Thursday, July 21, 2011

Thoughts on the US credit debacle

No, debacle is not too strong of a word. That Congress and the President let it get this close to the wire - again - is a disgrace. Yes, I believe there will be a deal but not because the bond market is not worried. After all, any deal or non-deal will not stop interest payments from being made. And Grandma should not worry either because, again, even without a deal there will be enough money to pay her SS check.

So, no, we will not default on contracts. We will, however, not have enough money to spend on all the programs that we may or may not need if no deal is struck. Did you notice the breakdown in the US Dollar Index today?  Better find a handbasket to ride.

The ratings agencies, for all their flaws and warts on the housing crisis, are telling us something. The USA has a greater than 50% chance of being downgraded anyway, even if the debt ceiling is raised and everybody sucking at the government teat gets their fill.

Wall Street is already preparing for the downgrade as it checks out its holdings. The hidden cost is everywhere because Treasuries are often used as collateral for financial dealings. What happens if the collateral is suddenly not such high quality? Will loans get called early? Will deals in progress get pulled?

And what happens to all sorts of lending rates that are tied to Treasury yields? Your mortgage might get a rate bump. 

And even worse, what happens to the value of short-term Treasury securities held in money market funds?  If you thought one fund company breaking the buck a few years ago was bad, this will be worse.

Again, I think there will be a deal and Armageddon will be avoided - or at least kicked down the road. But the problem remains where it always has been - with politicians and their only goal of getting reelected.


bmbull said...

And it's the same politicians who, had they done their jobs long ago and kept budgets in line in previous years, wouldn't be in this in this position. They didn't do their jobs then, and they won't do them now.

What a mess.

joed said...

Michael Kahn for President!

Michael Kahn said...

President? NFW!

But dictator for six months, that is a possibility. Yes, dictator and only until the problems are fixed.

Having 537 arguing politicians (House, Senate, Pres and Veep) is an impossible roadblock.

Don't get me wrong, I believe in democracy implemented as a republic. It is just the rules of the representatives that must change. As in, one longer term and out. You may re-apply after giving someone else a chance. in the mean time, get a job.

Amalan said...

Term limits won't solve the problem either, because there won't be an incentive to work once elected. The problem is with us! Not only do so many of the people vote according to party lines, thus providing for no real competition, but we also demand the congressmen/women show us his/her accomplishments, which they do by inserting line items in the budgets. Once they bring us the new bridge or the school or the library or the water park, we vote him back, and then we are unhappy because there is no money left.

As for the ruin we are in due to the financial debacle of 2008, which was due to a bubble that formed over the preceding years, don't we advocate for business all the time, and when we do, don't businesses get big, and when they do, don't they lobby the politicians, and then the politicians remove the checks and supervision that could have eliminated the bubble forming in the first place. So how can we encourage businesses that lobby to get what they want and then blame the politicians when the mess finally is upon us?

So the circle continues...