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Home Publications Blogs Beat the Press Debt Default Would be Death for Wall Street, not the Country

Debt Default Would be Death for Wall Street, not the Country

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Tuesday, 10 May 2011 05:27

A front page Washington Post article included an assertion from Roger Altman, who is identified as "a private-equity investor who served in the Clinton Treasury Department," that defaulting on the national debt would be the "financial equivalent of suicide."

It is worth noting that Wall Street would be especially hard hit by a debt default. While a default would almost certainly lead to a severe financial crisis, even worse than the one in the fall of 2008, the rest of the economy would most certainly recover. We would have the same capital stock, infrastructure, state of technical knowledge and skilled labor force after the crisis as before.

However, the Wall Street banks would almost certainly not recover. They would almost certainly end up in bankruptcy. Their successors would probably never be as powerful in international finance as the current group of institutions. For this reason, Altman and other Wall Street financiers have far more to fear from a default than does the rest of the country. It would have been useful to include a wider range of perspectives on the impact of a debt default.

Comments (13)Add Comment
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written by izzatzo, May 10, 2011 7:41
We would have the same capital stock, infrastructure, state of technical knowledge and skilled labor force after the crisis as before.


The reason of course is because the survivalists are preparing for the end of the economy as we know it. We will all be grateful for their foresight and rue the day we mocked them.
Exactly
written by paul, May 10, 2011 8:26
Wall Street banks would almost certainly not recover. They would almost certainly end up in bankruptcy.

That is why it will never happen. This is the end of the road for the Teabaggers and they don't even know it.
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written by wally, May 10, 2011 8:55
Is your name Blomqvist?
Sounds like a theme right out of the last chapters of The Girl With the Dragon Tattoo.
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written by kharris, May 10, 2011 10:41
Boehner's address to the NY Economics Club was billed as his effort to soothe concerns over the threat to Wall Street from his budget tactics. In the event, what he told them was that he has an unbending set of demands which he puts before any concern for financial stability.

And financial life continues on pretty much unchanged today. Anybody have any thoughts on how Boehner is gonna get past the fact that Wall Street and Social Security recipients and businesses which make their money off of privatized public-sector endeavor (a mostly Republican-voting lot) are all threatened by his budget agenda?
He's bluffing
written by Dennis Doubleday, May 10, 2011 1:02
@kharris: Boehner's bluffing, it is quite obvious. If Wall St. wants it, it will happen. However, I wouldn't be surprised if Democrats bargain with him anyway; they appear to be idiots politically.
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written by Fed Up, May 10, 2011 1:21
"We would have the same capital stock, infrastructure, state of technical knowledge and skilled labor force after the crisis as before."

I disagree. With a debt default the amount of medium of exchange would fall. That would eventually lead to falling demand, falling prices, and falling stock prices/business profits. Since businesses exist to maximize profits/revenues, they will decide to cut back on capacity to maintain pricing power. The capital stock falls along with real GDP. Your economy starts "spiraling backwards in time" to a lower level just like the increasing debt (medium of exchange) allowed it to "spiral forwards in time" to a higher level when the debt was being issued.
On the other hand
written by JHM, May 10, 2011 2:06
The _Wall Street Jingo_ (which certainly ought to know about such stuff) has revealed that

Ah, but what about the bond markets—won't they panic as the debt limit draws near and Treasury predicts disaster? We doubt it. Bond holders want above all to know they'll be repaid, preferably in uninflated dollars, and the best guarantee of repayment will be evidence that Washington has finally donned a fiscal straightjacket. The real path to default is to keep raising the debt limit as if the Treasury can borrow more forever. Ask the Greeks (see below) how that's working out.

Not quite the horse's anatomy, but perhaps a little closer to it than is the Commissariat for Progressive Economics.




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written by Steve6pack, May 10, 2011 3:05
Hey, we've tried it Wall Street's way; the recovery is great, as long as you live within a 75 mile radius of Manhattan.

The rest of the country? Still mired in a deep recession, people still losing jobs, big business still being outsourced, small business still dying, inflation on everything you need, no recovery within view of the Hubble Telescope.

Why not a default? From the Flyover perspective, it can't get much worse. And a default would have the singular benefit of inflicting some pain where it belongs.
We Can Reflate the economy
written by Dean, May 10, 2011 4:53
Fed-up,

My assumption is that the Fed would take steps to reflate the economy (e.g. special lending facilities, QE3-31) following a default. However, if it just sat back and did nothing, like it did in the Great Depression (not exactly true -- but close), then we would see capital disappear through the process you describe.
Iceland is doing better than Ireland
written by ljm, May 10, 2011 8:54
These small countries don't have the impact on the rest of the world a country like ours would have if we defaulted, but given the choice, I'd like to do things the way Iceland did. Ireland got sold out, literally.
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written by Bob, May 10, 2011 9:23
There's been a lot of discussion of terrorists lately in the news. What would be the reaction if terrorists threatened us with an economic depression unless we eliminated Medicare and handed trillions of dollars to their financial backers? That's what's going on with the debt ceiling.
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written by Bob, May 10, 2011 9:32
If Obama ever really wanted to put immediate pressure on Congress to raise the debt limit he'd invoke the Argentina example and point the default gun at Wall Street, but there's no sign this could happen, and I'm not as hopeful as Dean Baker that Wall Street would make out worse than main street from a default. Given Geithner's history how do you think he'll prioritize payments if he has to pick between your social security check or the interest owed to Goldman Sachs? The rich and connected are very good at using the "shock doctrine" to maneuver through crises while grabbing even more power.
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written by Fed Up, May 11, 2011 2:09
Dean said: "My assumption is that the Fed would take steps to reflate the economy (e.g. special lending facilities, QE3-31) following a default."

What if that does not cause the amount of medium of exchange to increase and/or raise its velocity? That is, what happens if lower interest rates and attempts to raise asset prices don't cause excess savers (mostly the rich and rich corporations) to spend their savings (past demand to the present) and/or go into debt (future demand to the present) and most other people don't want to/don't need to/are unable to go into debt?

What if before the Great Depression and before the Great Recession there was more medium of exchange created from currency with no bond attached (present spending in the present)? Would there have been a less of a chance of debt defaults?

I'm of the opinion that the solution to too much lower and middle class debt is not more middle and lower class debt and not more gov't debt, both owed to the rich. I'm also of the opinion that when more and more debt does not produce price inflation and wage inflation there is/are problem(s) in an economy.

Thanks for the reply!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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