Was the Debt Ceiling Crisis Useful?

The debt ceiling crisis was not entirely bad, says MoneyShow's Jim Jubak, who points out the few advantages it did provide, and the new areas to worry about next.

Well, you know, you cannot say that the debt ceiling crisis, manufactured as it was, has not been useful. We now have a little better sense of how the world central banks will react to this crisis, because we have seen how they reacted to the current one, and now that gives us some guidance for how they will react to the next one, when this comes up again in, say, February, according to current legislation that is likely to pass.

The thing that we have seen is that way back in the depths of the global financial crisis in 2008, the Fed opened a lot of credit lines. They were basically willing to lend dollars to any central bank that needed it around the world, so that the global financial system would keep going. They closed some of those lines at the height, there were about 14 in operation, but what they did in 2010, and what they have kept going now, and extended is, they still have major credit lines out to the Bank of England, the Bank of Canada, and the European Central Bank. This gives these banks a chance to borrow as many dollars as they need, to keep their own monetary systems going, and also gives them the dollars that they might need to buy treasurys. If you are looking at a place where the system might fail, and I think that is what we are trying to figure out from this iteration of the debt crisis, we are not looking at the treasury market as really being one place that would happen. It looks like we are going to have plenty of liquidity in the world's most liquid market, thanks to the Fed, and other central banks.

The question then, is really, "Well, if that is not our worry, where else can we worry?" We should put that behind us, but I think that leaves us with a lot of other worries, because we still do not know who in the system might be unwilling to hold treasuries as collateral. We do not know where liquidity might freeze up. We know that it is not going to happen in the treasury market per se, but we have already seen money market funds decide they are not going to hold short treasuries and that means that that part of the market has sort of seized up. We can say, with a great deal of confidence, I think at this point, as much as there is any confidence in the system at all, the problem is not going to be at central bank level. It is not going to be in the dollar market, it is probably not going to be in the treasury market, so we can take those off our list and start looking for other places where it all might go to hell in a hand basket.

This is Jim Jubak for the Money Show.com Video Network.