Federal Reserve chairman Ben Bernanke has warned of a Lehman-style meltdown if the US Congress uses the national debt limit as a "bargaining chip".
He argues this would "cause interest rates on mortgages... to rise, rattle financial markets and hurt the economy”, the BBC reports. In the worst case, it risked another Lehman-style crisis, he told the Senate banking committee.
Congressional Republicans have threatened not to approve the legal limit on government debt if President Obama does not make deep spending cuts.
The government is not allowed to exceed a ceiling on its total outstanding debts - currently $14.3tn (£8.8tn) - set by Congress.
But this does not prevent Congress from passing legislation that raises government spending and cuts taxation, implicitly requiring the federal government to run a deficit.
The US government is set to run up against the debt ceiling in a matter of days unless the Republican-controlled Congress passes legislation raising the limit. A failure to raise the limit would force the government to either break the limit or else default on payment obligations, according to the BBC.
"It is a risky approach not to raise the debt limit in a reasonable time," said Bernanke at the Senate committee hearing.
"The worst outcome would be one in which the financial system was again destabilised as we saw following Lehman, for example, which would of course have extremely dire consequences for the US economy."
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