Side Effects Great if Debt Ceiling Not Raised

Tom Smith told CBS Atlanta the effects on a government default and credit rating downgrade are, in some cases, unpredictable.

Congress continued to debate Thursday on plans to increase the nation’s debt limit and cut government spending less than one week before the United States Treasury estimates it won’t have enough cash to pay all of its obligations.

At issue is a balance between raising the debt ceiling — the amount of money the government is able to borrow — and cutting into a growing deficit. Raising the debt limit would allow the treasury to continue cutting checks but major agencies have hinted at downgrading the government’s credit rating should the nation go into default.

Politicians on both sides of the aisle have debated over a course of action for weeks as uncertainty grows.

Tom Smith, an assistant professor in the practice of finance, said there’s no way of knowing exactly what will happen to the economy in the event of government default.

Such an instance has never occurred.

“I think it’s a game of chicken with the economy they’re playing and it’s a pretty drastic game of chicken,” Smith told CBS Atlanta Wednesday afternoon (VIDEO).  I think they will come to an arrangement — a deal — and I hope it’s an arrangement that will actually make sense.”

Smith said interest rates on car and home loans would likely go up because they’re tied to treasury securities. How much and how quickly interest rates rise is tough to predict.

“Everyone should worry about a failure to agree on the debt ceiling and a debt default,” Goizueta professor Ray Hill told the Atlanta Journal-Constitution. “It would be like jumping off a cliff without knowing how far you could fall.”

Hill, an assistant professor in the practice of finance,  said he’s skeptical of predictions that a downgrade and interest rate increase will cause another recession, but adds it’s not worth the test.

“I can imagine scernarios in which failure to lift the debt ceiling does not lead to default and scenarios in which default does not lead to a severe disruption in financial markets,” he said. “But it is not worth taking the risk.”


ABOUT THE EXPERTS

Smith (bio) joined Goizueta in 2008. He has held faculty positions at the University of Illinois–Chicago, National-Louis University, Loyola University, and North Central College. Smith received a PhD in labor and demography/cultural economics and policy from the University of Illinois at Chicago in 1998 and holds a BA from Illinois Wesleyan University. He has also served as a consultant for the arts, music and entertainment industry. His expertise is in cultural economics — including sports, arts and religion —  real estate economics and labor economics.

Hill (bio) joined Goizueta  in 2003 and teaches managerial economics and finance. Hill began his academic career by teaching economics at Princeton University, before leaving in 1982 to become an investment banker. In that role he worked around the world.  Hill returned to his native Georgia in 1993 and worked for ten years at Mirant Corporation and its predecessor, a subsidiary of Southern Company. During that time he served as the company’s chief financial officer, except for an eighteen month stint as a CEO of one of the largest independent power companies in Asia, which was owned by Southern. His expertise includes project finance, monetary policy and energy economics and finance.

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