WASHINGTON — Treasury Secretary Jacob Lew and financial industry officials warned lawmakers on Thursday about the multitude of economic consequences that a default on government debt could bring, just days before the country reaches its borrowing limit.

The Senate Finance Committee and the Senate Banking Committee held back-to-back hearings examining the problem, with Democratic lawmakers and witnesses continuing to raise warnings ahead of an Oct. 17 cutoff, after which the Treasury Department estimates the government will have to manage its bills with cash on hand.

Elsewhere in Congress and at the White House, there were signs that the stalemate over the debt ceiling and other fiscal woes could be coming to an end — at least temporarily -- though it's not yet clear that a concrete deal to raise the borrowing limit is in sight. Those discussions come as the federal government remains shut down after lawmakers failed to pass a spending bill for the new fiscal year that started Oct. 1.

"If Congress fails to meet its responsibility, it could deeply damage financial markets, the ongoing economic recovery and the jobs and savings of millions of American," Lew told the finance panel. "I have a responsibility to be transparent with Congress and the American people about these risks, and I think it would be a grave mistake to discount or dismiss them."

The head of the Treasury Department also reiterated that the government's hands will be tied if it runs out of cash, attempting to counter Republican claims that the agency can reorder its payments to avoid the worst of the fallout.

"I don't believe there is a way to pick and choose on a broad basis. The system was not designed to be turned off selectively. Anyone who thinks it can be done just doesn't know the architecture of our multiple payments that are very complex," said Lew. "Prioritization is just default by another name. It's just saying we will default on some subset of our obligations."

He also sparred with Republicans over the White House's willingness to negotiate on major fiscal issues, reiterating that President Obama is open to sitting down with the GOP.

"I think the president's budget does reflect his openness to serious entitlement reform. And he has been willing to work on a bipartisan basis to do things that are unpopular on the Democratic side," said Lew. "He is just looking for a partner to work with who is willing to have some give and take, not just one way."

At the banking panel hearing, meanwhile, financial industry officials from several key trade groups further highlighted the problems a default could cause — and detailed the impacts already being felt.

"The confidence of our buyers and sellers is waning very rapidly. We have transactions cancelling right now, we have people not being able to get loans — if we can't get beyond where we're at, it's going to go backwards very, very fast," said Gary Thomas, president of the National Association of Realtors.

Banks and investors are also increasingly nervous, several panelists said.

"The lending community, the borrowing community, the community banks and even the large institutions that I work for are very alarmed because of the uncertainty, because of the panic, because of the potential for long-term destructive results," said Frank Keating, president and chief executive of the American Bankers Association.

Kenneth Bentsen, president of the Securities Industry and Financial Markets Association, added that investors are already "voting with their wallets and their feet."

"The market has already signaled increasing concerns regarding the public debt limit, resulting in dramatic pricing effects on the short end of the Treasury market and repurchase agreements or repos," he said.

They also warned that letting the country fall into default would do substantial harm, in large part because of the ongoing uncertainty around the potential impacts — even as they agreed that the country must enact longer-term fiscal reforms to the tax code and entitlement programs down the line.

"We're in terra incognita — we really don't know what the impact would be," said Paul Schott Stevens, president and chief executive of the Investment Company Institute. "There would be lots of individual decision-makers, holders of Treasury securities, that would enter into whether we'd be able to roll our bills next Thursday or what the rate would be that they're willing to lend us money at — and all the knock-on effects."

Still, the panelists agreed that the failure to raise the borrowing limit would have dire consequences.

"I think there's no question that it would be cataclysmic," Stevens said.

The fallout from that would likely do significant damage to the financial markets as well as the real economy.

"Interest rates would undoubtedly rise, meaning less people could afford to buy or refinance homes, housing prices would plummet again and you would have a catastrophe in the real estate industry, which would lead the economy back into a deep recession, if not a depression," Thomas warned.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.