IS THE UNITED STATES GOVERNMENT “TOO BIG TO FAIL”? As I post this, the government is in another of a a series of negotiations about the federal debt ceiling. I have posted before about the United States debt ceiling crisis of 2011, the Greek crisis of 2012, the Eurozone crisis of 2012, and the Cyprus crisis of 2013. Tony James in a Wall Street Journal article (October 9) makes a point about the consequences of a possible United States default that has not received enough attention: “A Treasury debt payment failure will also trigger defaults in the massive credit default swap and derivatives markets that nearly brought the country to its knees in 2008. Many of these are written on Treasurys or otherwise are tied to them. The financial system could melt.”
The situation would be analogous to the consequences of the Lehman collapse in 2008. The Lehman collapse affected counterparties and counterparties of counterparties. “Too big to fail” meant “too complicated to fail” or “involved directly or indirectly in too many transactions to fail”. Of course, United States Treasury bonds are involved in a much larger set of transactions than Lehman was.