One bright side to default...
If you're a lawyer.
Some fear that a default could cause a 2008-style crunch in repo markets, with the raising of “haircuts” on Treasuries leading to margin calls. The reality would be more complicated. For one thing, it’s not clear that there is a viable alternative as the “risk-free” benchmark. One banker jokes that AAA-rated Johnson & Johnson is “not quite as liquid”. In a flight to safety triggered by a default, much of the money bailing out of risky assets could end up in Treasury debt. Increased demand for collateral to secure loans could even push up its price.Then there is the impact of a ratings downgrade. Money-market funds, which hold $684 billion of government and agency securities, are allowed to hold government paper that has been downgraded a notch. Other investors, such as some insurers, can only hold top-rated securities but their investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm. There’s a surprise. [More]
I read George Will's retread column from the 1980s today and simply cannot fathom what he is talking about. Except, I fear I can. He is channeling Mitch McConnell. Boehner and McConnell have one goal and it is has nothing to do with the economy. It is destroying this president and this presidency. They are clearly calculating that the economic devastation their vandalism could create will so hurt the economy that it could bring them back to power through the wreckage. And they will use every smear, every lie, every canard possible to advance this goal. The propaganda channel dreamt of by Roger Ailes in the Nixon era will continue to pump poison into the body politic, until they defeat the man whose legitimacy as president they have never truly accepted.Coming from abroad, this country seems as if it is beyond dysfunctional. It looks like a banana republic on the verge of economic collapse. Now that Nixon's dream has come true and the GOP is fundamentally the party of the Confederacy, it was perhaps naive to think they could ever accept the legitimacy of this president, or treat him with respect or act as adults in the governing process.But this is who they are. I longed for Obama to bridge this gulf in ideology. But he cannot bridge it alone, especially when the GOP is determined to burn the bridge entirely, even when presented with a deal so tilted to the right only true fanatics could possibly walk away from it. And so the very republic is being plunged into crisis and possible depression by a single, implacable, fanatical faction. Until they are defeated, the country remains in more peril than we know. [More]Meanwhile, the Old World keeps talking and talking and...reaching agreement.
AFTER musing on the new euro-zone plan for an evening, two principal thoughts stand out. First, the deal clearly makes for good firefighting. Yields on peripheral debt are cratering this morning, and it isn't too difficult to understand why. A few days ago, Iwrote:
Either the Europeans are willing to fight to keep their union or they aren't. If they aren't, they'll lose it; it's as simple as that.
In recent weeks, markets came to doubt seriously that the Europeans were willing to fight. The seeming lack of urgency and imagination made a near-term break-up of the euro zone look plausible, even likely, and that was increasingly reflected in bond yields. The new plan does not solve all of the euro-zone's problems, but it does send a strong signal that Europe is not done fighting. And it increases the likelihood that further troubles in the future will be met with further assistance from core euro-zone governments. That alone is enough to take the wind out of the sails of traders betting against the future of the euro zone. [More]