Fed's Plosser Admits 'Helicopter Bernanke' Is Planning For Potential U.S. Debt Default
Jul 21, 2011 at 11:25 PM
DailyBail in bernanke, bernanke, charles plosser, debt ceiling, default, fed. federal reserve, federal reserve

(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.

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