July 19, 2011


TARP's Shadow (Nicole Gelinas, 7/18/11, City Journal)
A Treasury default would be worse than the financial crisis of 2008. The world economy is built on Treasury securities. Companies around the globe use them as collateral for overnight loans so that they have cash to pay workers as they wait for their own payments from other companies. Because this collateral is so safe, the lenders who make the overnight loans don't have to worry about the borrowers. The key is that Treasury bonds are supposed to be risk-free. But nothing is risk-free. If and when the market discovers this about Treasury bonds, the consequences will be dire. Companies short of cash would shed workers. Global asset selloffs could send the slow-brewing Eurozone crisis into multiple defaults, and European governments would struggle to protect their own financial institutions from panic. The fear of default could spur companies around the world to hoard more cash in anticipation, slowing the economy down. In the past week, a parade of leading financial figures has sounded the alarm--Federal Reserve chief Ben Bernanke, JPMorgan Chase honcho Jamie Dimon, Senate Minority Leader Mitch McConnell, Treasury secretary Timothy Geithner, and former Obama economic adviser Larry Summers among them. And that's precisely the problem. Tea Party freshmen and their supporters hold this establishment in contempt. Implicitly invoking TARP, as Pelosi did when she mentioned a stock-market crash, won't scare them; it will only embolden them. It would be one thing if Tea Party adherents merely believed that a default wouldn't spell disaster; in that event, the GOP freshmen would figure out the truth soon enough. The problem is that many Tea Partiers consider TARP such a terrible idea that they would have chosen to brave a worse financial disaster instead. Today, they think that a market cataclysm would be better than another "sellout" vote.
It goes without saying that folks who welcome the cleansing effects of a Depression ought not be allowed to determine government policy.
Posted by at July 19, 2011 4:25 PM

blog comments powered by Disqus