Testifying before the Senate Finance Committee during an unusual 8 a.m. hearing, Treasury Secretary Jacob Lew all but ruled out the chances that the Obama administration would try to prioritize who gets paid in the event that next week's debt ceiling deadline passes.
The Treasury Department has been deploying extraordinary measures since May to ensure the government pays all it bills. The nation hit the $16.67 trillion debt ceiling then and has been moving money between accounts to ensure the bills are paid. Those measures run out next week, and Lew told lawmakers they were playing with fire if they don't do something before next week.
"I very much fear that a miscalculation ... could lead to an unintended but very severe consequence," Lew said, noting that he's seen swings in daily incoming revenue and that the government could unintentionally default on its obligations before the Oct, 17 date or after it.
Asked by Pennsylvania Republican Sen. Pat Toomey why the Treasury Department won't guarantee bondholders the government won't default on these debts, Lew shot back, "Senator, all the options are bad." If the deadline is passed, he warned, "were going to be ... in uncharted territory."
Lew pointed to a tripling of short-term borrowing costs for the government over the past week and warned that the closer to the nation gets to the Oct. 17 deadline the more risk of panic in markets that erases wealth and harms the economy.
It was a warning echoed by Sen. Maria Cantwell, D-Wash.
"By Friday or Monday you could see ...as much as a 25 percent drop in the stock market ," she said, citing discussions she'd had with market participants. "We don't have to go to default. Just talk of default is causing the uncertainty we're trying to avoid."
In August 2011, the last time the Congress went to the brink over the debt ceiling, stocks fell by about 20 percent. Economists believe it slowed growth that had been gaining momentum and harmed consumer confidence.
Asked about prioritizing payments due so that bondholders get paid, and so do Social Security recipients, military families and so on, Lew suggested it couldn't be done.
"This system was not designed to be turned off selectively," he said.
Lew repeatedly warned that it's not just a matter of paying interest to bondholders to prevent a default on U.S. government bonds, but rather the hundreds of millions of dollars of bonds that roll over in coming weeks. These bonds are used as collateral in all sorts of financial transactions and if financial markets decide they won't trade then until the government is funded it could cause financial markets to seize up.
Along with rising short-term borrowing costs, Thursday also brought a sharp spike in first-time claims for unemployment, which rose by 66,000 in a sign that the government shutdown and debt-ceiling debate are following the script of 2011.
Much of Thursday's appearance by Lew was spent on old-fashioned politicking, with senators from each sides playing to the cameras.
Grilled by the top Republican on the panel, Utah's Orrin Hatch, Lew refused to offer a number for how long or by how much the Obama administration would like to see the debt ceiling raised.
"Those are two simple questions," Hatch said, frustrated by a lack of response.
The administration doesn't want to offer a number because voters are always angry over the large number involved in raising the debt ceiling, which allows the government to borrow to pay bills already racked up. The debt ceiling does not amount to new spending but rather allows government to pay existing creditors.
The non-partisan Congressional Budget Office has put the cost of raising it for another year at about $1.3 trillion. Senators mentioned that number repeatedly, and Lew carefully avoided acknowledging any number in favor of as long an extension as possible.
In a sign of how farcical the debate had become, lawmakers agreed that the nation was headed, figuratively, towards a cliff. But even there they couldn't agree how they were heading there.
"We are like a blindfolded man walking towards a cliff," warned Sen. Charles Schumer, D-NY.
Later, Sen. Pat Roberts, R-Kansas, countered that "I think we're walking towards the cliff with our eyes wide open."
Iowa Republican Sen. Charles Grassley pressed Lew, a Washington insider since the 1970's, on the administration's assertion that past administrations haven't been subjected to negotiating the debt limit. In fact they have repeatedly since 1917, quite often since the mid-1990s.
Lew acknowledged that it has been attached to budget deals and other spending-related agreements, but noted that in August 2011 the Tea Party influence in the House of Representatives changed the historical dynamic. They were willing to default to win a political battle, he said.
"The question is, is it going to be used as a threat to the economy and that can't be," said the Treasury secretary.
Senate Republicans blasted Lew and Obama for failing to negotiate as the deadline loomed.
Past congresses haven't had to deal with a President " who said he won't negotiate," said Sen. Rob Portman, R-Ohio.
Obama is scheduled to meet with House Speaker John Boehner, R-Ohio, on Thursday.