'This Week' Roundtable: Economic Outlook

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to the limit. Because the fact of the matter, we do not...

AMANPOUR: And default?

KRUGMAN: Possibly, if -- if we have complete -- if we have demands

for a large change in policy under threats of debt limit. This has to

be the point where you say, no, we don't believe in letting hostages be

taken.

AMANPOUR: Do you -- I mean, do you agree with that?

ALTMAN: No, I don't. I respect Paul, but I don't. I think default

would be a profound and hugely negative step. I think it would be

terribly destabilizing. I think it would reduce the amount of

institutions around the world that would, in the future, buy Treasury

debt and be...

KRUGMAN: But let me make my case here. We...

(LAUGHTER)

OK, but let me just say, we have an enormous budget dispute. We

have vastly opposed poles of policy. That's not something we should

resolve with a, you know, with a bomb hanging over our head. It's not

something we should try and change. And so Democrats have to make clear

that they're not going to let themselves be blackmailed in that way.

HOLTZ-EAKIN: The first choice is real solutions, so real cuts in

the near term, real targets over the medium term and real changes in the

entitlement proms.

It has to be -- the most convincing thing for markets is the actual

changes in the policy. It's what Americans know has to be done and it's

what would be best for the country. The backup is just a framework; we

promise to hit this target or that target with enforcement -- that's

less compelling. It might be easier to say, but less compelling.

AMANPOUR: An article -- a story that's in The Washington Post

today, talking about the negotiations between Vice President Biden and

congressional leaders, talking about federal pensions and what would

amount to about a 5 percent cut in salary. Does that -- is that a goer?

HOLTZ-EAKIN: I believe, as a matter of politics, the federal

government employees can't be exempt from whatever the deal is. The

perception that somehow everything has to change for Americans, but that

the sheltered few in D.C. are exempt -- nah, it's not going to fly.

BAIR: Can I just say I really -- I'm sorry, but I'm truly

frightened by even suggestions that we could default on Treasury debt.

I think the knock on impact on that would be tremendous. We would lose,

I assume, our AAA credit rating. A lot of institutions who currently

hold Treasuries would no longer be able to hold them. They would have

to liquidate them. That would create tremendous down-pressure on bond

prices.

The fact that interest rates would spike in terms of what Treasury

has to pay -- those yields all consumer and business credit price off of

Treasury yields, so borrowing costs for the real economy would go up.

Both consumers and businesses now are very hesitant and uncertain,

so they're not committing capital. If their borrowing costs go up, it

will -- it will be very detrimental to the economic recovery.

So I'm sorry, but I think -- it truly frightens me.

KRUGMAN: No, I'm terrified...

BAIR: I don't think we should be talking about it.

(LAUGHTER)

KRUGMAN: But I'm also terrified by a blackmail political system.

BAIR: Yeah.

AMANPOUR: On that note -- on that terrifying note...

(LAUGHTER)

... we're going to have to pick this up another time.

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