Default on debt affect on legal job market/upcoming OCI

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Verity
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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 4:07 pm

swc65 wrote:Default has a very specific meaning (not servicing the debt or exchanging current liabilities for ones with less favorable terms to the creditor). This simply cannot happen-14th amendment, 200 billion in revenues/month only 29 billion in debt servicing/month= no technical default.

Defaulting on "obligations" is just scare tactics and equivication. It is another example of politicians being sloppy with language to scare people. A real default (i.e. rating of D or SD will just not happen).

Downgrades, on the other hand, could have a significant impact. Banks/money markets/retirement funds etc. are required to hold a certain amount of tier one capital. The choice asset for that is treasuries. If treasuries no longer met the tier one requirement, financial entities might (if they are under the required amounts without treasuries) have to replace that capital with something else. This means fewer loans and more dollars being held by banks which means less money in the real economy and lower velocity=lower GDP. Basically a repeat of 08 except the financial institutions would be "writing down" treasuries instead of mortgage backed securities. The Fed might respond with massive money supply expansion. This could actually help because the Fed could buy back treasuries at face value (pre-write down) and the banks would not have to suck money out of the real economy. Or, it might not work and we would have a crash even bigger than 08. The crash is highly doubtful because in the case of write downs of treasuries, the Fed has almost unlimited power to intervene and there are a million things they could do. Also, they could see this coming unlike 08 when they thought everything would be fine.

Simple loss of faith in treasuries could have the same outcome.


Add to that a pullout of capital from investors, worldwide, dumping Treasuries and other types of securities. The market will react harshly if they can't raise the debt ceiling. Call it what you will, but we all know the outcome.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:11 pm

Anonymous User wrote:
Verity wrote: It's a big charade. They want to make Obama look like a bad leader, and they're testing his resolve. They actually have the upper hand, because while virtually no Democrats want a default, plenty of Tea Bag fuckheads do. But House Republicans know better; they're just playing games.


Eh the Tea Party folk have an advantage in that they're too stupid to understand just how bad a default would be. It's like playing chicken with a crazy person-- if they don't realize they'll get hurt in a crash, you can't really play with them. And they're a big enough force that the House Republicans are stuck having to kiss their @$$es.

It's the Republicans who are coming out of this looking bad, and Boehner knows it, I think. The American people generally support a "balanced approach" that's actually significantly to the right of Obama's proposal. Republicans won't give an inch on the revenue side, which makes the whole thing a non-starter. I'd support raising the debt ceiling ASAP and talking about health care spending/revenue increases later, meaning not in the middle of a potential crisis over the debt ceiling...



Have you considered that "Tea Party" people would rather have a government shutdown (NOT A DEFAULT BECAUSE THAT CANNOT HAPPEN) now than an actual default 15 to 20 years from now. It is not stupid to have a little pain now and forgoe a lot of pain later. They may, of course, be wrong, but that doesn't mean they are "too stupid" to understand how bad a default would be. Maybe, they are smart enough to know what a default is and smart enough to know there is no way for it to happen next week.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:14 pm

Verity wrote:
swc65 wrote:Default has a very specific meaning (not servicing the debt or exchanging current liabilities for ones with less favorable terms to the creditor). This simply cannot happen-14th amendment, 200 billion in revenues/month only 29 billion in debt servicing/month= no technical default.

Defaulting on "obligations" is just scare tactics and equivication. It is another example of politicians being sloppy with language to scare people. A real default (i.e. rating of D or SD will just not happen).

Downgrades, on the other hand, could have a significant impact. Banks/money markets/retirement funds etc. are required to hold a certain amount of tier one capital. The choice asset for that is treasuries. If treasuries no longer met the tier one requirement, financial entities might (if they are under the required amounts without treasuries) have to replace that capital with something else. This means fewer loans and more dollars being held by banks which means less money in the real economy and lower velocity=lower GDP. Basically a repeat of 08 except the financial institutions would be "writing down" treasuries instead of mortgage backed securities. The Fed might respond with massive money supply expansion. This could actually help because the Fed could buy back treasuries at face value (pre-write down) and the banks would not have to suck money out of the real economy. Or, it might not work and we would have a crash even bigger than 08. The crash is highly doubtful because in the case of write downs of treasuries, the Fed has almost unlimited power to intervene and there are a million things they could do. Also, they could see this coming unlike 08 when they thought everything would be fine.

Simple loss of faith in treasuries could have the same outcome.


Add to that a pullout of capital from investors, worldwide, dumping Treasuries and other types of securities. The market will react harshly if they can't raise the debt ceiling. Call it what you will, but we all know the outcome.



In that event, the Fed could purchase treasuries on the open market which is something it is very capable of doing. That would keep interest rates the same. Of course this could lead to massive long term inflaction, but the Fed has other tools to quell inflation. For example, it could raise RRR. So banks would have more money but be required to hold more of it in reserve. So the total amount of money in the system would remain flat. Of course, the Fed is likely to over/undershoot, but it will probably avert a total collapse.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 4:15 pm

swc65 wrote:Have you considered that "Tea Party" people would rather have a government shutdown (NOT A DEFAULT BECAUSE THAT CANNOT HAPPEN) now than an actual default 15 to 20 years from now. It is not stupid to have a little pain now and forgoe a lot of pain later. They may, of course, be wrong, but that doesn't mean they are "too stupid" to understand how bad a default would be. Maybe, they are smart enough to know what a default is and smart enough to know there is no way for it to happen next week.


considering.....

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 4:16 pm

.....considered. Tea Party idiots.


Anyone who doesn't think anything can be solved without seriously jeopardizing the economy for the next few years is an idiot.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 4:18 pm

swc65 wrote:...probably avert a total collapse.


Well thank heavens! Just as long as it's not a total collapse

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:22 pm

Verity wrote:.....considered. Tea Party idiots.


Anyone who doesn't think anything can be solved without seriously jeopardizing the economy for the next few years is an idiot.




Of course, there is always risk. I am just saying that 1. A real default simply will not happen (although it would certainly be catastrophic if it did) 2. There are many many tools left to avert a crisis and keep things running.

But you are correct, that if a global panick started, it would be tough to stop. But most holders of US debt know the facts and are not actually afraid of a default. Downgrades, on the other hand, are a trickier issue and could lead to more pain. But it is probably not the doomsday scenario.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby boron1234 » Wed Jul 27, 2011 4:23 pm

swc65 wrote:
In that event, the Fed could purchase treasuries on the open market which is something it is very capable of doing. That would keep interest rates the same. Of course this could lead to massive long term inflaction, but the Fed has other tools to quell inflation. For example, it could raise RRR. So banks would have more money but be required to hold more of it in reserve. So the total amount of money in the system would remain flat. Of course, the Fed is likely to over/undershoot, but it will probably avert a total collapse.


Actually it can't. Interest rates are now at zero. If the US gets downgraded and investors believe it (i.e. they think there's a chance that Washington is gridlocked enough that there's actually a chance of a default), there would be no way for the Fed to get interest rates down to zero without buying ALL of the outstanding debt. This is because, at 0% interest, Treasuries are seen as cash equivalents. But at ANY risk of default, investors will demand an interest rate on debt that captures this possibility of default. Since the government can't default on cash, if the Fed wants to keep interest rates the same, they would instantly dump their entire holding of Treasuries for cash, and there wouldn't be any debt left outstanding.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby RMstratosphere » Wed Jul 27, 2011 4:28 pm

swc65 wrote:
Anonymous User wrote:
Verity wrote: It's a big charade. They want to make Obama look like a bad leader, and they're testing his resolve. They actually have the upper hand, because while virtually no Democrats want a default, plenty of Tea Bag fuckheads do. But House Republicans know better; they're just playing games.


Eh the Tea Party folk have an advantage in that they're too stupid to understand just how bad a default would be. It's like playing chicken with a crazy person-- if they don't realize they'll get hurt in a crash, you can't really play with them. And they're a big enough force that the House Republicans are stuck having to kiss their @$$es.

It's the Republicans who are coming out of this looking bad, and Boehner knows it, I think. The American people generally support a "balanced approach" that's actually significantly to the right of Obama's proposal. Republicans won't give an inch on the revenue side, which makes the whole thing a non-starter. I'd support raising the debt ceiling ASAP and talking about health care spending/revenue increases later, meaning not in the middle of a potential crisis over the debt ceiling...



Have you considered that "Tea Party" people would rather have a government shutdown (NOT A DEFAULT BECAUSE THAT CANNOT HAPPEN) now than an actual default 15 to 20 years from now. It is not stupid to have a little pain now and forgoe a lot of pain later. They may, of course, be wrong, but that doesn't mean they are "too stupid" to understand how bad a default would be. Maybe, they are smart enough to know what a default is and smart enough to know there is no way for it to happen next week.


“This is a misnomer that I believe that the president and the treasury secretary have been trying to pass off on the American people, and it’s this: That if Congress fails to raise the debt ceiling by $2.5 trillion, that somehow the United States will go into default and we will lose the full faith and credit of the United States. That is simply not true,”
-Michelle Bachmann

“There are two reasons we could get a downgrade,” said Rand Paul. “One would be not raising the debt ceiling and one would be raising the debt ceiling.” Paul's plan: "We will filibuster until we talk about the debt ceiling, until we talk about proposals."

Or, as Marco Rubio said,” Everything is worse since this president has taken over.”

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:29 pm

boron1234 wrote:
swc65 wrote:
In that event, the Fed could purchase treasuries on the open market which is something it is very capable of doing. That would keep interest rates the same. Of course this could lead to massive long term inflaction, but the Fed has other tools to quell inflation. For example, it could raise RRR. So banks would have more money but be required to hold more of it in reserve. So the total amount of money in the system would remain flat. Of course, the Fed is likely to over/undershoot, but it will probably avert a total collapse.


Actually it can't. Interest rates are now at zero. If the US gets downgraded and investors believe it (i.e. they think there's a chance that Washington is gridlocked enough that there's actually a chance of a default), there would be no way for the Fed to get interest rates down to zero without buying ALL of the outstanding debt. This is because, at 0% interest, Treasuries are seen as cash equivalents. But at ANY risk of default, investors will demand an interest rate on debt that captures this possibility of default. Since the government can't default on cash, if the Fed wants to keep interest rates the same, they would instantly dump their entire holding of Treasuries for cash, and there wouldn't be any debt left outstanding.


I think you misunderstand what "interest rates" means. Interest rates on treasuries are not zero.
They are nominally positive for all maturities. The risk of loss of faith means people would sell treasuries, the increased supply makes the face value of the coupons go down and the interest rate would therefore raise. If the Fed buys treasuries it has a countervailing effect buy increasing demand, pushing face values up and thereby lowering interest rates. The Fed does this all the time. The only interest rate that is 0-25 basis points in the fed funds rates, not the interest on any date of treasuries.

Also if the Fed buys govt. debt, the debt is still "outstanding." In fact, the largest holder, by leaps and bounds, of treasuries is the federal government (including the Fed)- around 6 trillion or 40% of the total debt. Those treasuries are counted as part of the total debt for the debt ceiling.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Anonymous User » Wed Jul 27, 2011 4:33 pm

swc65 wrote:
I think you misunderstand what "interest rates" means. Interest rates on treasuries are not zero.
They are nominally positive for all maturities. The risk of loss of faith means people would sell treasuries, the increased supply makes the face value of the coupons would go down and the interest rate would therefore raise. If the Fed buys treasuries it has a countervailing effect buy increasing demand, pushing face values up and thereby lowering interest rates.


Interest rates on short-term debt (the debt the Fed OMC effectively sets) are at 0. For the Fed to keep the interest rate there, it would have to increase the demand enough to keep the interest rate at that level. But if there's a default risk, the market would adjust to the now-supposedly real risk. But if the Fed wants to keep interest rates where they are, it has to act as if that risk doesn't exist and start buying up Treasuries. But no investor would hold onto Treasuries at the zero bound (where they are essentially cash equivalents) if there's a perceived risk of default, so the Fed would have to buy the entire stock, dramatically expanding its balance sheet, to keep interest rates constant.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby boron1234 » Wed Jul 27, 2011 4:37 pm

Above post was me, hit the wrong button by accident.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 4:42 pm

Let's cut through all this convoluted talk about interest rates and what the Fed may or may not do. The simple fact is that our economy is at a fragile stage. Nobody (especially law students) wants a double dip recession. If this isn't resolved by August 2nd, there will be panic in the markets, and our economy will suffer dearly. This is why Republicans have to get with the spirit of compromise, and stop posturing like the ruthless assholes they have been throughout the process.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:45 pm

Anonymous User wrote:
swc65 wrote:
I think you misunderstand what "interest rates" means. Interest rates on treasuries are not zero.
They are nominally positive for all maturities. The risk of loss of faith means people would sell treasuries, the increased supply makes the face value of the coupons would go down and the interest rate would therefore raise. If the Fed buys treasuries it has a countervailing effect buy increasing demand, pushing face values up and thereby lowering interest rates.


Interest rates on short-term debt (the debt the Fed OMC effectively sets) are at 0. For the Fed to keep the interest rate there, it would have to increase the demand enough to keep the interest rate at that level. But if there's a default risk, the market would adjust to the now-supposedly real risk. But if the Fed wants to keep interest rates where they are, it has to act as if that risk doesn't exist and start buying up Treasuries. But no investor would hold onto Treasuries at the zero bound (where they are essentially cash equivalents) if there's a perceived risk of default, so the Fed would have to buy the entire stock, dramatically expanding its balance sheet, to keep interest rates constant.



What? Not so. The only way the Fed would have to buy ALL the treasuries is if EVERYONE thought there was a risk of DEFAULT and no one was willing to assume that risk for a given interest rate of the TREASURY.

Is this conceivable? Yeah, sure but is is also conceivable that the FEd actually could purchase every last security.


I am not sure why you keep menting the fed funds rate. That is the rate that banks lend to each other on an overnight basis, not the rate that investors lend to the US government on a term security. Also, it falls within a range of 0-25 basis points. The rate cannot ever actualyl be zero. That would mean the money supply at that point in time is unlimited. One would borrow an unlimited amount of money at 0.

The fed funds rate is essentially controlled through increases or decreases in the money supply. The money supply is partly controlled by purchases or sales of treasuries but there are several other mechanisms for this too. It would be helpful to stop conflating the fed funds rate with the interest rates on government debt. They are seperate (although interrelated as almost all interest rates are).
Last edited by swc65 on Wed Jul 27, 2011 4:54 pm, edited 2 times in total.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:47 pm

Verity wrote:Let's cut through all this convoluted talk about interest rates and what the Fed may or may not do. The simple fact is that our economy is at a fragile stage. Nobody (especially law students) wants a double dip recession. If this isn't resolved by August 2nd, there will be panic in the markets, and our economy will suffer dearly. This is why Republicans have to get with the spirit of compromise, and stop posturing like the ruthless assholes they have been throughout the process.



Agreed. No one wants to risk another recession. That would suck for everyone. But, it may be too late to avert some kind of a slowdown because of this. People have heard their president and the leaders of both parties scream the sky is falling for a month. If they pull back on spending because of all of the toxic/misleading rhetoric and all that jazz we may double dip/slowdown even if there is no default or ratings downgrade.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby swc65 » Wed Jul 27, 2011 4:50 pm

boron1234 wrote:Above post was me, hit the wrong button by accident.



yeah I have always thought those two buttons are in the wrong place!!

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Re: Default on debt affect on legal job market/upcoming OCI

Postby boron1234 » Wed Jul 27, 2011 5:02 pm

swc65 wrote:
What? Not so. The only way the Fed would have to buy ALL the treasuries is if EVERYONE thought there was a risk of DEFAULT and no one was willing to assume that risk for a given interest rate of the TREASURY.

Is this conceivable? Yeah, sure but is is also conceivable that the FEd actually could purchase every last security.


I am not sure why you keep menting the fed funds rate. That is the rate that banks lend to each other on an overnight basis, not the rate that investors lend to the US government on a term security. Also, it falls within a range of 0-25 basis points. The rate cannot ever actualyl be zero. That would mean the money supply at that point in time is unlimited. One would borrow an unlimited amount of money at 0.

The fed funds rate is essentially controlled through increases or decreases in the money supply. The money supply is partly controlled by purchases or sales of treasuries but there are several other mechanisms for this too. It would be helpful to stop conflating the fed funds rate with the interest rates on government debt. They are seperate (although interrelated as almost all interest rates are).


I think you don't understand the relationship between the two. The Fed funds rate feeds into the short-term interest rate. Paul Krugman actually explains it on his blog a few days ago. Here's the relevant text- I would bold it but the board software is being a royal pain in the rear and won't let me highlight:

What we normally say in a liquidity trap is that the Fed is keeping short-term interest rates at zero, which is as low as they can go because below that cash dominates bonds. And the Fed achieves that zero rate by being willing to buy short-term government debt whenever the rate threatens to rise above zero.

But now introduce the threat of default. This makes short-term debt worse than cash, unless it offers a sufficiently positive interest rate. Yet we’ve just posited that the Fed is ready to buy bonds to keep the rate at zero. So what happens? In a simple model, investors sell *all* short-term US debt to the Fed.

Then what? In practice, the hawks at the Fed might force Uncle Ben to stop the purchases, out of fear of too great an expansion in the monetary base. (Misplaced fear, but never mind). But suppose the Fed does in fact buy all the short-term debt. Then there is no longer a market interest rate on that debt. But there is still a “shadow” rate, the rate at which private investors would be willing to buy short-term US debt — and that rate can easily go well above zero.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby Verity » Wed Jul 27, 2011 5:35 pm

The rest of the world doesn't have that strong a tradition of laissez-faire capitalism. They're looking at us and thinking WTF are they doing??? Even "sister" countries like the UK are flabbergasted.

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Re: Default on debt affect on legal job market/upcoming OCI

Postby IrwinM.Fletcher » Wed Jul 27, 2011 7:09 pm

Looks like the subsidization of interest on graduate student loans is likely to get the axe:

http://blogs.forbes.com/janetnovack/201 ... ent-loans/




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