Friday, July 22, 2011
The Fed, Wall Street plan for default
With less than two weeks before the United States cannot borrow more money, the Federal Reserve and Wall Street are making plans to prepare for the country’s possible default on its $14.3 trillion debt.
In the most revealing comments to date, Charles Plosser, the president of the Philadelphia Federal Reserve, told Reuters the nation has for months been in “contingency planning mode” to deal with the fallout when the federal government runs out of money.
“We are developing processes and procedures by which the Treasury communicates to us what we are going to do,” Plosser said. “How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good? There are a lot of people working on what we would do and how we would do it.”
The Treasury Department has repeatedly denied making plans for default, saying raising the debt ceiling is the lone acceptable option. A spokesman did not comment to Reuters.
Wall Street officials are in the same boat, devising what the New York Times called “doomsday plans in case the clock runs out.”
Meanwhile, the Wall Street firms, the Times wrote, are seeking to reduce their risk related to Treasury bonds while hedge funds are hoarding cash to purchase U.S. debt if the price plummets in the event of a post-default sell-off.
The paper wrote that a full-scale financial panic has not set in but is close.
“The metaphor is a pile of sand,” Mark Zandi, the chief economist at Moody’s Analytics, told the Times. “You keep putting one piece of sand on the pile, nothing happens, and then, all of the sudden it just caves.”
Plosser also told Reuters that, despite the shaky economy, the Fed may raise interest rates before the year is out. He said he expects the unemployment rate, now at 9.2 percent, to fall to 8.5 percent.
“I don’t see the fundamentals of the economy as changed that much,” he said. “Yeah, there’s been some shocks and disruptions, but the underlying forces that are going to cause us to continue a slow, moderate recovery are still in place.”
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