Gonna blow up the whole country

I honestly have been expecting there to be a deal on the debt ceiling one way or the other simply on the grounds that it would be very very crazy not to get one.

The first to fall will be “directly linked” debt. These are bonds that rely on payments from the federal government. Naomi Richman, a managing director in Moody’s Public Finance division, puts it bluntly: “There are certain kinds of municipal bonds that are directly reliant on Treasury paying or some other direct payment,” she says. “If those bonds don't receive their payment, they have no other source of revenue.” So down they go.

Then there’s the “indirectly linked” debt. That’s debt from state government, local governments, hospitals, universities and other institutions that rely, in some way or another, on payments from the federal government. If Medicaid stops paying its bills, all the hospitals that rely on Medicaid’s payments become less creditworthy. If we stop funding Pell grants, then all the universities that enroll students who pay using financial aid become less creditworthy. And since the federal government passes one-fifth of its revenues through to the states, and the states pass those revenues through to cities, if the federal government stops paying its bills, all states and all cities are suddenly in worse financial shape, which will make it harder for them to get loans.

And then there’s everything else. Mortgages. Credit cards. Loans that businesses take out to expand. Much of the debt in the American economy, and in fact globally, is “benchmarked” to Treasury debt. When your bank quotes you a mortgage rate, the calculation begins with the rate on 10-year treasuries and then adds premiums for various types of risk specific to you and your area on top of that. “There’s a whole credit structure,” says Pete Davis, president of Davis Capital Investment Ideas. “Think of it as roads and bridges, but it’s finance, it’s all connected, and it’s all on top of treasuries. Your CD at a bank, your credit card interest rates, your car loans, your mortgages — that’s all built on Treasury rates. So when you shake the basis of it, everything on top of it shakes, too.”

But now I'm starting to wonder if they really are very very crazy.