Talk of downgrading U.S. triple-A bond rating... my crazy talk conspiracy theory

[Capitalocracy]

We already know that the Fed interest rates are near-zero, which means banks can borrow money from the government practically for free. And then they can (and do) turn around and purchase U.S. treasury bonds at a higher interest rate, making massive amounts of free money in a backdoor bailout, while at the same time refusing to lend to small businesses and consumers to help jumpstart the economy.

If S&P makes good on its threat to downgrade the U.S.'s triple-A rating, it will not be because the U.S. defaults on its debt, especially not to banks. If the Constitution means nothing today, the bankers' stranglehold on our government means the U.S. will never default on those bonds.

So if they downgrade our bond rating, all it will do is raise the interest rates the treasury offers on bonds. And if the Fed interest rate remains the same, it will widen the gap between the rate at which banks are borrowing money from the Fed and the rate at which they're lending it back to the Treasury, making it possible for them to get even more free money from the government.

When are we going to take a stand and say enough free money for the banks? I'm not one of those gold standard kooks, but can't we come up with a better system of supplying currency to the economy than putting it all in the hands of the banks and letting them keep 90% of it?

[Skink]

1. Or we could close the discount window.

[Capitalocracy]

4. Kind of makes you wish you were a bank, right? nt

[banned from Kos]

2. Banks cannot borrow unlimited money at that .25% Fed Funds rate

they must post sound collateral first - usually in the form of Treasuries.

So if Treasuries have a low yield like that do now a bank would make more money at 5% in the private market.

[girl gone mad]

3. I guess you've never heard of the Term Auction Facility.

[banned from Kos]

5. Its been closed well over a year.

But I supported it - when 3-month LIBOR hit north of 5% we were in credit lock-up.

Try something else. You fail again.

[Spider Jerusalem]

6. Well no

by definition, if the debt ceiling isn't raised and the fiscal shortfall isn't funded, if the Treasury misses a single payment on maturing bonds and Treasury bills, that is default. Default is the failure to meet contractually obligated schedules of repayment. It does not matter if the debt is later paid in full, it is still in default until paid.

[banned from Kos]

7. Love that Mencken quote and the man himself.

Twain, Mencken, and Clarence Darrow -- all such giants of Americana.

[Capitalocracy]

8. I'm not saying they won't default on anything

I'm saying I would be very surprised if they defaulted on any debt to any of the banks that used to be run by any current administration staff, for example.

[banned from Kos]

9. You are into CT now - no prominent Obama admin has "run a bank"

there would be many millions hurt by default - mostly pension funds, sovereign funds, and the SS Trust Fund.

[Spider Jerusalem]

10. Doesn't matter

a default is a default, any default on any part of the American government's obligations to its creditors would have the same result. And I'd honestly have to question whether they'd prioritise repayment to say JP Morgan before repayment to China, or the Bank of Japan, or the Bank of England, or any of the other central banks that hold American debt.

[Igel]

11. This makes no sense.

I don't think you understand bond interest rates.

Each bond pays an amount that's set when it's sold. The seller continues to "see" that interest rate. Let's say X sells a bond for $100 that pays $5 annually. My father buys it. The interest rate that a later buyer "gets" is increased or decreased by the cost of the bond at purchase. Let's say my mother bought it some time later when the interest rates were at 10%. Then that $100 bond would sell for less, perhaps $50. My father took a capital loss. The bond would still pay $5 but she would have bought it for $50--she would "see" 10% on the bond; the issuer still sees that they're paying $5 per year on the $100 they sold the bond for. So let's assume I buy it years later and pay $200 for it. It's paying $5, I'm getting 2.5% interest on my $200. The issuer is still paying 5%.

If the bond's interest rate goes up, it usually means the value of all bonds currently held go down. If the banks hold $500 billion and T-bill interest rate soars, they take a capital loss. If they are using those T-bills as collateral, their collateral's worth less and they effectively have to pony up more assets.

Banks pay little interest on loans from the Fed. Probably a good thing, right now. It means they charge less interest. There are limits to what they can borrow (called "collateral"). Regs tightened on reserve requirements, the quality of the collateral and amount. T-bills reduce their status, they're not good collateral.

The biggest holder of federal debt is the Treasury and the Fed. They've bought up trillions of dollars in federal debt to keep the interest rates down. That's kept $100-200 billion a month federal debt from public auction. The downgrade threat is based more on future debt issuances than on any suggestion of default in the next few months. You can't go on issuing $1.5 trillion a year in debt until the debt load becomes too great and the very issuance of so much debt causes the validity of the US debt to be questioned. (Personally, I think the president has more call to invoke the 14th Amendment to suspend the budget to avoid the issuance of new debt than to raise taxes or borrow on his own. Then again, my benefits aren't immediately on the line.)

Most intriguing, I find, is the difference in views between GM and the banks. Both got government bail outs. Both have made great strides to repaying their debts. Both saved jobs. And, arguably, the bank bailout reduced the impact of the financial crisis and, therefore, of the recession.