Dean Baker is an economist worth listening to. He was one of the few who recognized the housing market bubble. He forcefully predicted that mortgages were in peril — at a time when better-paid financial professionals were doubling down on toxic assets and collecting massive bonuses for being so smart.
Baker, who heads the left-leaning Center for Economic and Policy Research, is warning that Republican brinksmanship over the U.S. debt ceiling could hurt one of the GOP's most cerished constituencies: investment banks.
"There is no doubt that the failure to raise the debt ceiling would be very bad news for the economy," Baker writes. He predicts an even more grim re-run of the recent crisis, hurting us all. A default would "shake the financial markets even more than the collapse of Lehman in September of 2008," freezing credit markets and forcing companies "to dump millions of workers, as they could no longer meet their payrolls."
Remarkably, Republicans are now actually warming up to such a catastrophe, in hopes it would force Obama to make deep cuts to social programs like Medicare, Medicaid and Social Security.
But Baker argues that the real victim would be Wall Street. "A debt default would almost certainly make all the major banks insolvent as they would have to mark down the value of U.S. government debt," he explains. And the pain wouldn't be short-lived.
"Even when the economy revived, the U.S. financial sector would never hold the same place in the world as it does today. Without the ironclad financial backing of the U.S. government standing behind them, the Wall Street gang could never again be the dominant actor in international financial markets."
Baker's article is worth a read in its entirety.