Yellen Says Congress Risks Creating a Self-Made Crisis With ‘Unthinkable’ Debt Default

Treasury Secretary Janet Yellen delivers remarks in Washington, on Feb. 9, 2023. Leah Millis/Reuters

Treasury Secretary Janet Yellen accused the Republican-controlled House of creating a self-made crisis over its stance on the debt ceiling.

Yellen, who was attending a Group of Seven (G7) conference in Niigata, Japan, called on Congress to raise the $31.4 trillion federal debt limit to avert a U.S. government default that would trigger a global economic crisis and undermine the strength of the world’s largest economy.

The secretary issued prepared remarks at a press conference ahead of her meeting with her counterparts from the G7 nations on May 10, along with India, Indonesia, and Brazil.

The Treasury Department has warned the U.S. government could default as soon as June 1 without a deal.

“A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” said Yellen.

“It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests.”

Biden Meets With GOP Leaders to Negotiate Over Debt Limit

President Joe Biden met with top Republican and Democrat legislators on May 9 to resolve the three-month standoff over the debt limit.

After what Biden called a “productive” meeting, both parties agreed to meet again on May 12 to solve the impasse before the June 1 deadline.

The president said that Congress’s failure to act before the government runs out of money would throw the economy into a recession, and he insists that the legislature pass a bill to lift the debt ceiling without conditions.

House Republicans said that any increase in the debt limit must be tied to major spending cuts to lower the federal deficit.

The White House has discussed invoking the 14th Amendment of the U.S. Constitution to push through a ceiling hike, as it states that the “validity of the public debt of the United States, authorized by law … shall not be questioned.”

That move may give the administration a way to issue the debt needed to pay the off government’s bills and ignore Congress over the debt ceiling.

Yellen said that circumventing Congress was not a short-run solution and that it appears “legally questionable whether that’s a viable strategy.”

US Government Edges Closer Toward Default

After the federal government ran up against its legal borrowing limit in January, the Treasury has been carrying out “extraordinary measures” to avoid missing payments on its bills.

Yellen has been repeatedly critical of Republicans’ brinksmanship with the Biden administration over the issue, calling the current situation a “crisis of our own making.”

House Speaker Kevin McCarthy (R-Calif.) called for trillions of dollars in spending cuts over the next decade in return for an increase, which Biden has resisted.

Yellen added that the threat of a default would lead to a downgrade of the government’s credit rating and weaken consumer confidence, similar to what happened during the last battle over the debt ceiling in 2011.

“We could see a rise in interest rates drive up payments on mortgages, auto loans, and credit cards. We are already seeing spikes in interest rates for debt due around the date that the debt limit may bind,” she warned.

Yellen also called U.S. Treasury securities the most valuable assets in global financial markets, and that a U.S. default would cause a loss of confidence, leading to a worldwide depression.

Yellen Calls for Changes to Fiscal Policy Rules

According to the U.S. Constitution, Congress has the right to set a ceiling on how much the federal government can borrow, but since it spends far more than it takes in, lawmakers must periodically raise that cap.

The secretary also suggested a new system to handle national finances and avoid congressional approval of a debt-ceiling hike.

“Personally, I think we should find a different system for deciding on fiscal policy,” Yellen in response to a question, and said that Congress could repeal the cap or handle it differently.

Yellen said that under a new system, the president would be able to raise the debt ceiling, but Congress could only override that decision with a two-thirds supermajority that would negate any attempt at a veto.

She said that the current system puts the government in a position where “we can’t pay all the government’s bills, and I don’t think that’s any way to run the government,” noting that this has occurred nearly 80 times since 1960.

“To go through this every couple of years is tremendously damaging,” Yellen said.

For now, she believes that raising the cap to avert a default on the national debt remains the only short-term solution.

“There are choices,” but “the answer is there is no good alternative that will save us from catastrophe,” Yellen said.

“The only reasonable thing to do is to raise the debt ceiling and avoid the dreadful consequences that will come if we have to make those choices.”

However, she said she was still “very hopeful that the differences can be bridged and the ceiling will be raised.”

The Associated Press and Reuters contributed to this report.