Millstein: Devastation From Default Could Last Generations

Monday, 14 Oct 2013 11:29 AM

By Michael Kling

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Business and finance experts are warning that a government default, caused by Congress refusal to raise the debt ceiling, may cause an economic collapse worse than the 2008 financial crisis.

The economic devastation prompted by a default could last for generations, says Jim Millstein, chairman of Millstein & Co. and former chief restructuring officer at the Treasury Department.

Republicans controlling the House of Representatives first refused to pass a budget without defunding Obamacare, leading to a government shutdown. Now they're refusing raise the debt ceiling unless their budget plan is met.

Editor’s Note:
Weird Trick Adds $1,000 to Your Social Security Checks

"This isn't partisan gamesmanship as usual," Millstein writes in a guest blog for CNBC.

"The threat to default on the government's debt is something that we all have a stake in — a really big stake. If the government were to default, a disaster will unfold that will affect every household in America, perhaps permanently."

As Millstein and other business experts note, government debt is the foundation of our banking and monetary system, widely held by banks, money market funds, the Social Security trust fund and individuals through pensions.

The ability of financial institutions to return the money deposited with them depends on the government's ability and willingness to pay principal and interest on Treasurys they're holding.

If financial institutions are not paid, they'll be in "a big pinch," Millstein predicts. "And when big financial institutions feel a pinch, the rest of us get squeezed, just like we did in 2008. Lending will come to a halt, spending will freeze up, businesses will stop hiring."

In short, the banking system will be the brink of the abyss.

Although the government's long-term finances need to be fixed, there's no question it can pay its current debts, Millstein says.

"If our representatives in Congress are prepared to put default on the table now, they are declaring war on you and your job, your pension and your savings."

Other financial experts agree that default may spark a liquidity crisis similar to the 2008 financial crisis, followed by a worldwide recession.

Although the impact is uncertain, even a small chance of such a catastrophe should be enough to motivate anyone to steer clear of a default, writes University of Maryland business professor Clifford Rossi in an article for American Banker.

"Default by the U.S. government is the ultimate systemic risk. We face the real possibility that Congress and the Administration sometime in the next few weeks will trigger a systemic risk event every bit as harmful as the financial crisis of 2008-2009," Rossi warns.

Some Republican Congressmen have said a default might not be a big deal, he notes.

"That perspective is dangerous and shows a complete lack of understanding of the basics of financial markets, panic and contagion, particularly when the latest crisis places us squarely in uncharted territory."

Editor’s Note: Weird Trick Adds $1,000 to Your Social Security Checks

Related Stories:

US May Join 1933 Germany in Pantheon of Deadbeat Defaults

Washington Dysfunction Shutting Down Housing Market Recovery

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