Still, no Armageddon, unless . . .

I think we're looking at a gradual worsening of the U.S. global financial posture. But that doesn't count as Armageddon, because that's pretty much what investors have been looking at for years. Do you know anyone who is surprised at this trend?

My big worry is that the current slow erosion of faith in U.S. Treasurys will turn into a cascade of unanticipated consequences if the debt ceiling isn't raised. Treasurys play a unique role in the global financial markets. They aren't important only because they're jammed into so many global portfolios, including the portfolios of so many of the world's countries. They're also important because they serve as collateral on a huge percentage of the complex deals that use derivatives to shift risk around the globe.

It's that role that makes me think Armageddon is a possibility. It's a remote possibility, I think. But given the very limited information about these markets and the balance sheets of the players, I can't say with any degree of certainty how small the possibility might be.

A look at repo market

For example, Treasurys are used as collateral for cash loans in the repo (repurchase) market. In a repo agreement, the seller of a security agrees to buy it back from a buyer at a higher price on a specified date in the future. Repos are, in effect, short-term loans; they are used to raise short-term cash by banks and corporations. Central banks, such as the Federal Reserve, also use them to manage the money supply. To expand the money supply, the Fed decreases the repo rate at which it buys back government debt instruments from commercial banks. To shrink the money supply, the Fed increases the repo rate.

It's a huge market. Bank of America Merrill Lynch estimates that 74% of primary dealer repo financing -- or about $2.1 trillion -- involves Treasurys as collateral. And you don't have to be JPMorgan Chase (JPM, news) or the European Central Bank to have exposure to this market. Money market funds have big chunks of their cash in the repo market. (Anyone who remembers the problems that the Lehman crisis created for money market funds should regard any advice on using money market funds as a safe haven in the event of a U.S. default with extreme skepticism.)

And this is just one of the markets that uses Treasurys as collateral. According to estimates by JPMorgan Chase, about $4 trillion in U.S. Treasury debt is used to back deals.

The truth, though, is that no one knows exactly what would trigger problems in one or more of these markets. We do know, though, that Wall Street is worried. The Financial Times has reported that Matthew Zames, an executive at JPMorgan Chase and chairman of the Treasury Borrowing Advisory Committee, wrote in April to Treasury Secretary Timothy Geithner that "a default could trigger a wave of margin calls and a widening of haircuts on collateral, which in turn could lead to deleveraging and a sharp drop in lending." On July 15, the Securities Industry and Financial Markets Association held a meeting with staff from the big banks to discuss the effects of a U.S. default on those markets.

Watch the ripples

The ripples from any default or downgrade of the U.S. credit rating would spread out like this: Investors who lent cash against Treasurys as collateral would require more bonds to back their loans. That would force borrowers to find cash, sell other assets or close their repos and other positions. And that would set off a wave of deleveraging very similar to the one that swept the financial markets in the wake of the Lehman bankruptcy in September 2008. We could get a replay of the credit crunch that almost brought down global financial markets and the global economy in 2008. (And this time the Federal Reserve would be unable to ride to the rescue.)

As I say, I think this is a remote scenario. But what troubles me is that almost three years after the Lehman bankruptcy, the global financial system remains pretty much the opaque network of undisclosed and unregulated leverage it was then. Very little has changed that would prevent a replay of that crisis.

To me, such a rerun would qualify as Armageddon -- and that makes me wonder why nobody who is trying to get this debt ceiling deal done is explaining to voters this aspect of the danger we all face. Maybe it is too complicated -- not for voters but for the politicians who sit in Washington. Certainly we've seen a very convincing demonstration over the last few weeks of Washington's abysmal level of understanding of finance and economics.

Why didn't they fix this?

But I can't help thinking that there's something else at work. Neither party really wants to draw attention to the fact that it did so little to fix the system that produced the last crisis. The Republicans have concentrated on gutting a system of reforms, even before the regulations for them have been written, but nobody thinks the reforms being so tepidly defended by the Democrats in Congress and in the White House really get at the problems that contributed to the last crisis.

Click here to become a fan of MSN Money on Facebook

Above all, I suspect, nobody wants to admit that the pain a failure to raise the debt ceiling and a downgrade of the U.S. credit rating following a default would inflict on the average voter isn't enough reason to reach a deal. But that worries from Wall Street might well be.

When the country remains as angry as it has every right to be about Wall Street's ability to escape the consequences of the last crisis, I doubt that anyone in Washington wants to remind voters that the folks in D.C. listen to Wall Street and ignore Main Street.

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. Find a full list of the stocks in the fund as of the end of March here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.