US default would trigger ‘significant volatility’ and ‘breakages’ in financial system, SEC Chairman warns

US default would trigger ‘significant volatility’ and ‘breakages’ in financial system, SEC Chairman warns
Bill Clark/Pool/AFP/Getty Images

Gary Gensler, the chairman of the Securities and Exchange Commission, warned lawmakers Tuesday that a US default would likely set off historic stress in financial markets because Treasuries are the bedrock of the entire system.

“Although we don’t know for sure, we’d have significant volatility in the markets and we’d see some breakages in the system, but I couldn’t predict which firms,” Gensler said during the House Financial Services Committee hearing.

Gensler, who previously served as a senior official at the Treasury Department and led the Commodity Futures Trading Commission, added that there is great uncertainty over what would happen to mortgages, auto loans and money market funds — as well as the banks that rely on money market funds.

“We’d be in very uncharted waters. The uncertainties abound about this,” Gensler said.

The SEC chairman said what is known, however, is that US Treasuries sit at the “base of our entire capital markets.”

“If that were to go into default, we’d be in for some of the greatest challenges in our financial sector, much greater probably than what we’ve seen in the past,” Gensler said.

The United States could be just weeks away from defaulting on its debt for the first time ever.

The $28.4 trillion debt limit was reinstated August 1. Since then, Treasury Secretary Janet Yellen has been keeping the nation’s finances afloat by using emergency accounting maneuvers. Known as “extraordinary measures,” these steps allow the government to borrow additional funds without breaching the debt ceiling.

But Yellen has warned lawmakers that if Congress fails to raise, or suspend, the debt ceiling, the federal government will exhaust those extraordinary measures by October 18.

“At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” Yellen wrote in a letter to Congress. “It is uncertain whether we would continue to meet all the nation’s commitments after that date.”

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