Bankrupt the Economy, or Increase Foreclosure Rate?

Posted by Jim DeBellis on May 26th, 2011

We’ve been hearing an awful lot of political banter about raising the debt ceiling in recent weeks, but now we’re starting to see some articles, all spawned by a report from the Center for American Progress, telling us that failure to raise the debt ceiling will “torpedo the housing market” and result in “economic pain and a high foreclosure rate.” Possible, I suppose – but continuing to borrow boatloads of money could sink the whole economy.

Few people believe that Congress won’t reach some kind of compromise involving spending cuts that will, for better or worse, muster the votes to raise the debt limit again…but is this latest report just more political scare tactics, or will failure to raise the debt ceiling really send the housing market even further into the depths of hell?

First of all, the Center for American Progress (founded by John Podesta, funded by George Soros, with the motto: “Progressive ideas for a strong, just, and free America”) is a partisan source. Nevertheless, their argument that putting a lid on borrowing will put upward pressure on interest rates has merit. Tighter credit may well cause interest rates to rise.

However, if we stop borrowing, our trading partners and those who own and buy our debt will have more confidence in our economy, currency, and ability to repay our debt. Therefore, our debt instruments (Treasury bonds) will be more lucrative, and we won’t have to tempt buyers with high rates of interest in order to get them to buy or hold our debt. They will be willing to take a lower rate of return in exchange for a lower risk factor. The dollar will be stronger, our imported goods will cost us less, and that includes food commodities and oil as well.

The fallacy of the debt ceiling argument is that it doesn’t consider the big picture. At our current tipping point, more borrowing is perhaps more likely to do greater damage to the entire economy than higher interest and a stronger dollar – which may cure more ills than it creates. Sometimes there’s no escaping the fact that some sector is going to have to suffer for a while before we can truly heal, and housing may have to endure the scourge of higher interest rates in order to bring balance and recovery to the economy as a whole. More government borrowing may keep us from feeling the pain, but the disease may linger on indefinitely.