Money & You – November 2013

Were We Ever in Danger of Default?

By Tommy Haws

These last few weeks, we watched as our elected representatives in Washington began a dance that seemed to hold the world hostage as they failed to find a way to keep the government fully operational into its new fiscal year that began October 1.

This caused a lot of concern among many that they would also fail to reach an agreement on the debt ceiling by October 17.  Once again the government maxed out its “credit cards” and needed a new limit to continue its ongoing deficit spending.  If an agreement was not reached, many pundits worried that this would cause us to default on our obligations to debt holders – including many companies, countries and individuals. Here are a few reasons why this would not have happened.

• We are under constitutional mandate to pay our debts.  Before any other expenditure is paid, we are bound by law to pay our debts first.
• The interest on the debt is far below what the government was already taking in.  This does not mean other programs, etc., might have been cut, but the bond debt issued by the government was not in danger of default – we have the cash to pay because the federal government continues to receive income.
• There is no way the U.S. would ever willingly choose to throw the entire global economy into a tailspin with such a move – all other talk to the contrary was political saber rattling.

In addition to this, there was some worry about whether or not there would be a run on banks because of the problems associated with the shutdown and debt ceiling talks.  This was such a concern, that we were informed of some measures being taken to control the pending chaos by local law enforcement should such a run take place.

This would have been unnecessary, even if the government failed to raise the debt ceiling.  We would not have defaulted – as noted above – but also the Federal Reserve and the FDIC are separate entities from the federal government and are independently funded and self-supporting entities.  FDIC insurance on deposits is independent of the government’s support and has nothing to do with the budgets there.  Banks and other institutions pay a premium for the use of the FDIC program; even the exams and other regulatory support is paid for by these banks.  They do not rely on the government being in operation to function – so even if the government shutdown was going to be prolonged, there was not anything that would have put deposits in jeopardy.  The same holds true with the Federal Reserve – it is overseen by the federal government and has appointed members from the federal government, but it is not a federal bureau in the same sense that say – the BIA or Department of Justice are.

The banking system in the U.S. is unique in the world and among the strongest because we are not fully concentrated in one or two banks and the competition creates better service and latitude.  Because of this – reserves and other processes to protect the system are in place to work separately from government sourcing alone.

Please do not misconstrue this as a this-was-no-big-deal attitude about the partial shutdown recently.  Many people, especially in our area, were affected as the checks were held up for their employment, etc.  However, this was just to clarify some facts regarding the cross talk that happens when rare things like this happen.  If you are ever concerned about the safety of your money, your deposits, or other questions like this, please do not hesitate to ask us at the bank and we can help you navigate these, sometimes turbulent, times.

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