Morgan Stanley’s Vincent Reinhart is on BloombergTV, talking some sense about the debt ceiling with Tom Keene.One of his points is that the belief in 11th hour deals has become such a big cliche that markets may never react and apply the force needed to get a deal, and so that’s worrisome.
But furthermore, he says that if there’s no debt ceiling hike, The Treasury will have to break one of three laws:
— It will have to break the budget law, not making payments that are guaranteed by law.
— It will have to ignore the Second Liberty Bond Act of 1917 (which established the debt ceiling).
— It will have to violate the current Fed law, by getting overdraft protection.
This last point is interesting, but seems the least likely. Theoretically the Fed is able to provide overdraft protection to the Treasury, but its legality would be in doubt, and the Fed probably won’t do it.
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