The Fed prepares for default
21 Jul, 2011 15:58
Are you wondering what the federal government will do if and when the United States runs out of money in two weeks? So are they.
Philadelphia Federal Reserve Bank President Charles Plosser said on Wednesday that his financial powerhouse has been working alongside the US Treasury to try to figure out a game plan for a default, which could come if Congress can’t agree to raise the debt ceiling by August 2."We are in contingency planning mode," Plosser says in a sit-down with Reuters this week. "We are all engaged. … It's a very active process."Active or not, the process will have to outline what plans will need to happen in order to keep disaster to a minimum. The New York Times goes as far as to call the talks “doomsday plans in case the clock runs out.”As of today, only 12 days are left on that clock.The Treasury had previously placed a default as an unlikely consequence, noting that the debt ceiling has been raised numerous times during the last several administrations. After months of talks gone fruitless, however, the clock is ticking down to a default that is looking more and more imminent.Should the US default, the country will technically run out of money. Unable to pay back its creditors the $14.3 trillion it would owe, the US dollar would decline in value, leading to an economic downturn worldwide. Earlier this week, China’s State Administration of Foreign Exchange urged the US to figure out a way to avoid default, begging America to get “responsible.” "It could be very bad. At some level we don't really know what the consequences could be. It could be very serious. It could be less serious. Do we really want to run that experiment?" says Plosser.Last week, Federal Reserve Chairman Ben Bernanke said a default would be “catastrophic” to the international financial markets.So far Moody’s, Standard & Poor’s and Fitch have all threatened to downgrade the States’ credit rating if a compromise isn’t come to shortly."There are a lot of people working on what we would do and how we would do it," Plosser says.President Obama met separately with both Republican and Democratic lawmakers on Wednesday, though no deal has been set in stone yet. The president led five consecutive days of discussion last week before giving a White House press conference on Friday where he said that the “log jam” would be broken up in a matter of days.