Default on debt affect on legal job market/upcoming OCI Forum

[Bronte]

The "printing" of money is a perfunctory task that just involves exchanging old bills for new bills. It really has nothing to with the Fed. The Fed controls the money supply by buying and selling treasury bonds in the open market. If you think this involves people in suits printing money and giving to it to sellers in suitcases, you're a long way from understanding the macroeconomy.

The printing of physical money does nothing. It's about how much money is tied up in in inactive investments versus how much money is liquid and being put into active investments, like starting business ventures. When the Fed buys bonds, it both makes the assets of private entities more liquid and drives down interest rates, which in theory encourages borrowing and investment. Printing money would be effective in increasing the money supply only if they dropped bags of it from airplanes.

[Anonymous User]

Treasury bonds are risk free, as the fed can print money whenever they want. The only thing that could really cause a default on that type of debt is for the US to openly give the proverbial "finger" to the rest of the world and stop sending them their interest payments.

This isn't right. If Treasury can't borrow, the Fed can't buy newly issued Treasuries, so the government can't finance itself even if the Fed were willing to finance the US's deficit in its entirety.

Genuinely curious question, because you are literally the first person I've read who says anything to the effect of "There will be little to no consequence." Are there any economists or professors of economics who are predicting what you are predicting? If so, please throw me the link, because I want a little twig of optimism at this point.

Me too. Because every prediction I've seen ends with us living in caves and fighting with sticks.

Paul Krugman doesn't seem that worried.

In any case, look at the market. There's very little indication on the various metrics that apocalypse is near. The situation is exactly the opposite of the recent financial turmoil. There on paper everything was great but nobody knew what the assets were worth. In this case, there might be trouble on paper, but nobody seems to doubt the ability of the US Government to pay its debts.

We're days away from default and there isn't exploding CDS spreads or rising Treasury yields. No huge stock selloffs. Investors don't seem to believe that apocalypse is imminent. Why? Two possibilities:

1) Investors have tremendous faith in Washington and the ability of the (D)'s and the (R)'s to compromise.
2) Investors just aren't worried about a technical default.

While I'm not saying it's not (1), I do think (2) is plausible.

Krugman isn't worried about a downgrade. He's plenty worried about a default. It would plunge the US straight back into recession and cause huge turmoil in the capital markets. I think the spreads aren't blowing out because investors just think it's inconceivable that Congress would be stupid enough to actually default. It's really the governing equivalent of shooting yourself in the nuts with a shotgun...

[rayiner]

Treasury bonds are risk free, as the fed can print money whenever they want. The only thing that could really cause a default on that type of debt is for the US to openly give the proverbial "finger" to the rest of the world and stop sending them their interest payments.

This isn't right. If Treasury can't borrow, the Fed can't buy newly issued Treasuries, so the government can't finance itself even if the Fed were willing to finance the US's deficit in its entirety.

Genuinely curious question, because you are literally the first person I've read who says anything to the effect of "There will be little to no consequence." Are there any economists or professors of economics who are predicting what you are predicting? If so, please throw me the link, because I want a little twig of optimism at this point.

Me too. Because every prediction I've seen ends with us living in caves and fighting with sticks.

Paul Krugman doesn't seem that worried.

In any case, look at the market. There's very little indication on the various metrics that apocalypse is near. The situation is exactly the opposite of the recent financial turmoil. There on paper everything was great but nobody knew what the assets were worth. In this case, there might be trouble on paper, but nobody seems to doubt the ability of the US Government to pay its debts.

We're days away from default and there isn't exploding CDS spreads or rising Treasury yields. No huge stock selloffs. Investors don't seem to believe that apocalypse is imminent. Why? Two possibilities:

1) Investors have tremendous faith in Washington and the ability of the (D)'s and the (R)'s to compromise.
2) Investors just aren't worried about a technical default.

While I'm not saying it's not (1), I do think (2) is plausible.

Krugman isn't worried about a downgrade. He's plenty worried about a default. It would plunge the US straight back into recession and cause huge turmoil in the capital markets. I think the spreads aren't blowing out because investors just think it's inconceivable that Congress would be stupid enough to actually default. It's really the governing equivalent of shooting yourself in the nuts with a shotgun...

The downgrade is the only thing to worry about. The US isn't going to actually stop paying interest on Treasury securities.

[Renzo]

[
The downgrade is the only thing to worry about. The US isn't going to actually stop paying interest on Treasury securities.

I'm not sure I agree with the first, although I absolutely agree with the second. It depends on who and in what form the default takes place. If the government has some long-term vendors or trade creditors it can defer paying, that's probably not going to hurt too bad. But if real people (employees, soldiers, welfare recipients, medicare providers, etc.) don't get paid on time, it could potentially have a huge impact on the economy.

[Anonymous User]

The downgrade is the only thing to worry about. The US isn't going to actually stop paying interest on Treasury securities.

This isn't right either. That's like saying that a company isn't bankrupt because it's paying interest on its bonds, but doesn't have the cash to pay its contract employees. If the US doesn't raise the debt ceiling, it's not meeting its obligations, even if it is continuing to pay its bondholders. On top of that, there's also the economic disaster that comes with cutting off aid to the neediest (health care for old folks and the poor, unemployment insurance and food stamps, etc.), as well as instantly terminating the jobs of some thousands of federal workers that they can't pay. There's also student loan payments, Pell grants, and all of the other federally administered programs that come with it...

[Verity]

I'm buying small company "growth" stocks as we speak. Washington will strike a deal, and in a week or so I'll profit big time.

[boron1234]

Stocks haven't really reacted to all the default nonsense. At least not in a visible way. Heck, long-term Treasury spreads haven't reacted to it either. They're all pretty sure Washington will reach a deal. I'm not so sure. Used to be that you could count on a deal because anyone with a shred of common-sense knows what a disaster a forced default would be. I'm not so sure anymore... used to be that Wall Street could pressure Republicans to not make dumb choices with the debt ceiling, but House Republicans, with the new "Tea Party" fools pressuring their leaders, aren't really beholden to Wall Street anymore. In this case, that's a bad thing. Like Wall Street or hate them, they're not interested in driving the country off a cliff. Tea Party people are too stupid to realize that that's exactly what not raising the debt ceiling would do...

[IrwinM.Fletcher]

I'm not a doom and gloomer on the economy, but the VIX movement this afternoon is worrisome. The market's sending a pretty clear message that it does, in fact, give a massive damn about getting a deal struck by Tuesday.

I swear to God if this thing blows up and finds a way to fuck up my jerb cycle...

[Verity]

Now is when you go fishing for the WSJ's biggest losers. I really don't believe that Washington will allow a default, and most of Wall Street doesn't either. Still good for a 5 point pop though, at least.

[boron1234]

Now is when you go fishing for the WSJ's biggest losers. I really don't believe that Washington will allow a default, and most of Wall Street doesn't either. Still good for a 5 point pop though, at least.

That's what I thought a week ago. Now, it really looks like House Republicans would rather default than give half an inch...

[ObLaDiObLaDa]

I actually asked someone the other day how they thought the default might affect law students. The debate/arguments being made in this thread are significantly better than my stockbroker-friend's response of *shrug*.

[IrwinM.Fletcher]

A confident optimist would be selling out of the money puts while volatility is high.

I'm not quite that confident.

[Verity]

Now is when you go fishing for the WSJ's biggest losers. I really don't believe that Washington will allow a default, and most of Wall Street doesn't either. Still good for a 5 point pop though, at least.

That's what I thought a week ago. Now, it really looks like House Republicans would rather default than give half an inch...

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.

[romothesavior]

Serious question though (and one that hasn't really been fully answered)... assuming we do default, which I really do think we could, how screwed are all of us current law students?

And will we be SOL for our student loan disbursements?

[RMstratosphere]

Now is when you go fishing for the WSJ's biggest losers. I really don't believe that Washington will allow a default, and most of Wall Street doesn't either. Still good for a 5 point pop though, at least.

That's what I thought a week ago. Now, it really looks like House Republicans would rather default than give half an inch...

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.

[crosses fingers]

[Verity]

Serious question though (and one that hasn't really been fully answered)... assuming we do default, which I really do think we could, how screwed are all of us current law students?

And will we be SOL for our student loan disbursements?

Nobody will be able to accurately predict the effect on hiring, but it will probably be very bad, unless Congress can patch things up quick.

As for loan disbursements, education will probably be among the first of things to get slighted. SOL is very probable.

[Verity]

Now is when you go fishing for the WSJ's biggest losers. I really don't believe that Washington will allow a default, and most of Wall Street doesn't either. Still good for a 5 point pop though, at least.

That's what I thought a week ago. Now, it really looks like House Republicans would rather default than give half an inch...

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.

[crosses fingers]

Republicans would really call it a feather in their cap to have Obama go down in history as the one who was in charge when our AAA credit rating was downgraded.

[IrwinM.Fletcher]

I actually think the bulk of loan money for the fall has already been transferred to the disbursing institutions, where it's held until your school's release date for the checks.

[romothesavior]

I actually think the bulk of loan money for the fall has already been transferred to the disbursing institutions, where it's held until your school's release date for the checks.

Let's hope so.

[ndirish2010]

LOL at all you liberals. As if the democrats wouldn't be doing the same thing if it was one of their pet issues. In fact they have, many times.

[Anonymous User]

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...

[ndirish2010]

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...

That's it, let's just call everyone with a different opinion than you stupid. Tolerance at its finest! Gotta love the hypocrisy.

[Verity]

LOL at all you liberals. As if the democrats wouldn't be doing the same thing if it was one of their pet issues. In fact they have, many times.

This is a bit more serious than some "pet" issue. We just barely pulled out of a recession, the economy's fragile, and Republicans are screwing around with the economy, credit, and prestige of our country. They have gone way too far on this one.

[swc65]

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.


But the reaility is that if the ceiling is not raised, it will be just a normal government shutdown. Actually, less than that because the government could spend EVERYTHING it takes and would not be limited to mandatory payments.


The real danger in this is the loss of credibility in the ability of the government to fix our long term fiscal situation. Without a belief that the fiscal problems will eventually be fixed, interest rates will rise over the long term and it is unlikely the Fed will intervene without some emergency as an excuse/source of power.

[Aston2412]

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...

That's it, let's just call everyone with a different opinion than you stupid. Tolerance at its finest! Gotta love the hypocrisy.

Pretty sure Republicans are categorically opposed to people defaulting on loans. Except when its the US and they can make Obama look bad. Still want to talk about hypocrisy?