– Credit Market Nightmare: The US Default Idea Is Going Mainstream (Business Insider, Jun. 8, 2011):
It gets really hard to play chicken when the other side isn’t afraid of crashing.
Heretofore the debt ceiling game has been characterized as exactly that — a game of chicken — with the presumption that one side would veer off the road at the last second.
But what if the GOP really doesn’t worry about crashing at all, and in fact it thinks crashing might be good?
We’ve been saying for a while how stunned we were that the idea of a technical default was gaining currency among mainstream thinkers, and now Reuters confirms it. Nobody is particularly concerned about a default. The deadlines are no big deal. As long as it’s short, they think, it wouldn’t have calamitous implications, a notion hotly disputed by just about every financial institution (including small banks).
Particularly influential on the GOP was this OpEd in the Journal by Stan Druckenmiller (the former hedge funder) calling for the default outcome, or at least saying it wasn’t so bad.
Hey, if a financial guy says it, it must be true!
See also:
– China Warns US Debt-Default Idea Is ‘Playing With Fire’ (Reuters)
Less than 3 months ago, I listened to Ben Bernanke speak to a senate panel on the US economy. He kept bringing up the financial credibility issue with them, that we need to revive our former good standing. Otherwise, investors would continue to leave our markets in droves because they no longer trust them.
Right now, “high frequency trades” make up 80% of all transactions on the Big Board. That means a few people handling funds of hundreds of millions of dollar buy and sell blocks of stock in less than 8 seconds. This makes it impossible for the individual investor to buy and sell stocks on an even playing field. Credibility anyone?
Each senator brought up the question of state bankruptcy. Was it legal, what would the Fed say about it, did the Fed play a role if they did, how did it work? Bernanke answered the Fed had little to say or do on the question of state bankruptcy, it was up to the lawmakers. He went back to financial credibility, the senators kept bringing up state defaults/bankruptcies.
They finally concluded states could default on their bonds, but none have done so since the Great Depression.
But, if states could file bankruptcy, they could dump all their pension plans for their workers and retirees. Chrysler did it, they cut retirement funds after filing bankruptcy to 40%. Chrysler, GM, the Airlines, Enron, Worldcom…..there is a huge corporate precedent to draw from if they can get the laws bent to their favor.
There is a plan in place, I’m not sure of the details, but it isn’t good for the people.
The sources for my data come from Bloomberg, Dylan Ratigan, Financial Times, NY Times and others.
Sincerely,
Marilyn Gjerdrum