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While the country will still be left standing after a debt default, there is one important sector that will not be standing: Wall Street. A debt default would almost certainly make all the major banks insolvent as they would have to mark down the value of U.S. government debt, which had been held as a completely safe asset. The loss of value would also apply to all the assets backed by the government, such as the mortgage backed securities issued by Fannie Mae and Freddie Mac.
Even when the economy revived, the U.S. financial sector would never hold the same place in the world as it does today. Without the ironclad financial backing of the U.S. government standing behind them, the Wall Street gang could never again be the dominant actor in international financial markets.
This fact is essential in understanding the endgame on the debt ceiling. Suppose that we get to the dates in August when the Treasury has reached the limit of its ability to shuffle accounts and literally can no longer pay its bills. Secretary Geithner will at that point make an announcement that in three days there is an X billion payment on Treasury bonds coming due. He will say that the government does not have the money in the bank and will therefore have to miss this payment.
The markets will then go into turmoil. We will see the same sort of plunge in the stock market that we saw when the House voted down the TARP the first time back in September of 2008. At that point, the Wall Street boys will be screaming their heads off at Speaker Boehner and the rest of the Republican leadership. The news media would all be running clips with depression footage, telling us that another Great Depression looms just around the horizon.
In this context the Republicans will do exactly what they did with the TARP. They will cut deals, make the threats and do whatever else is necessary to round up the votes needed to raise the debt ceiling.
When everyone remembers that this is what the endgame looks like, they will realize that there is no need to put essential programs like Social Security, Medicare and Medicaid on the chopping block to get Republican support for raising the debt ceiling. The gun is pointed most directly at Wall Street's head, and this incredibly powerful lobby is not going to let Congress pull the trigger.
http://www.huffingtonpost.com/dean-baker/the-endgame-on-the-debt-c_b_880531.html?ir=Politics