Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Federal Reserve Bank of New York President William Dudley met Friday to talk about challenges they likely will face if no deal is struck in time. They discussed a number of issues that officals hope never materialize, including what would happen if the government's debt were down-graded by rating firms.
Administration officials have determined they don't have the power to raise the debt ceiling without Congress, and likely have no power ot avoid an eventual default on government debt. That has put their focuson trying to determine what finacial trumoil might unfold if the debt ceiling isn't raised, and what powers they might have to try to blunt any fallout.
A key concern for regulators is Treasury's expected move to replace $87 billion in maturing debt on Aug. 4. Investors are still expected to line up for an auction, but the government might have to pay more if the debt ceiling isn't raised, given the higher risk othe government ould someday default. If the aution "fails" because investors don't show up, it could trigger a financial crisis. The Federal Reserve would likely play a central role in managing any such crisis.
But the central bank wouldnt have the ability to lend the government money. It is permitted t buy U.S. Treasury securities, and has purchased 900 billion in recentyears as part of its efforts to support the broader economy. But by law it can buy Treasurys only "on the open market" meaning from investors and not directly from the U.S. Treasury.
"I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt," Mr. Bernanke told Congress last week.
Fed and Treasury officlas studied whether they could shut off some payments but not others, during the debt limit debates in the mid -1990's and concluded that the government's systems weren't up to the complexity of the task, said Donald Kohn, the Feds former vice chairman and currently a Brookings Institution scholar. Given the lengthy process of changing the computer coding in Fed and Treasury systems that would have been required, "it was just impossible to cut off some payments adn not others," Mr Kohn said.
The Treasury Departments's Financial Management Service office processes about a billion payments annually, not including payments made by the militayr, which are handled on a different system.