2011 Debt Limit Crisis: How Should the Fed Respond?

It seemed unthinkable to many, but in July of 2011, the possibility that the US federal government would default on its debt was becoming an increasing likelihood. The problem was not insolvency; rather the Congress was refusing to increase the debt limit of the country. Without Congressional action, the Treasury Department would not be able to issue more debt, and in turn, pay off coming obligations and the interest on the current debt. For Ben Bernanke, the Chair of the Federal Reserve System, breaching the debt limit was concerning. As the Treasury’s fiscal agent, Bernanke and the Fed would advise the Treasury on how to pay its obligations. Observers conceded that both available options would disrupt the economy, but which option was the least bad? No matter how the Treasury chose to pay its obligations, the Fed’s charge to regulate large money center banks and maintain stability in the financial markets would be put to a test. A Treasury default would mean that there would be large