Economics / Politics

MSN Money’s Jim Jubak thinks we’ve been headed towards financial armageddon for years now; the debt-ceiling ‘crisis’ is just the latest wrinkle:

“…even if Congress does come up with a deal that extends the debt ceiling, major damage has already been done to U.S. credibility. Imagine that you’re an overseas investor following the current debate in Washington. You’ve heard U.S. politicians say that a default is better than raising the debt ceiling. You’ve heard statements that have basically challenged you to find another place to put your money. And you’ve seen politicians willing to sacrifice bond investors to short-term domestic politics. Every investor in the world has got to be asking: “How soon can I find an alternative investment for some of my Treasurys?”

“I think we’re looking at a gradual worsening of the U.S. global financial posture. But that doesn’t count as Armageddon, because that’s pretty much what investors have been looking at for years. Do you know anyone who is surprised at this trend?
“My big worry is that the current slow erosion of faith in U.S. Treasurys will turn into a cascade of unanticipated consequences if the debt ceiling isn’t raised. Treasurys play a unique role in the global financial markets. They aren’t important only because they’re jammed into so many global portfolios, including the portfolios of so many of the world’s countries. They’re also important because they serve as collateral on a huge percentage of the complex deals that use derivatives to shift risk around the globe.

“The ripples from any default or downgrade of the U.S. credit rating would spread out like this: Investors who lent cash against Treasurys as collateral would require more bonds to back their loans. That would force borrowers to find cash, sell other assets or close their repos and other positions. And that would set off a wave of deleveraging very similar to the one that swept the financial markets in the wake of the Lehman bankruptcy in September 2008. We could get a replay of the credit crunch that almost brought down global financial markets and the global economy in 2008. (And this time the Federal Reserve would be unable to ride to the rescue.)
“As I say, I think this is a remote scenario. But what troubles me is that almost three years after the Lehman bankruptcy, the global financial system remains pretty much the opaque network of undisclosed and unregulated leverage it was then. Very little has changed that would prevent a replay of that crisis.

“When the country remains as angry as it has every right to be about Wall Street’s ability to escape the consequences of the last crisis, I doubt that anyone in Washington wants to remind voters that the folks in D.C. listen to Wall Street and ignore Main Street.”


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