While we wait for Congress to decide whether to shut down the government, a far more terrifying threat looms: The possibility that Congress could let the U.S. default on its debt.
That would cause another financial crisis. It would be like the financial crisis of 2008, only scarier, because it's unprecedented.
The Treasury Department says it will run out of money to pay its bills by mid-October. If Congress doesn't raise the government's debt ceiling and let it borrow more to pay old bills, then the U.S. government could default on its debts for the first time in history.
"Crossing the debt ceiling would be catastrophic," RBC Capital Markets analysts said in a research note.
Cardiff Garcia of FT Alphaville and Kevin Roose of New York magazine have longer, more detailed, explanations of why this is so. For people like me with wrecked attention spans, here is the short version:
- The repo market, where banks borrow short-term cash using Treasury debt as collateral, could freeze up. This means the entire credit market freezes up.
In short, we'd be looking at another financial crisis and depression, just five years after the last one.
Goldman Sachs and others have raised the hope that a government shutdown next week could inspire a deal that averts a debt-ceiling breach. This may be the best we can hope: That Congress fails its first test of competence in order to barely pass the second.
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