Debt Crisis Could Make Lehman's Fail Look Lame

Downgrade could be worse: Neel Kashkari
By Polly Davis Doig,  Newser Staff
Posted Jul 30, 2011 11:55 AM CDT
In this Nov. 10, 2008 file photo, assistant Treasury Secretary Neel Kashkari, a Bush-era appointee who led the federal government's $700 billion bank rescue effort.   (AP Photo/Mark Lennihan, FILE)
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(Newser) – If the debt follies in Washington result in US credit being downgraded, it could end up being a worse financial hit than the epic failure of Lehman Brothers, writes Neel Kashkari. The former assistant secretary to the Treasury, who was appointed by George W Bush to oversee the $700 billion bank bailout, notes the harsh lessons of 2008 and breaks down the similarities and differences between then and now in the Washington Post:

  • Too safe to fail? Pre-2008, everyone "generally believed that major US investment banks were so large they would never be allowed to fail." But since US Treasurys have been the "risk-free" gold standard for decades, "a far bigger shock" than Lehman could occur.

  • How much money are we talking? With a whopping $14 trillion, US Treasurys are "the single biggest security market in the global economy." Lehman, in comparison, was worth $600 billion—less than 5% of that.
  • Will we actually default? Probably not. "But a small deviation from a cherished belief can be as shocking as a large deviation from a weaker belief."

Kashkari points to differences in the economic climates of 2008 and the present, but says a "US downgrade has the potential to be as bad or perhaps worse than the Lehman shock." We may be sure of only one thing: "There is no upside to finding out." Click for Kashkari's entire column.

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