U.S. Debt Default Would Be Worse Than Lehman

http://www.bloomberg.com/news/2011-07-16/summers-says-default-would-cause-more-panic-than-lehman-brothers.html

by chailatte • 15 years ago

25 36 15 years ago

walexander2• 15 years ago

I'm fairly certain there is no crisis. They'll come to some last minute deal, as always, after they've done all the theatrics for MSNBC and Fox.

philwelch• 15 years ago

Even if they don't, it's not likely to matter much. US sovereign default is unconstitutional under the 14th amendment.

btilly4• 15 years ago

Nobody doubts that the money will eventually be paid in full. However a failure to pay it on time will result in financial catastrophe.

btilly4• 15 years ago

I'm positive that that this is everyone's intention. But they've dug themselves into entrenched positions, and are running it down to the wire. In that situation, accidents can happen.

See http://www.telegraph.co.uk/finance/economics/8639896/The-las... for how a similar situation in 1979 caused us to accidentally pay $120 million slightly late, resulting in our paying several billion in additional interest.

anonymoushn2• 15 years ago

Even if they don't raise the debt limit ever, there's no reason for us to default. Our tax revenues can pay for much more than our debt service.

walexander2• 15 years ago

Related to that, most of our debt is owed to the federal reserve, which just makes up money out of thin air for us anyway.

Could the federal reserve theoretically give a forbearance on interest payments? The debt owed to the public and international financiers (China,Japan) is fairly insignificant compared to what's owed to the Federal Reserve, and could probably be paid.

What happens if we pay everyone except ourselves?

tomjen32• 15 years ago

That seems to be the consensus, but I am not really sure.

The problem is that the Tea party people can't afford to compromise their position at all and even many who are not members of it are still under their influence.

wccrawford• 15 years ago

I don't think anyone thinks we shouldn't pay.

Instead, what everyone thinks is that we -have- to balance the budget, and this appears to be the only way to get politicians to do their jobs. They seem to be treating a balanced budget as if it isn't their problem. That someone else should be doing that.

I'm starting to wonder if that's right. Maybe there should be another body that has oversight of our ridiculous spending.

diolpah• 15 years ago

Actually, lots of people think we shouldn't pay. More specifically, Millennials will need to decide at some point if they are willing to pay for the profligacies of their parents. Many of them rightly understand that they are shouldering a burden they neither asked for nor benefitted from.

sethg• 15 years ago

We have to balance the budget in the long run, but this is a hare-brained way to make it happen. If anything, a default will make it harder to balance the budget in the long run, because if the markets get spooked into higher interest rates on T-bills, a greater proportion of tax revenue will have to be spent on debt service.

pnathan• 15 years ago

My thoughts when reading these sorts of articles is that we are faced with essentially two choices:

* Keep building the house of cards

* Let it fall down

I don't see any points of view that advocate slow unwinding of the issues that got us here, and that's troubling.

jbooth2• 15 years ago

Obama and Boehner had the outlines of a 10 year, 4 trillion deal that had some pain for everyone. For about 24 hours.

Unfortunately, that would have been a victory for Obama (and the country, incidentally). So it's a no-go as far as the Tea Party is concerned, which meant Boehner had to back out. Nevermind that these are people who've been shrieking about the deficit since January 2009.

rbanffy• 15 years ago

And that's the risk. The process looks like it's based on ideology. Ideology knows no compromise.

It will be interesting to watch.

ck22• 15 years ago

It's an engineered distraction. We (led by the media) far for it every time.

Just like the nonsense about the "mosque at ground zero" - remember that? Notice how all the nonsense vanished?

Remember the debt is stuff we've already "bought" it's not the future budget and has been raised dozens and dozens of times, under every kind of leadership or lack thereof. This is just a puppet show - one side makes the show and the other side sits memorized and doesn't look at what else is going on.

Just imagine if we actually had this much effort by news outlets into health care reform (not the health insurance fiasco we got instead). We might have gotten an actual progressive solution.

Estragon• 15 years ago

An out-and-out default is extremely unlikely, but a massive devaluation in the US dollar would be just about the perfect treatment for America's economic woes. Devaluation of debt, and massive increase in export competitiveness...

ck22• 15 years ago

So selling twice the number of $1 widgets at 50 cents fixes something? Or just makes us tread water faster?

How exactly do we compete against nearly free labor in manufacturing from China and Vietnam and such? (answer: we cannot and should not try - we should tax imports and make selling to ourselves cheaper with domestic products vs imports - people will buy from overseas when their widgets are 50 cents and ours are $1 but not if there's is 90 cents and ours is still just $1)

kevin_morrill• 15 years ago

I agree this is the likely outcoming, but couldn't disagree more about it being the "perfect treatment". What you had with the housing boom was effectively devaluation in a limited sector (along with oil). Inflation causes massive capital misallocations and screwed up pricing signals. Think about how many people who were working in construction and real estate needlessly that could have been working on things people truly need/want. Eventually all those lost man years of effort add up to lost lives in the aggregate.

ChuckMcM• 15 years ago

"It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said."

Yup the who thing is a self inflicted cluster-f*k. From the politicians who spend to much, to voters who don't think about who they are voting for, to media who would love nothing more than armeggedon so they could get a few more rating points. One thing I know for sure, is that there will be a chapter on this period in the US and the world in economics textbooks.

randallsquared• 15 years ago

In order to call it self-inflicted, you have to buy into the collection of people as an entity. It's not clear to me that this will continue to be viewed as the most useful abstraction.

vegas• 15 years ago

obvious headline is obvious.

espeed• 15 years ago

How much is owed to the Fed? If they don't raise the debt ceiling, just "default" to the Fed -- they still have the $4 trillion sitting there that hasn't been touched.

bwb• 15 years ago

Hah when I read the title of this post I was like Duh, no kidding it would be way worse.

adaml_623• 15 years ago

What a rubbish article. 1000 words to sum up something that most people probably know. With absolutely no analysis or details or links into anything interesting. Press release journalism at it's most boring.

(Yes I know it's not technically a press release)

yason• 15 years ago

Right. Not exactly being able to pay one's debts will surely be corrected by taking more debt. And having more loaned money to spend will naturally just encourage tightening up one's expenses.

If this financial situation wasn't about a nation but a private person, it would be obvious to everyone that his finances are simply fucked up.

U.S. Debt Default Would Be Worse Than Lehman

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