In an interview with conservative radio host Hugh Hewitt Tuesday evening, the former chairman of Obama's Council of Economic Advisers denied that the White House is crying wolf over the debt ceiling, as many believe the administration did over the sequestration cuts before they went into effect earlier this year. But he acknowledged that public confusion over the timeline of events that would lead to a default could create a credibility problem for the White House.
It's the timing, not the impact, of a possible default that's in question. That's where the fuzziness comes in, Goolsbee says.
One source of confusion is the Oct. 17 line drawn by Treasury Secretary Jack Lew. That date refers not to when he expects a default, but to when he expects to no longer have any ability to borrow funds. Since hitting the debt ceiling in May, Lew has been taking extraordinary measures to create headroom for borrowing under the debt ceiling.
Oct. 17 is the last day that Lew expects to be able to guarantee that the Treasury won't miss a payment on the debt or any of the government's other obligations.
But beyond that point, anything could happen. "They will not be able to borrow starting on that day," Goolsbee said. "They have very small few means to go about continuing operations, $30 billion of which, which they’ve publicly said here’s all we have. That won’t get us very far."
The Congressional Budget Office has estimated that the Treasury will run out of cash by Oct. 22. The Bipartisan Policy Center places that date between Oct. 22 and Nov. 1. If markets haven't panicked before then, that is the point at which the Treasury could miss a payment on its bonds or on payments to programs like Social Security and Medicare, sending markets into a tailspin.
Missing an interest payment, Goolsbee said, would be "the economic nuclear bomb, for sure."
He added: "If those Treasury bonds were in default, there is no bank in America that would not be instantly insolvent."