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How A Default Could Devastate The Country

Among the growing signs that the U.S. is bracing for the possibility of default:

Treasury Secretary Timothy Geithner and Federal Reserve Board Chairman Ben Bernanke met Friday for 90 minutes to begin contingency plans for preventing a default from triggering a calamitous ripple effect through the economy – which could send stocks tumbling to financial crisis levels of three years ago, strip major banks of essential liquidity and touch off an international financial crisis. The administration has also begun discussing how best to prioritize expenditures of revenues once the Treasury exhausts its borrowing authority, such as whether payments to creditors like China and Japan should take precedence over sending out Social Security checks or paying the military.

* Maryland and Virginia, home to large numbers of federal workers and government contractors, were put on notice by Moody’s last week that their credit ratings may be downgraded if the federal government is forced to lay off tens of thousands of workers and postpone paying contractors in the event of default. Experts say the government would have to almost immediately cut spending by 40 percent when the Treasury exhausts its borrowing authority early next month.

* Nationwide, consumers and financial advisers pondered the effects of another possible stock market crash that could decimate 401(k) retirement funds, push up interest rates on mortgages and car loans, throw more people out of work and possibly send the fragile economy back into a recession.

“It’s conceivable the worst-case scenario is that the entire financial system of the world just freezes up, and it will make what happened with Lehman Brothers look much less by comparison,” Bruce Bartlett, a former Reagan White House policy adviser and columnist for The Fiscal Times, said on Saturday.

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