Thursday, July 21, 2011

Federal Reserve prepares for possible default

The tone of the reporting on the debt crisis is variable Thursday morning, with the Washington Post hopeful of a deal in stages, leading to a grand bargain – while still concerned about ideological intransigence --  but CNN still reporting “no progress” last night.

AOL and Adriana’s Huffington Post, however, report that the Federal Reserve is preparing for the possibility of a default. For example, it’s necessary to determine which payments have “cleared”.  Even in “The Event” (NBC-speak) of default, the Fed could step in as a “lender of last resort” if the markets seize. That sounds like a paradox.

Here is Huffington’s link.

There’s still some double talk about the “seriousness” of default, because, in a sense, the Tea Party is partially right. In the short run, the government could still make its interest payments,  pay normal entitlements, and pay federal salaries (you can look at the numbers).  But the situation would become dangerous quickly. Probably contractors wouldn’t be paid.  Eventually – and fairly quickly – interest payments and the values of bonds and stocks and even cash would be jeopardized, risking wholesale panic.  Don’t play with fireworks.  You can’t make a permanent 40% cut in the Federal budget in one week.

I still sense a desire of some Tea Party house members to throw people off the bus “because they can”.  This is the old case of “two wrongs don’t make a right.”  Someone can be destroyed for good by what someone else does, and perhaps there is a tragedy in that the “victim” never would admit his own dependency.  Everybody loses.  Here, the Tea Party blames the president for taking seniors as “hostage”, but in a month or so there will be a lot of “hostages”.  And, yup, they will be people whom some think should be taken down.

We’re all sinners. 

How many members of the House said pledged they would never extend the debt ceiling?  I thought it was "only" about 40 or so. 

Also, the New York Times (Louise Story and Julie Creswell) and MSNBC have a story about Wall Street's preparations for possible default here. MSNBC is reporting that the US may already have passed a critical point in avoiding a credit rating downgrade. 

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