomes along with fewer expenditures on 
services, renovations, appliances and other goods associated with home 
purchases that would weigh on ancillary businesses and their decisions 
to create jobs. Higher mortgage rates also hamper refinance activity, 
which would hold back additional consumption spending.
    As noted by the U.S. Department of the Treasury, it is important to 
recognize the sovereign debt concerns in Europe, as well the sharp 
downward revision to 1st quarter GDP in the United States, had an 
impact on U.S. financial markets during the 2011 debt limit episode.\4\ 
Thus, the widening of mortgage spreads in 2011 was due in part to these 
issues. However, those same concerns dropped Treasury yields, so on 
balance, mortgage rates decreased even as the spreads widened. If 
mortgage spreads widened today as a result of a debt ceiling impasse, 
with Treasury yields rising, the negative consequence for borrowers 
would be higher mortgage rates, which would curtail household spending 
and prevent the housing market from contributing to our economic 
recovery.
---------------------------------------------------------------------------
    \4\ U.S. Department of the Treasury. The Potential Macroeconomic 
Effect of Debt Ceiling Brinkmanship. By Sabrina Siddiqui. Available at: 
http://www.treasury.gov/connect/blog/Pages/Report-on-Macroeconomic-
Effect-of-Debt-Ceiling-Brinkmanship.aspx. Accessed: 10/4/13.
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    The Federal Reserve's ability to support the housing market could 
be affected as well. The Federal Reserve has been purchasing $40 
billion of mortgage backed securities and $45 billion in Treasuries per 
month since the fall of 2012, but has indicated its intent to wind down 
this program. A decline in Treasury prices could undermine the Federal 
Reserve's ability to wind down its purchases in an orderly fashion, 
potentially creating volatile movements in mortgage rates. In the long 
term, lower Treasury and mortgage-backed security (MBS) prices could 
hamper the Federal Reserve's ability to manage its significant holdings 
of Treasuries and MBS. What's more, if weaker confidence in the 
Treasury results in less and more erratic demand for it, the Federal 
Reserve's open market operations would become more difficult, limiting 
the Federal Reserve's ability to respond to the next crisis.
    The impact of an actual default would have far greater and long-
lasting impact on interest rates on Treasuries than concerns about a 
potential default during a temporary standoff.
High Mortgage Rates & Lower Consumer Confidence
    Consumer spending is a key driver of our Nation's housing market 
and overall economy. The consumer confidence index measures the degree 
of optimism that consumers feel about the overall state of the economy 
and their personal financial situation. Confidence in the stability of 
their incomes affects consumer economic decisions, such as spending 
activity, and therefore serves as one of the key indicators for the 
overall shape of the economy.
    In essence, if consumer confidence is high, consumers likely 
purchase more goods and services. Conversely, if confidence is lower, 
consumers tend to save more and spend less on goods and services. A 
month-to-month trend in consumer confidence suggests the outlook of 
consumers on their ability to find and retain good jobs according to 
their perception of the current state of the economy and their personal 
financial situation.
    Falling stock values, weak employment numbers, and higher mortgage 
rates can weigh on consumer confidence. This was evident during the 
debt ceiling stalemate between June and August 2011. According to the 
U.S. Department of the Treasury, consumer confidence eased in the 
spring of 2011 over employment concerns before it plummeted 22 percent 
in response to the impasse; it took several months after the debt limit 
stalemate was resolved before consumer sentiment recovered.\5\ A home 
is the largest and most complicated purchase of most consumers' lives. 
A general decline in confidence would weigh on consumers.
---------------------------------------------------------------------------
    \5\ U.S. Department of the Treasury. The Potential Macroeconomic 
Effect of Debt Ceiling Brinkmanship. By Sabrina Siddiqui. Available at: 
http://www.treasury.gov/connect/blog/Pages/Report-on-Macroeconomic-
Effect-of-Debt-Ceiling-Brinkmanship.aspx. Accessed: 10/4/13.
---------------------------------------------------------------------------
    Just as with interest rates, the impact of an actual default would 
have far greater and long-lasting impact on consumer confidence than 
concerns about a potential default during a temporary standoff.
Mortgage Rates & Consumer Confidence Impact on Housing & Economy
    Higher mortgage rates and lower consumer confidence are associated 
with fewer home sales because the cost of borrowing goes up for 
consumers. This mechanism is more relevant today given today's tighter 
underwriting and debt-to-income requirements, as well as regulatory 
requirements from the qualified mortgage (QM) rule. Home sales decline 
when interest rates go up, and housing prices moderate as a result. As 
seen in recent years, stagnant or falling prices weigh on sales growth 
as buyers fear the value of their purchase may decline. Slow price 
growth slows equity accumulation, forcing some consumers to pay 
mortgage insurance longer, hampering refinancing during recessions, and 
making owners more susceptible to default as a result of unemployment 
or loss of income.
    Interest rates tend to fall during recessions and eventually, 
demand for housing and new construction increases as a result. This 
pattern has been an important driver of U.S. economic expansions in 
recent decades with the notable exception of the most recent episode. 
Furthermore, the U.S. Treasury securities status as a safe or risk-free 
store of wealth attracts capital especially during an economic and 
fiscal crisis when investors shy away from riskier activities which 
augments this pattern resulting in shallower recessions. A decline in 
the Treasury securities low-risk of default status could reverse this 
pattern.
    Fewer home sales means less construction, less income from 
transactions, and fewer purchase of appliances, renovations and the 
services that accompany a purchase. As discussed earlier, this pattern 
is circular as it weighs on the economy, job growth, and future home 
ownership.
    As previously noted, the impact of an actual default would have a 
much more severe and drawn out effect on home prices and sales than 
concerns about a potential default during a temporary standoff.
Challenges Facing the Housing Recovery
    Luckily, our economy has been able to bounce back from the 2011 
debt ceiling debate and home prices have increased 14.7 percent over 
the 12-month period ending in August. However, they are still 7.6 
percent lower than in August of 2006. Today, home prices have led to 
positive gains in the net worth of homeowners, $18.6 trillion of which 
is saved up in residential real estate. Rising home prices have also 
cut the number of underwater homeowners by nearly half, but have put 
pressure on potential home buyers who have not yet completed their home 
purchase. Home sales rose 13.2 percent from August of 2012 to August of 
2013, but are 24.2 percent below the level from August of 2006.
    In addition to increases in home prices, mortgage rates have begun 
their ascent from historically unprecedented lows. While mortgage rates 
have stabilized recently due to the Federal Reserve's delay in the 
tapering of asset purchases, all expectations of a healing housing 
market and recovering economy point to higher mortgage rates ahead. 
These two factors combined with meager increases in family income are 
squeezing the affordability of homes. Affordability has plunged 18 
percent to the lowest level since 2006. While affordability remains 
above historic levels, a swift reduction will undoubtedly have an 
impact on buyer options and psychology.
    Consumer sentiment is already facing headwinds from rising interest 
rates and the recent Government shutdown will likely be an additional 
blow to consumer confidence and our economic recovery. Some economists 
have predicted that a weeklong Government shutdown could slow GDP 
growth by a quarter of a percent. Any longer shut down could result in 
a more significant effect. In either case, U.S. economic expansion will 
be more susceptible to the adverse effects from a debt limit impasse 
than prior to the shutdown.
Conclusion
    The U.S. housing sector is in the midst of recovering from the 
worst economic downturn since the Great Depression. Home prices and 
sales, as well as household wealth, are all up from a year ago. While 
this industry continues to face many headwinds such as higher interest 
rates and affordability challenges, maintaining the housing recovery 
will be key to boosting economic and job growth, as it has in past 
recoveries. This will only be possible if Congress has the willingness 
to raise the debt limit in a timely manner.
    We have already experienced the negative economic consequences from 
even the prospect of a default during the debt ceiling impasse in 2011. 
Let's not repeat this mistake again. More importantly, let's not allow 
a debt limit impasse lead to the Unites States defaulting on its debt. 
An actual default by the Federal Government along with a protracted 
Government shutdown could have serious implications on the U.S. economy 
and may result in a recession even more severe than any since the Great 
Depression. This scenario may include higher interest rates, reduced 
consumer spending and business investment, diminished household wealth, 
and high unemployment levels that could last more than a generation.
                                 ______
                                 
               PREPARED STATEMENT OF PAUL SCHOTT STEVENS
            President and CEO, Investment Company Institute
                            October 10, 2013
Introduction
    Chairman Johnson, Ranking Member Crapo, Members of the Committee, 
thank you for the opportunity to appear before you once again. My name 
is Paul Schott Stevens. I am President and CEO of the Investment 
Company Institute, the national association of U.S. registered 
investment companies, including mutual funds, closed-end funds, 
exchange-traded funds, and unit investment trusts. Members of ICI 
manage total assets of more than $15 trillion.
    I am honored to appear before the Senate Committee on Banking, 
Housing, and Urban Affairs to testify on the ``Impact of a Default on 
Financial Stability and Economic Growth.''Members of ICI serve more 
than 90 million shareholders, including half of all U.S. households. 
Much of our policy work accordingly focuses on the effect that 
actions--or inactions--in Washington have on investors and financial 
markets.
    Funds and their investors have a significant stake in the stability 
and predictability of the market for U.S. Treasury securities. The most 
recent ICI data show that as of June 30, funds registered under the 
Investment Company Act of 1940 \1\ (1940 Act) held more than $1.7 
trillion in securities issued by the Treasury and U.S. Government 
agencies--accounting for more than 10 percent of their assets. Mutual 
funds and their investors are not uniquely at risk, however, because 
the health of the Treasury market underpins all financial markets. U.S. 
Treasuries trade in the deepest, most liquid market in the world. Their 
interest rates set the benchmark for other debt issuers--and as the 
``risk-free rate of return,'' these rates factor into the pricing of a 
wide range of other assets, including stocks and real estate.
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    \1\ Data include mutual funds (long-term funds and money market 
funds), exchange-traded funds, closed-end funds, and unit investment 
trusts. Total net assets of these funds on June 30, 2013, were $15.4 
trillion. ``Agency'' securities include those issued by the Federal 
National Mortgage Association (Fannie Mae), the Federal Home Loan 
Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks, and 
the Federal Farm Credit Banks.
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    Today, fund advisers and the investors they serve are watching 
Washington's approach to debt and deficits with alarm. They see on all 
sides--at both ends of Pennsylvania Avenue--a lack of action on our 
Nation's current fiscal policies.They are deeply concerned about the 
potential results of this inaction.
    After all, there are two things that individuals, households, 
businesses large or small, or nations must do to maintain a high level 
of creditworthiness:

    They must pay their bills on time, when they come due; and

    They must avoid taking on an unsupportable level of debt--
        more debt than they can reasonably afford to service and pay.

    For our Nation, a violation of either of those principles would be 
ruinous. One failure--default, which we are here to discuss today--
could lead to a sudden crisis and degradation of the United States' 
financial and economic standing. But the other failure--to bring our 
debt under control--is equally insidious, equally destructive, and, on 
current trends, even more likely.
    With that perspective in mind, and on behalf of more than 90 
million Americans saving and investing to meet their financial goals 
through mutual funds, I am here today to state unequivocally that no 
one should take lightly the prospect of a default on the United States' 
debt obligations. The credit of the United States most emphatically 
should not be put into question.
    Let me say with equal force, however, that those who dismiss or 
minimize our current budget problems also are playing with fire. The 
risks they are taking may be less immediate, but they are no less 
consequential--and the longer our Nation delays action, the larger and 
more difficult the necessary corrective steps become.
    My testimony that follows outlines the risks of a default on debt 
for investors, including registered funds and their shareholders; our 
economy; and our standing in the world. It then discusses the long-term 
outlook for national debt and the hazards of failing to address our 
budget imbalances.
The Uncharted Waters of a Treasury Default
    Since September 2007, the gross national debt \2\ has risen by $7.9 
trillion, or an average of $1.3 trillion each year. The debt ceiling 
that is at issue today--$16.7 trillion--is 85 percent greater than the 
debt 6 years ago. It is also larger than the U.S. economy--at 105 
percent of GDP--for only the second time in our history, the first 
being immediately after our Nation bore the costs of protecting freedom 
in World War II.
---------------------------------------------------------------------------
    \2\ The debt ceiling applies to gross national debt, which includes 
both debt held by the public and debt held by governmental agencies and 
trust funds, most notably the Social Security Trust Fund and Government 
retirement plans. Discussion of Federal debt and its economic impact 
usually focuses on debt held by the public, which was $12.0 trillion as 
of August 30, 2013. My testimony carefully distinguishes between these 
two concepts.
---------------------------------------------------------------------------
    How has the United States managed to fund its national debt at such 
historically high levels? Some factors are obvious. Our Nation has the 
largest and one of the most dynamic economies in the world. Our stable 
Government, steady social institutions, and strong rule of law help 
make our securities a safe haven for investors. We actively promote the 
free flow of capital around the globe--including substantial purchases 
of U.S. Treasury securities by foreign investors. The dollar's status 
as the world's reserve currency--used as a store of value for foreign 
central banks and as the means of exchange to price such crucial 
commodities as oil--makes Treasury securities an attractive holding for 
those investors.
    But one crucial element in the United States' success in funding 
its debt is the Treasury market itself. U.S. Treasury securities trade 
in the deepest, most liquid market in the world. Every day, trading in 
Treasury securities just by ``primary dealers''--the 21 brokers with 
which the Federal Reserve Bank of New York conducts open market 
operations--exceeds $500 billion.
    The Treasury market depends for its stability first, on the 
unquestioned ``full faith and credit'' of the United States and second, 
on the certainty of its regular operations. Both of those features are 
at risk as Treasury runs through the ``extraordinary measures'' it has 
used since mid-May to maintain sufficient financing for Government 
operations. According to the Treasury Department's latest projections, 
those measures will be exhausted by October 17--one week from today.
    I will leave it to others to describe the mechanics of what will 
happen if the debt ceiling is not raised by that date. I also will 
avoid parsing the differences among ``technical default,'' ``selective 
default,'' and ``actual default,'' or whether missing a Social Security 
payment is equivalent to missing an interest payment or failing to 
redeem a maturing Treasury bill.
    All such discussion misses the key point: the United States, like 
any other major debtor, must maintain the confidence of its creditors--
or risk the consequences.
    What makes the Treasury market so deep and so liquid is the 
certainty of investors that the U.S. Treasury will pay its obligations, 
on time and in full, when interest or principal become due. Whether 
corporate treasurer, fund manager, or retiree, an investor holding a 
Treasury bill, note, or bond has always known that an upcoming interest 
payment or maturing security is ``as good as cash.''
    Conversely, investors with cash know that the Treasury Department 
auctions new debt securities on a predetermined, regular schedule. This 
predictability is another strength of this market.
    If the debt ceiling is not increased and at some point the Treasury 
cannot honor an interest payment or redeem a maturing security, 
investors holding affected securities will not have the cash they 
expect. If they have cash needs, they must find a buyer willing to 
assume the risk of an uncertain date for payment. Risk and uncertainty 
always bear a price, so the original Treasury investor must suffer a 
loss on securities that were deemed ``as good as cash.''
    Once Treasury has exercised the option to delay payments, investors 
will learn a lesson that cannot and will not be unlearned--even after 
all missed or delayed payments have been made good. That lesson is 
simple: Treasury securities are no longer as good as cash--they carry a 
future risk of further missed payments. That risk will be priced into 
the interest rate that investors demand, and into traders' reluctance 
to treat Treasuries as liquid.
    We already can see early signs of these effects developing in the 
market, as the October 17 debt-ceiling deadline approaches. Unsure 
about its future ability to borrow, the Treasury Department is scaling 
back its auctions of bills--squeezing the supply of securities that are 
in high demand and undermining the predictability of Treasury issuance.
    Rates on the Treasury securities most at risk have risen sharply. 
Yields on Treasury securities maturing between October 17 and October 
31 rose from around 2 basis points on September 24 to between 20 and 25 
basis points on October 8. The price of credit default swaps on 6-month 
and 1-year Treasury securities--basically, the premium for insurance 
against default on those securities--hovered between $11,000 and 
$12,000 per $10 million of coverage in mid-September. By this week, 
these premiums were over $50,000.
    We saw similar rate spikes in 2011, when a previous stalemate over 
the debt ceiling brought the United States to the edge of default. In 
the weeks before the 2011 debt ceiling impasse was resolved, yields on 
maturing Treasury securities rose sharply. The rate on the Treasury 
bill set to mature on August 4, 2011, climbed from slightly above zero 
in early July to almost 30 basis points by the end of that month. Even 
as Congress and the White House averted a default, the confrontation 
reflected so badly on the Nation that Standard & Poor's felt compelled 
to issue its historic downgrade of the United States' AAA sovereign 
debt rating.
    The effects of a default would quickly spill beyond the Treasury 
markets and into the broader economy. As noted, failure to meet 
interest payments or to redeem maturing Treasury securities could 
directly hit the finances of those who depend on Treasuries in their 
cash management--individuals, businesses, nonprofit institutions, and 
State and local governments. These entities in turn may struggle to 
meet their obligations to suppliers and creditors, undermining economic 
activity and damaging confidence.
    When the asset valued by millions of investors for its ``risk-
free'' nature suddenly assumes unanticipated risk of illiquidity or 
default, these investors and others will rapidly adjust their 
expectations--and grow increasingly cautious. Rising rates on Treasury 
securities could be expected to drive up interest rates for other 
borrowers and increase the cost of capital for corporate issuers and 
State and local governments. Home buyers hoping to price mortgages 
during the default period could face unpredictable swings in rates, and 
other variable-rate household borrowing could be affected.
    The damage would not be limited to our shores. The U.S. dollar is 
the world's reserve currency not because foreign banks and investors 
own huge stacks of greenbacks, but because they have access to highly 
liquid, low-risk securities denominated in dollars--namely, Treasuries. 
Default, as Fitch Ratings has noted, would undermine ``investor 
confidence in the full faith and credit of the United States . . . This 
`faith' is a key underpinning of the U.S. dollar's global reserve 
currency status and reason why the U.S. `AAA' rating can tolerate a 
substantially higher level of public debt than other `AAA' 
sovereigns.'' Lack of confidence in U.S. Treasuries is likely to reduce 
the value of the dollar relative to other currencies below what it 
otherwise would be.
    These multiple shocks--cash shortfalls, higher interest rates, 
diminished confidence, and international impacts--would be likely to 
undermine economic activity and growth. Their effects would also 
persist well beyond any resolution of the debt ceiling standoff and 
repair of defaults.
    How would this turmoil affect registered funds and their investors?
    Since the earliest days of the American Republic, mutual funds have 
been engaged in the markets for U.S. Government debt. In 1788, a pair 
of bankers in Amsterdam organized the first of what became more than 30 
investment trusts formed to speculate on the debts issued to finance 
the Revolution by the Continental Congress, the Continental Army's 
quartermaster and commissary corps, and the States. These complicated 
schemes could be ``possible only as long as the United States did not 
default on its interest payments.''\3\ Fortunately, even in those shaky 
early days of independence, the United States honored its obligations--
and it has done so ever since.
---------------------------------------------------------------------------
    \3\ ``The Origin of Mutual Funds,'' in The Origins of Value: The 
Financial Innovations That Created Modern Capital Markets (William N. 
Goetzmann and K. Geert Rouwenhorst eds., Oxford University Press 2005), 
at 264.
---------------------------------------------------------------------------
    Earlier, I reported that funds registered under the 1940 Act held 
more than 10 percent of their assets in Treasury and U.S. Government 
agency securities. Such holdings are pervasive--as of June 30, 30 
percent of mutual funds held these securities--as even equity funds 
rely upon Treasury securities for cash management and liquidity. The 90 
million Americans invested in funds thus share significantly in the 
risks associated with a Treasury default.
    It is important to note, however, that registered funds and their 
investors are not uniquely at risk. Nothing about the structure or 
activities of registered funds makes them or their investors any more 
vulnerable to the hazards of a Treasury default than any other 
investment product or investor. The damage of a default--or even of a 
second near-miss in a little over 2 years' time--would be visited upon 
every American who saves, who borrows, or who participates in the 
economy. No class of Americans will be immune to the impact.
    Given these effects, let me repeat my earlier message: no one 
should take lightly the prospect of a default on the United States' 
debt obligations. The credit of the United States emphatically should 
not be put into question.
Outlook for Fiscal Policy and the Risks of `Slow Default'
    The first fiscal year of the United States government was 1789. The 
national debt held by the public \4\ did not reach $1 trillion until 
1983--the 194th fiscal year in our history. Contrast that with our 
recent history: in four of the last 5 years (2009 through 2012), debt 
held by the public grew by more than $1 trillion.\5\
---------------------------------------------------------------------------
    \4\ As noted previously (Note 2), debt held by the public is the 
concept most commonly used in discussions of budget policy and its 
economic impacts. CBO's long-term projections, for example, are 
expressed in terms of debt held by the public. The discussion in this 
section will follow that convention.
    \5\ White House Office of Management and Budget, ``Historical 
Tables,'' Table 7.1, available at http://www.whitehouse.gov/omb/budget/
Historicals.
---------------------------------------------------------------------------
    The massive deficits of the past several years were accumulated as 
our Government fought the financial crisis and the subsequent recession 
and slow recovery. Future economists and historians will have to sort 
out whether these huge deficits were justified or had the effects that 
their advocates have claimed for them. However that may be, even the 
most ardent supporters of fiscal stimulus, beginning with John Maynard 
Keynes, would tell you that budget deficits incurred to counter a 
recession should be a temporary expedient.
    The tax and spending bargains reached so painfully in the past 3 
years have slowed the growth of debt, at least for the short term. But 
CBO's latest long-term projections show that progress will be short-
lived: by 2018, the debt held by the public will be rising again as a 
share of GDP. After that, CBO notes, ``growing deficits would 
ultimately push debt back above its current high level.'' CBO projects 
that by 2038, under current law and budgetary policies, Federal debt 
held by the public will reach 108 percent of GDP.\6\
---------------------------------------------------------------------------
    \6\ Congressional Budget Office, The 2013 Long-Term Budget Outlook, 
September 19, 2013 (``CBO, Long-Term Budget Outlook''), available at 
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44521-
LTBO2013.pdf, at 3.
---------------------------------------------------------------------------
    CBO also estimates an ``extended alternative fiscal scenario'' that 
projects deficits and debt under arguably more realistic budget 
assumptions: that the current spending caps of sequestration end, that 
spending constraints on Medicare and other Federal health programs are 
not maintained, and that discretionary spending resumes its historic 
growth rates. Under this alternative scenario, CBO projects that debt 
will reach 190 percent of GDP in 2038.\7\
---------------------------------------------------------------------------
    \7\ Id. at 84.
---------------------------------------------------------------------------
    Those two projections are based on CBO's best estimate of the 
impact of deficits and debt on economic growth. CBO points out that its 
projections are very sensitive to its forecasts of interest rates and 
economic growth. Moderate changes in those projections can drive the 
estimates of the debt burden up or down significantly.
    For example, CBO estimates that a 75 basis point increase in 
interest rates over its forecast would drive the debt held by the 
public to 132 percent of GDP in 2038, compared to 108 percent of GDP in 
the current-law baseline.\8\ Similarly, a reduction in the long-term 
economic growth rate of 0.5 percentage point drives the debt held by 
the public to 156 percent of GDP in 2038.\9\
---------------------------------------------------------------------------
    \8\ Id. at 97.
    \9\ Id. at 95.
---------------------------------------------------------------------------
    Let me point out two events that could make these downside risks 
more likely--resulting in a greater debt burden than CBO's baseline.
    First, nearly half of the debt held by the public is held by 
foreign investors. A rapid change in foreign investors' willingness to 
hold Treasuries could significantly increase the Government's interest 
costs, in excess of the rates CBO used in its forecasts.
    The sensitivity of interest rates has been demonstrated by recent 
events involving the Federal Reserve--the largest domestic holder of 
tradable Treasury securities, holding $2.1 trillion as of October 
3.\10\ The mere suggestion by Fed officials earlier this year that they 
would slow purchases of Treasury bonds under their'' quantitative 
easing'' policies drove interest rates on the 10-year Treasury bond up 
by as much as 125 basis points (1.25 percentage points).
---------------------------------------------------------------------------
    \10\ Federal Reserve Board, ``Factors Affecting Reserve Balances: 
Federal Reserve Statistical Release H.4.1,'' October 3, 2013, available 
at http://www.Federalreserve.gov/releases/h41/current/h41.htm#h41tab1.
---------------------------------------------------------------------------
    A second event that could worsen the debt outlook would be a larger 
than anticipated impact of the higher debt burden on economic growth. 
Economists generally agree that high levels of Government debt are 
associated with slower economic growth,\11\ but the mechanisms through 
which higher debt levels may cause economic growth to slow are not 
fully understood. A more sluggish pace of economic growth could cause 
the debt burden to worsen more than the baseline forecast.
---------------------------------------------------------------------------
    \11\ Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. 
Rogoff, ``Public Debt Overhangs: Advanced-Economy Episodes Since 
1800,'' 26 The Journal of Economic Perspectives 69, Summer 2012.
---------------------------------------------------------------------------
    Beyond these worrisome events, we must also recognize that the 
composition of our Federal budget is shifting in ways that will make it 
increasingly difficult to establish and maintain any discipline on 
spending. This trend involves the accelerating trajectory of growth for 
``mandatory spending''--programs, such as Social Security, Medicare, 
and veterans' benefits, which are funded automatically each year. It is 
these programs, outside the annual spending process, that increasingly 
drive the Federal budget.
    In its near-term forecast for 2014 to 2023, CBO projects that 
mandatory outlays will represent 61 percent of Federal spending over 
the next 10 years.\12\ Interest payments on the national debt--another 
unavoidable cost--will account for 11 percent. Discretionary spending 
will account for just about one-quarter of Federal spending--27 
percent. In fact, mandatory spending has become so dominant that 
eliminating all nondefense discretionary spending would just barely 
balance the budget over the forecast period.
---------------------------------------------------------------------------
    \12\ ICI calculations based on Congressional Budget Office, 
``Updated Budget Projections: Fiscal Years 2013 to 2023,'' available at 
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44172-
Baseline2.pdf.
---------------------------------------------------------------------------
    The dominance of mandatory spending is growing. By 2038, CBO says, 
Federal spending for health care and Social Security will be running at 
twice the average level of the past 40 years, while ``total spending on 
everything other than the major health care programs, Social Security, 
and net interest payments would decline to . . . a smaller share of the 
economy than at any time since the late 1930s'' (emphasis added).\13\
---------------------------------------------------------------------------
    \13\ CBO, Long-Term Budget Outlook, supra note 6, at 3.
---------------------------------------------------------------------------
    It is inconceivable that the U.S. electorate or political system 
would allow the discretionary activities of the Federal Government--
defense and domestic alike--to shrink to the scale that prevailed prior 
to World War II. Given that reality, it is difficult to maintain even 
the relatively pessimistic view of the CBO's baseline projection for 
the course of the national debt, absent significant reform and controls 
on mandatory spending.
    Rather than address the growth of mandatory spending, however, 
recent policy has tended to tilt the balance further. The automatic 
cuts of sequestration, for example, apply only to discretionary 
spending--leaving mandatory programs unscathed.
    Let me be clear--the programs funded through mandatory spending are 
very important. For example, on many occasions, ICI has expressed 
strong support for Social Security as the foundation of Americans' 
retirement security. Fulfilling our social contract by putting Social 
Security on a sustainable footing for the indefinite future is nothing 
less than a moral obligation.
    But paying our own bills--as a Nation, as a generation--that, too, 
is a moral obligation. The Father of Our Country, George Washington, 
warned against ``ungenerously throwing upon posterity the burden which 
we ourselves ought to bear.''\14\ Yet that is exactly the course that 
we are following.
---------------------------------------------------------------------------
    \14\ ``Washington's Farewell Address 1796,'' posted by The Avalon 
Project, Lillian Goldman Law Library, Yale Law School, available at 
http://avalon.law.yale.edu/18th_century/washing.asp. For a more 
complete discussion of Washington's views on the national debt, as 
expressed in his Farewell Address, see Paul Schott Stevens, `` 
`Warnings of a Parting Friend: Today's Fiscal Crisis and U.S. National 
Security,' '' National Strategy Forum Review, Winter-Spring 2012, at 
20; available at http://www.nationalstrategy.com/Portals/0/documents/
Winter-Spring%202012/Stevens-Warnings%20of%20a%20Parting%20Friend.pdf.
---------------------------------------------------------------------------
Conclusion
    The imperative need to increase the national debt ceiling and 
ensure that Treasury can borrow to finance the Government focuses 
urgent attention on the prospects and consequences of a default on 
Treasury securities. Make no mistake: that is an event our Nation must 
avoid. For generation after generation, since 1789, the United States 
has stood behind its financial obligations. Ours should not be the 
generation that fails to do so.
    It is no less imperative, however, to focus on the less dramatic--
but equally insidious--threat that our Nation faces from growing and 
unsustainable levels of debt. Even the relatively optimistic CBO 
baseline forecast paints a dire picture. The longer we delay decisive 
action, the worse our problems become and the harder they are to fix.
    The 90 million American investors that ICI's member funds serve are 
investing for a brighter future--a secure retirement, a better 
education, or a solid financial foundation. They need responsible 
action by their Government to protect the health of the economy and the 
financial markets on which they depend. They want Congress and the 
Administration to work together to put America on a path of fiscal 
responsibility.
    The health of our markets, the prosperity of our Nation, and the 
security of future generations all depend upon it.
    Thank you for your attention.
  RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM FRANK 
                            KEATING

Q.1. Since Congress has in the past always raised the debt 
limit in a timely manner, is it your opinion that during these 
discussions, or in the future, we will at some point deviate 
from this behavior? Why or why not?

A.1. Although Congress has never allowed debt limit debate to 
lead to an actual default, even approaching the deadline has 
severe consequences. Make no mistake, every time the U.S. 
government's willingness to pay its bills is questioned, there 
is a real cost to both taxpayers and the economy.
    The Bipartisan Policy Center (of which I am a board member) 
estimated the 2011 debt standoff cost taxpayers close to $20 
billion as nervous investors demanded higher interest on U.S. 
Treasury bonds to account for the risk of Government default. 
S&P highlighted this as additional risk when it stripped us of 
our coveted triple-A rating citing willingness to pay, not 
ability.
    Even the slightest uptick in Treasury interest rates would 
cascade through the economy. It would raise the costs for 
taxpayers to service our country's debt and would raise the 
cost of borrowing for businesses, meaning job losses and price 
increases. Default would be a blow to retirement funds, leaving 
fewer resources available for retirees. For banks, which hold 
$3 trillion in Treasury, agency and mortgage-backed securities, 
the sharp decline in value of those securities would translate 
into fewer resources available for mortgages, business, auto, 
credit card and student loans.
    Although Congress has never allowed the U.S. government to 
default on its debts, any debate that creates uncertainty has 
real costs, felt across the country. We need to change the way 
these discussions are held, or risk more self-inflicted 
injuries that will further undermine our still-fragile economic 
recovery.

Q.2. Do you believe Congress should reduce the deficit and 
begin toward the path of reducing the debt? If yes, and if the 
debt limit discussion is not the appropriate venue to discuss 
deficit reduction, what budgetary pressure points do you 
believe should be used by Congress to bring about legislative 
changes needed to enact meaningful deficit reduction?

A.2. The debt limit has risen twice as fast as the economy has 
grown in the last two years. While our debt has increased 
roughly $2.4 trillion, our increase in GDP has been less than 
half that. As our standard of living continues to decline, and 
the Government continues to borrow beyond its means, at what 
point do you believe our lenders stop lending money? If this 
were to occur, what would be the financial and economic impact 
on your particular industry?
    There should be a wholesome debate about how taxpayer 
dollars are spent in the future. We need to be sure that those 
precious tax dollars from hardworking American's are used in 
the most productive way possible. But we should not confuse the 
need to pay our bills for things that Congress has already 
approved and spent with the management of spending that is 
appropriate for the future.
    To use a credit card analogy, the decision about what to 
buy on credit tomorrow must take into account the debt we 
already owe, but that is never an excuse for not paying the 
current bill on time and in full.
    Markets, not Congress, truly determine our Government's 
ability to borrow. Our debt is already 70 percent of our GDP. 
While the sequester is expected to reduce debt-to-GDP for a few 
years, even it fails to arrest the longer-term upward 
trajectory. According to the Congressional Budget Office (CBO), 
by the year 2043 entitlement programs and debt service payments 
alone are projected to outstrip revenues. This means that there 
will be no funds at all for any discretionary spending. It is 
impossible to address the long-term sustainability of our debt 
without addressing the growing costs associated with our 
entitlement programs.
    The CBO predicts that in the next 25 years our debt will 
surpass 100 percent of our GDP. This would put us in the same 
league as the fiscally unstable countries that led Europe into 
crisis. Already, the U.S. debt amounts to nearly $54,000 per 
person, and $148,000 per taxpayer. The interest payments alone 
on our debt will cost over $8,000 per U.S. citizen in 2013. 
Addressing future spending and bringing our debt down to 
sustainable levels must be done in a bipartisan way. My 
experience serving on the Domenici-Rivlin commission gives me 
hope that tough decisions can be made for the good of our 
country.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM KENNETH E. 
                          BENTSEN, JR.

Q.1. Since Congress has in the past always raised the debt 
limit in a timely manner, is it your opinion that during these 
discussions, or in the future, we will at some point deviate 
from this behavior? Why or why not?

A.1. We believe it is vitally important for the Government to 
make good on its financial obligations and not default in any 
manner. The consequences of a delay or failure to raise the 
debt ceiling creates significant uncertainty throughout the 
financial markets, raises the cost of borrowing for the U.S. 
Government, and threatens the continued benchmark status of 
Treasury securities. As has been documented by the GAO and the 
Bipartisan Policy Council, the 2011 delay in raising the debt 
ceiling increased Treasury borrowing costs by $1.3 billion in 
2011 with 10-year costs estimated at $19 billion. In the most 
recent run-up to the debt ceiling deadline Treasury borrowing 
rates for short-term bills increased significantly just one 
month previous. For example, on October 9 the Treasury 
auctioned a five-day cash management bill at 30 basis points; 
one month before, on September 10 the Treasury had auctioned a 
five-day cash management bill at 4 basis points. Also, in the 
weeks immediately preceding the October 2013 deadline short 
term rates, particularly in the repo market, rose 
significantly. As wholesale funding costs rise in the repo 
market, the cost of credit throughout the economy will rise. 
Given the expectations in the market that Treasury will pay its 
debt timely, the consequences of any delay raise cost 
throughout the economy unnecessarily.

Q.2. Do you believe Congress should reduce the deficit and 
begin toward the path of reducing the debt? If yes, and if the 
debt limit discussion is not the appropriate venue to discuss 
deficit reduction, what budgetary pressure points do you 
believe should be used by Congress to bring about legislative 
changes needed to enact meaningful deficit reduction?

A.2. SIFMA believes that Congress and the Administration must 
come together and develop a plan to substantially reduce our 
long-term budget deficits with a goal of at least stabilizing 
our Nation's debt as a percentage of GDP--which, we recognize, 
will entail difficult choices for policymakers. The resulting 
plan must be long-term, predictable and binding. The financial 
markets and Main Street businesses need confidence that the 
long-term fiscal outlook will be addressed.

Q.3. The debt limit has risen twice as fast as the economy has 
grown in the last two years. While our debt has increased 
roughly $2.4 trillion, our increase in GDP has been less than 
half that. As our standard of living continues to decline, and 
the Government continues to borrow beyond its means, at what 
point do you believe our lenders stop lending money? If this 
were to occur, what would be the financial and economic impact 
on your particular industry?

A.3. Default, delays in payments, weak Treasury auctions, and a 
perception that policymakers are unable to deal with either 
short or long-term fiscal issues, could result in a reduction 
in foreign purchases of Treasury securities, or sell offs of 
existing foreign holdings. Foreign investors, most notably 
foreign governments and central banks, hold 40% of outstanding 
Treasury debt or about $5.6 trillion of the currently 
outstanding debt. Foreign investors would be less likely to 
participate aggressively at auction and may sell current 
holdings to reduce exposure. The truly unprecedented nature of 
a failure to make timely payment on Treasury debt would have 
thrown markets into disarray by undermining the important 
benchmark characteristics of Treasury debt.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM GARY 
                             THOMAS

Q.1. Since Congress has in the past always raised the debt 
limit in a timely manner, is it your opinion that during these 
discussions, or in the future, we will at some point deviate 
from this behavior? Why or why not?

A.1. We certainly hope Congress will continue to raise the debt 
ceiling in a timely manner; however, we remain concerned that 
congressional gridlock over raising the debt ceiling has 
unintended consequences which may harm the housing market. A 
default, or even the perceived threat of a default, could 
result in a harsh and long-lasting recession, which may be even 
more severe than the previous economic downturn. As the U.S. 
Treasury and others have stated, political brinkmanship during 
the 2011 debt ceiling was responsible for financial market 
disruptions, reduced consumer and business confidence, and 
slower job growth. Even though lawmakers were able to raise the 
debt limit before the Treasury expended its remaining cash on 
hand, we worry that continued political gridlock could cause 
our economic recovery to freeze.

Q.2. Do you believe Congress should reduce the deficit and 
begin toward the path of reducing the debt? If yes, and if the 
debt limit discussion is not the appropriate venue to discuss 
deficit reduction, what budgetary pressure points do you 
believe should be used by Congress to bring about legislative 
changes needed to enact meaningful deficit reduction?

A.2. We believe that Congress should continue to debate about 
how best to continue the path of reducing the deficit and 
ultimately the debt. Again, our concern is that even the hint 
that the United States might not pay some or all of its debts 
could hinder our nascent economic recovery and damage the 
fragile housing market.

Q.3. The debt limit has risen twice as fast as the economy has 
grown in the last two years. While our debt has increased 
roughly $2.4 trillion, our increase in GDP has been less than 
half that. As our standard of living continues to decline, and 
the Government continues to borrow beyond its means, at what 
point do you believe our lenders stop lending money? If this 
were to occur, what would be the financial and economic impact 
on your particular industry?

A.3. Predicting if or when our creditors will stop lending to 
the United States is beyond the capability of our organization. 
However, if the United States were unable to borrow at all, we 
anticipate it would be devastating to the real estate industry 
and for our overall economy.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM PAUL 
                         SCHOTT STEVENS

Q.1. Since Congress has in the past always raised the debt 
limit in a timely manner, is it your opinion that during these 
discussions, or in the future, we will at some point deviate 
from this behavior? Why or why not?

A.1. If the Government is spending more than its revenues, 
failing to raise the debt ceiling means that the United States 
does not pay someone for services rendered or debts owed bond 
holders, businesses, contractors, businesses, Government 
workers, etc. Reneging on any payment owed will imperil the 
finances of those who are due the payments.
    And once the Treasury has exercised the option to delay 
debt payments, investors will learn a lesson that cannot be 
unlearned, even after all missed or delayed payments have been 
made good. One crucial element of the United States' success in 
funding its debt is the Treasury market itself. The Treasury 
market depends for its stability on the ``full faith and 
credit'' of the United States and certainty of its regular 
operations. The United States, like any other debtor, must 
maintain the confidence of its creditors or risk consequences. 
Treasury securities will carry a future risk further missed 
payments, and that risk will be priced into the interest rate.
    Not raising the debt limit when the Government is spending 
more than its revenues would put into question the credit 
worthiness of the United States. The credit of the United 
States should not be put into question.

Q.2. Do you believe Congress should reduce the deficit and 
begin toward the path of reducing the debt? If yes, and if the 
debt limit discussion is not the appropriate venue to discuss 
deficit reduction, what budgetary pressure points do you 
believe should be used by Congress to bring about legislative 
changes needed to enact meaningful deficit reduction?

A.2. As I indicated in my testimony, the failure of the United 
States to bring our debt under control is as insidious and 
destructive as missing a debt payment, and on current trends 
seem seven more likely. It is imperative for our Nation to face 
the growing and increasingly unsustainable levels of national 
debt. The longer we delay decisive action, the worse our 
problems become and the harder they are to fix.
    As I noted in an answer to Senator Warren's question, it is 
certainly appropriate, and even valuable to have a debt ceiling 
to focus our attention on the urgent need finances. 
Nevertheless, for the Treasury to spend more than its revenues 
requires debt to finance that gap, and ultimately an increase 
in the debt ceiling.

Q.3. The debt limit has risen twice as fast as the economy has 
grown in the last 2 years. While our debt has increased roughly 
$2.4 trillion, our increase in GDP has been less than half 
that. As our standard of living continues to decline, and the 
Government continues to borrow beyond its means, at what point 
do you believe our lenders stop lending money? If this were to 
occur, what would be the financial and economic impact on your 
particular industry?

A.3. It is not easy to predict exactly where the tipping point 
is when our debtors stop lending money. Nearly half of the U.S. 
Government's public debt is held by foreigners. A rapid change 
in foreign investor's willingness to hold Treasuries could 
significantly increase the Government's interest costs and 
seriously impair our Nation's ability to fund vital 
expenditures. Should we reach such a tipping point, the 
consequences would extend well beyond our 90 million fund 
investors, and would imperil our economy and security more 
broadly.
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