Thursday, July 21, 2011

Preparing For The Worst

I can't believe that the people we elected and expected to have sound judgemant have allowed this thing to get to this point...

Yesterday,I thought I'd give everyone a break from talking about the debt ceiling, but I see that the politicians and powers that be have not given me a break from worrying.

Reports emerged last night that the Federal Reserve is actively preparing for a government debt default. With negotiations over the debt ceiling still going nowhere, it's clear that Fed Chairman Ben Bernanke and his fellow central bankers don't want to be caught without a plan.

There are just 12 days to go until the Aug. 2nd deadline set by the Treasury Department, when the government will run out of money and stop paying some bills. And, barring a last-minute compromise, the U.S. will face at least a credit downgrade and at worst the label of outright default on its debts.Serious business kiddies.

Yeah, Things have gotten this bad. And the Fed is preparing for the worst.

But I ask myself and you should be asking yourself ,just
how did we get from the idea or threat of default to the point where the Fed is actually expecting such a disaster to occur?

There are a few reasons, but let's cover the most pernicious: The political brinksmanship in Washington, D.C., has reached a new low. Yes, fiscal conservatives are correct when they say our massive government debts must change.I spoke on this two days ago. And, yes, social-minded liberals are also right to protect the poorest and the oldest Americans who need government assistance most. We should all agree on that much.

The hard part is finding a reasonable place to meet in the middle, where those competing interests can be balanced. But as we so often see in Congress, many spineless politicians have decided to take the easy way out by being stubborn and acting like it's the other guy who's being unreasonable -- all so they can please their bases and hopefully get re-elected in 2012.

So the Fed, not surprisingly, is making contingency plans. Some are just logistics -- for example, how to communicate with the Treasury and federal departments on which checks will bounce and which ones won't if the debt debate isn't resolved.

The Treasury, after all, is just a department itself. The Federal Reserve actually clears the millions of Social Security payouts and government employee paychecks that get written each month.

But some Fed plans are downright scary if they become necessary. For instance, the Federal Reserve plays a crucial role in short-term lending to massive financial institutions.

Fed "discount window" loans are offered to banks that hold Treasury bills as collateral. But in the event of a default or credit downgrade, those U.S. Treasury securities won't have as much weight as a guarantee that the borrower is good for the loan. Imagine if this wasn't the government we were talking about , but an individual...What do you think would happen to this person?

President Barack Obama has tried to express the importance of shared sacrifice and compromise in negotiations. It's a noble idea and one that our politicians should embrace.

But frankly, with each passing day, the most realistic outcome of the current politicking in D.C. seems to be a downgrade or default for federal debt. Be Afraid...Be very damn afraid...I'm not joking.


James Perkins said...

I'm surprised that I didn't see this yesterday...You're right..I'm very afraid!

Sean said...

Good work stay up on what's current!


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