By John W. Diamond, Rice University
Convening war-rooms, planning rapid bailouts and raising alarms for the house on fire are just a few ways that the largest banks and financial regulators prepare for an eventual default of U.S. debt.
“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, said in a television interview.
The doomsday planning is a reaction to a lack of progress in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – another round of negotiations took place on May 16, 2023. Without an increase in the debt limit, the U.S. can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.
What happens if a default occurs is an open question, but economists – including me – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers. It would almost be a certainty that the global economy would suffer a prolonged and severe recession. The reputation of the U.S. as the beacon of stability, and of the dollar in particular, will also be affected.