Central Bank officials have gathered to make contingency plans on how to sustain financial markets should the U.S. default on its debt.
U.S. Federal Reserve Chairman, Ben Bernanke, hosted a lunch of counterparts on Oct.12 during the annual International Monetary Fund (IMF) meeting held in Washington D.C. A number of policy makers had the chance to discuss the threat of the U.S. default.
U.S. default on its debt would likely send the nation into a depression and cause chaos worldwide. In 2008, Lehman Brothers Holdings Inc triggered a near global financial meltdown due to its investment in U.S. subprime mortgages. When the subprime bubble burst, Lehman Brothers owed $517 billion and filed for bankruptcy on Sept. 15. 2008 . Lehman’s bankruptcy filing remains the largest in U.S. history. Well, according to the U.S. debt clock, as of today the U.S. national debt is about $17 trillion – that’s nearly 30 times what Lehman Brothers owed, so the stakes are extremely high.
Time is running out for the U.S. congress to end the gridlock that risk’s putting the nation into default if the debt ceiling isn’t raised by Oct, 17th. The government shutdown is now in its 15th day, and neither Democratic or Republican leaders have come to a resolution.
“We’ve made tremendous progress,” Senate Majority Leader Harry Reid (D), said yesterday as the chamber adjourned. He expressed hope that a deal would be made today. Senate minority leader, Senator Mitch McConnell (R), said there was “substantial progress.”
The U.S. has always managed to straighten things out and pay its bills. Policy makers around the world have expressed their confidence that the U.S. will not default. Congress may act stupidly, but they aren’t that stupid, right?
In the past six years, central banks have increased their ability to deal with financial crisis starting in August of 2007 when it became apparent that the U.S. subprime market was insecure. Lehman failed, and set off a domino effect that negatively affected financial markets worldwide, especially in Europe.
In actuality, there may be a number of things that countries and investors can do to minimize the damage caused by a default but truthfully, if the U.S. economy goes belly up there is no real fail safe. Let’s hope congress can resolve this problem before the deadline.
(image via wikipedia)