Fed's Plosser Admits 'Helicopter Bernanke' Is Planning For Potential U.S. Debt Default

(Reuters) - The Federal Reserve is actively preparing for the possibility that the United States could default as a deadline for raising the government's $14.3 trillion borrowing limit looms, a top Fed policymaker said on Wednesday.

Charles Plosser, president of the Philadelphia Federal Reserve Bank, said the U.S. central bank has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash on August 2.

"We are in contingency planning mode," Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged. ... It's a very active process."

One aspect of the Fed's contingency planning is purely operational: the Fed is developing procedures about how the Treasury would notify it on which checks would get cleared and which wouldn't, Plosser said.

The Fed effectively acts as the Treasury's bank -- it clears the government's checks to everyone from social security recipients to government workers.

"We are developing processes and procedures by which the Treasury communicates to us what we are going to do," Plosser said, adding that the task was manageable. "How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good?"

Plosser added that there are difficult questions that the Fed itself had to grapple with.

The Fed lends to banks at the discount window against good collateral. But what happens if U.S. Treasuries no longer fit that bill?

"Do we treat them as if they didn't default, in which case we would be saying we are pretending it never happened? Or do we treat them as if they defaulted and don't lend against them?" Plosser said. "Those are more policy questions."

Plosser, who was a vocal critic of some of the Fed's extraordinary lending during the financial crisis -- which he said veered into fiscal policy and risked the central bank's independence -- warned it would be crucial for the Fed not to do the Treasury's work for it.

Continue reading at Reuters...

Comments

[Thebes]

So, if the Federal Government passes a bunch of bad checks, can we lock it up in jail?

[Vernon Clayson]

Such crap, the government will not become penniless on August 2nd, the never ending transfer of funds from people, businesses and organizations along with all the fees associated with government services continues. Are we of a sudden Germany after WWI, currency worthless and reparations due? The House of Representatives bears responsibility for federal expenditures but from all appearances they have relinguished that duty to floundering Obama and his circle of incompetents - and they are protected by their royal praetorian guard, Harry the Red Reed and his corrupt hedgers in the Senate. No one should be fooled, there is more to this so-called emergency than meets the eye, there's a bit of a plot towards instituting socialist government but there's more of covering up, no one among this band of thieves ever explains what they have done with the trillions of dollars they have scavenged from us. The money is gone but not one of them will admit to their careless profligacy, their fault, in bringing the richest nation in all of history to the brink of technical bankruptcy. We elected the devious ingrates that brought us to this circumstance and now they are back for more. If they are so sure of their positions, let's see them hold an odd year election for September 1st of this year.

[robertsgt40]

"We are in contingency planning mode,".....Me too. More ammo, food, water and TP

[Vernon Clayson]

Robertsgt40, how can you believe that storing up ammo, food, water and TP will do you any good against the local, state and federal law enforcement and military forces that will descend on you if you were to defy the government. You say you have a contingency plan, hell, they'd consider you at most a minor irritant and not worth the bother. If you get too uppity, they might treat you like the family at Ruby Ridge where they killed a man's dog, his son and his wife, in that order, because he, not they, defied the government. Get real, they make and enforce the rules, our recourse is in voting and believe it or not, they control that, who really knows the results of elections, the country is just Chicago writ large.

[Vernon Clayson]

Robertsgt40, check the Rochester NY news, that great and good city sent a SWAT team and 25 police cars to evict an old black woman because she hadn't paid the taxes incruing while her husband's probate was wending its way though the court. And chances are you are on some watch list with your comment. Life's a bitch.