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Failure to raise the debt ceiling does NOT have to lead to default! That claim is a scare tactic by bankers, the same crowd that TARPed us. The pundits' wisdom that Congress shouldn't discuss deficits while raising the debt ceiling is almost as funny as the line "No fighting in the war room" in "Dr. Strangelove."

Equating not raising the debt ceiling with default is so prevalent that I had to search all over the web to find a reliable source that confirms this isn't so. According to The Council of Foreign Relations (which thinks the debt ceiling should be lifted forthwith):

"The U.S. Treasury can take special emergency measures to forestall a default—the point at which the government fails to meet principal or interest payments on its debt. These include under-investing in certain government funds, suspending the sales of nonmarketable debt, and trimming or delaying auctions of securities. However, Geithner expects the gains from last-ditch efforts to be exhausted after about eight weeks.

"If the debt limit is reached despite such measures, federal spending would have to plummet dramatically or taxes would have to rise significantly (or a combination thereof). However, Geithner warns that because the government's obligations are so great, "immediate cuts in spending or tax increases cannot make the necessary cash available." If Treasury is unable to issue new debt or take further emergency actions to bridge the deficit, the government would be forced to default on some of its financial commitments, limiting or delaying payments to creditors, beneficiaries, vendors, and other entities."

In other words, we have until July before there is a real crunch and then we still have the option of reducing spending and/or increasing taxes; but, if we don't do either of those things and Treasury elects to save money by not paying debt, then we would default. The Treasury can continue to borrow under its old authorization and can even roll-over maturing debt, since that roll-over wouldn't increase total indebtedness. But, like the states, the Feds wouldn't be able to use increased debt to fund continuing deficits.

Treasury Secretary Tim "TARP" Geithner and Federal Reserve Chairman Ben "Bailout" Bernanke predict disaster and the end of our financial recovery if the debt ceiling is not raised immediately by Congress. These two, having failed to foresee the great recession, thought that the best way to cure it was by bailing out banks. Actually, they along with Republican Treasury Secretary Paulson, sold the Troubled Asset Relief Program (TARP) to Congress as a way to remove toxic mortgage debt and help the housing market; then Paulson (with the concurrence of the Fed) used the broad powers of the act to simply lend bailout money to banks and help finance greater consolidation of a banking system, which already had too many too-big-to-fail entities. Now Geithner and Bernanke want a "clean" increase in the debt limit, the unconditional power to keep borrowing. Shame on us (or Congress, anyway) if there's another blank check.

Not surprisingly, JP Morgan Chase (NYSE:JPM) CEO Jamie Dimon agrees with Bernanake and Geithner. Once his bank paid back its $25 billion bailout, he got a $19 million raise. He is essentially threatening the economy in this quote from the The Wall Street Journal''s "Washington Wire:"

"All short-term funding would disappear.

"I would have hundreds of [people] working around the world protecting our company from that kind of event. We would get prepared for it way ahead of time. Like, I would be taking really drastic action. It would be really unpleasant."

The not very veiled threat is that JP Morgan and others will start selling Treasury bonds if there's a risk of default. The banks will hold their breath until they turn blue. We better give them what they want now; otherwise how will they pay those salaries?

Republicans are right to hold out for substantive action on future deficits as part of allowing increased borrowing (which we unfortunately will need at some point as we bring the deficit curve down). Adopting some form of the bipartisan deficit commission plan as part of the debt ceiling increase would be a huge constructive step. Wealthfare (welfare for the rich) needs to be ruthlessly cut from the budget and tax code at the same time that unfunded entitlements are cut (including my Medicare).

One form of wealthfare that should be cut is the Fed giving low interest loans to banks with which they buy higher-yielding treasury securities. It is profit from this scheme which enabled the banks to "repay" us the TARP money at our expense without the bother and risk of making real loans to any but the richest corporations and depressed the interest rates banks pay us as well. Just to add insult to injury, under its QE2 program the Fed creates money with which to buy treasury debt itself, which action assures that the price of treasuries doesn't fall due to over-issue thereby costing the banks money on their portfolios. According to the NY Times, the $600 billion the Fed has minted for this program since November has not even kept pace with deficits and the bonds which have been issued to finance them and has had little effect on jobs and the economy. But, according to me, it has been good for the banks.

We shouldn't allow ourselves to be panicked into raising the debt ceiling without a significant reduction in future deficits. Any action to reduce future deficits will make interest rates go down, not up as Dimon, Geithner, and Bernanke threaten. Moreover, the dollar will strengthen once it becomes clear that we have the will to deal with long-term problems. If we simply write another huge cash-advance check, interest rates and the dollar will both go down.

Source: Bankers Crying Wolf Over Debt Ceiling