Once upon a time, Congress didn’t want to raise the debt ceiling, and sent the country into default. It was bad, and we shouldn’t do it again. The end.
Back in 1979, Congress waited, and waited, and waited to lift the debt ceiling, because Congress never likes taking responsibility for the tax and spending decisions it’s already made. [...] Congress did raise it right before defaulting on our obligations would have been unavoidable … but that didn’t let us avoid defaulting on our debt. At least not $120 million or so of it.
The government eventually paid back everyone what it owed with interest, but that didn’t erase this accidental default from the market’s memory. Short-term interest rates shot up 0.6 percentage points after the Treasury missed its payments, as you can see in the chart [above] from Terry Zivney and Richard Marcus, and remained higher than they otherwise would have been for a few months at least. It wasn’t the end of the world, but it wasn’t exactly something we want to repeat either.
But it would be much, much closer to Armageddon if we did this today. Blame shadow banking.