Geithner: Inaction on debt limit could lead to double-dip recession

A short-term default on government debts would do “irrevocable damage” to the American economy, according to Treasury Secretary Timothy Geithner.

In addition, failing to raise the debt limit and forcing the government to miss payments on some obligations would “likely push us into a double dip recession,” he warned Friday in one of the administration’s bluntest warnings yet on the dangers of inaction.

In a letter sent to Sen. Michael Bennet (D-Colo.), Geithner painted a bleak picture of what would happen if Congress were to fail to raise the $14.3 trillion debt limit in time. A government default would hurt an already weak housing market, drive down household wealth by hitting 401(k) accounts and pension funds, and actually increase the government’s debt burden by driving up costs.

{mosads}Bennet had written to both Geithner and Federal Reserve Chairman Ben Bernanke in March, asking for specifics on what exactly would happen if lawmakers did not approve an increase.

Some Republicans have accused the Treasury of employing scare tactics in the debt limit debate, and have maintained that the U.S. does not necessarily have to default if it is not raised. But Geithner was insistent in the letter that no increase to the debt limit would mean a default.

“Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our servicemembers, citizens, investors, and businesses,” Geithner told the senator. “This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our Nation’s economy, significantly reducing growth, and increasing unemployment.”

Geithner made clear that any default on payments, no matter how short, would do irreversible damage to the United State’s reputation in financial markets across the world.

“Investors have absolute confidence that the United States will meet its debt obligations on time, every time, and in full,” he wrote.”A default would call into question the status of Treasury securities as a cornerstone ofthe financial system, potentially squandering this unique role and the economic benefits that come with it.”

Geithner has been a leading voice for the White House in the fight over raising the debt limit. He has repeatedly called on lawmakers to raise the ceiling promptly, warning of catastrophic economic consequences if the government were to default.

While Republican leadership has acknowledged the limit will ultimately need to be raised, the GOP is still looking to leverage the tough vote to increase the limit to win major spending reforms, such as a balanced budget amendment.

Geithner has informed lawmakers that the government will likely hit the debt limit on Monday, but that the Treasury has enough tools that it can avoid a default until August 2.