A lot of the time when people talk about the risk of a debt ceiling breach, they talk about the stock market dive or an interest rate spike because maybe creditors might not lend to us at ultra-low rates anymore.
But really these pedestrian concerns don’t get at what makes a debt ceiling breach so concerning.
Luckily, Kevin Roose has written a great explainer of the debt ceiling at NYMag and he includes this paragraph:
The central nervous system of the banking system might freeze.
Fedwire is one of the least-known, most important services on Earth. It’s a clearing system, run by the Federal Reserve, that banks in America use to shuttle cash, stocks, bonds, and other assets back and forth between themselves. It processes trillions of dollars a day, and has been around for nearly 100 years. But it’s not set up to allow defaulted Treasury bonds to flow through its system. According to a note from RBC Capital, excerpted by FT Alphaville, if the U.S. defaults on its bonds, Fedwire could “seize” entirely, meaning that banks and other financial institutions could run into real trouble very quickly.
Read Kevin’s whole piece here. It’s great.
And once you see how bad it could be, you’ll see why you should just favour a government shutdown to stave off the crisis.
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