This is Part V of a six part series replying to a claim by the President at his recent White House News Conference. Part I covered the News Conference and the first two (the selective default, and the exploding option) of seven options the President might use to try save the US from defaulting in the face of continued deadlock in the Congress on raising the debt limit or repealing the law enabling it in its entirety. Part II discussed Platinum Coin Seigniorage, invoking the 14th amendment to justify continuing to issue conventional Treasury debt instruments, and consols. Part III discussed premium bonds, and Treasury sales of the Government’s material and cultural assets to the Federal Reserve. Part IV, then evaluated all seven options in light of variations among them in likely degree of legal difficulties they might face, and also the likely impact of each on confidence in the bond markets, if used.
The President’s Obligations, What He Ought to Do
I think I’ve shown that the President has an obligation not to use the 14th amendment followed by continued debt issuance, because there are many other options available to stop debt ceiling terrorism when it occurs. Of course, while I’ve been writing this, the Republicans have proposed to extend the debt limit to handle deficit spending for the next 6 weeks. But they’re wanting large concessions for that. The President is supposedly still “standing firm,” rejecting the Republican proposals, and the Senate is insisting on an agreement that both ends the shutdown and ends the possibility of any further debt ceiling terrorism until after the 2014 elections. Don’t worry, however, as long as the debt limit legislation is in place, and the Republicans control the House, and we have a President who will not end the deficit terrorism/debt ceiling game we will have more debt ceiling crises.
So, let’s get back to the options. If the President is obligated to obey the 14th amendment, then he should be doing whatever he can to use the other options to end the debt ceiling crisis. He should not be playing chicken with the Republicans over the debt ceiling and the shutdown. Both are dangerous to the economy, and there is a real risk of default in allowing the Treasury’s daily available balance to fall to the level it will be at as of October 17th.
The President’s rationalization for playing debt ceiling chicken is that he has no options apart from outfacing the Republicans. I’ve outlined 6 options apart from the premature use of the 14th amendment. So clearly, there are many alternatives, and the President’s TINA framing doesn’t hold. So, I think he ought to stop rationalizing and do something apart from playing chicken.
The way the chicken game is working, both sides are now edging toward a “Grand Bargain,”/”Great Betrayal.” Americans don’t want a “Great Betrayal.” Every poll shows that most people don’t want Social Security or Medicare cut.
The Congress and the President have a duty to represent us by delivering what people want; not what they and their corporate sponsors want. So, I think it’s their individual and collective duty to stop playing chicken and offering the Great Betrayal of us to each other as a possible compromise.
I know the President has maneuvered to keep the Great Betrayal in the political game since at least January 2010. Many people think that he’s been playing chicken with the Republicans, because he wants to create a crisis that will make the Great Betrayal, seem to be a matter of necessity. But given the options I’ve outlined, it is not that. It is the politics of choice. He ought to stop making that choice. We elected him and he owes us that.
On the debt ceiling, he doesn’t have to play chicken or to compromise, or to pay ransom. All he has to do is use his options. As the representative of all the people, that is his obligation. So, how should he use these options? How will they work best. Here’s what I think.
A few weeks ago, Bruce McF published a very good post in which he suggested a composite strategy for defeating the debt ceiling. He outlined three steps: a) sell consols, b) mint megacoins, and c) order the Treasury to defy the debt ceiling. He advocates using all three options because he thinks that the Supreme Court will either uphold the use of consols, or failing that the platinum coin, because corporate interests want neither default, nor a test of the constitutionality of the debt ceiling law in the Supreme Court, since the debt ceiling law is useful to them as an enabler of kabuki games which they value. I agree with his approach and his reasoning, and I like his strategy.
But, as I said, earlier, I don’t think the debt ceiling law is unconstitutional in the present context of multiple options, so I wouldn’t propose issuing orders to defy it as the third option. Instead, I think the President should 1) begin by selling consols; 2) make asset sales to the Fed; 3) mint the $60 T coin and 4) order defiance of the debt ceiling if and only if the Court invalidates the first three options.
If the Court invalidates consols it can only be on grounds that they have an implied face value not specified on the consol bond. If the Court makes that kind of move however, then it’s pretty clear it would consider premium bonds invalid too, because it would conclude that the sale price is the true implied face value of the bond.
Also, if they invalidated 2) one could also conclude that they would invalidate the exploding option too, because the only basis for invalidating 2) is the view that asset sales from the Treasury to the Fed are illegal due to some still to be determined interpretation of the Fed Act. Since the exploding option is an asset sale too, one could then assume that this option would not be sustained either.
That brings us to the $60 T coin. Why mint it rather than a Trillion Dollar Coin or two? Because, with the first two invalidated, Wall Street will be spooked, and they will pressure the Court to stop striking down counter-measures to the debt ceiling. Most people will feel that way.
The Court will be highly pressured from a fearful public and they will be very likely to want to end the disputes as well as the periodic debt ceiling conflicts that are roiling markets and the economy. So that is the best chance to see the $60 T coin sustained by the Court, and to both end debt ceiling crises and to get rid of the public debt for good, or at least for a very long period of time.
If the coin were rejected too, that would leave only the 14th amendment and selective default still standing. At that point, defiance of the debt ceiling would be strong in Court because selective default could be set aside aside on grounds that it is too risky in relation to default to sustain for very long, and that then leaves the argument for defiance based on unconstitutionality of the debt ceiling law a very strong argument. The Court will then surely accept the argument and invalidate the debt ceiling legislation for good.
What He Probably Will Do
In my view, the President decided a long time ago that he would primarily seek to serve the 1% and not those who have elected him, now twice. I won’t argue that case in this piece, but will just use it as an assumption underlying what I think he will do.
First, I think he will keep the pressure on Republicans and Democrats in Congress and on the people of the United States, because he doesn’t want to waste a perfectly good crisis, before it has reached its peak, he wants to bring Wall Street pressure to bear on the Republicans to get them to weaken the tea party’s grip, since he can work for his own objectives much more easily with people like Boehner, Cantor, and Ryan
Second, he will also keep the pressure on because the Republicans are getting the blame for the crisis and he sees the possibility that there could be a Democratic Congressional victory in 2014, that will save him from a possible impeachment effort in the last two years of his presidency.
Third, at some point, the risk of default resulting from the crisis will become too risky for the President to allow it to continue, and also the immediate uncertainty being created by the crisis will grow too great, and he will want to end it. At that point he will look to his options.
Fourth, he will try to go for a version of the Grand Bargain, a Bowles-Simpson catfood commission variation of some kind. In fact, that has been on his table all along, and if he succeeds in using the pressure of the crisis to get the Republicans in the House to defy the tea party, then he will conclude that kind of agreement with the Republicans quickly, if he can get the Democrats to go along with it.
Whatever happens he can probably get a lot of Democrats to go for it, especially if the debt limit is raised sufficiently to make it likely that further negotiations can be avoided until after the 2014 elections, and if the sequestration is ended or greatly reduced in severity. Whether this will work however, depends on the outcry opposing the Grand Bargain, both from the tea party and the progressives.
The heaviest resistance may come in the Senate from people like Patty Murray, Elizabeth Warren, Barbara Mikulski, Bernie Sanders, Sherrod Brown, Sheldon Whitehouse, Tom Harkin, Mark Begich, Barbara Boxer, Kirsten Gillibrand, Ron Wyden, Jeff Merkley, Jon Tester, Patrick Leahy, Debbie Stabenow, Carl Levin, Ben Cardn, Jay Rockefeller, and others. Democrats in both Houses don’t want to have to run in 2014, having to defend a vote to weaken the safety net, and especially Social Security.
Of course, any agreement will try to give them cover and they will cry TINA as much as they can, and point out that they got sequestration cut back, Obamacare untouched, and a long period without further debt ceiling crises. But if news of the alternatives available to the President to just make the debt ceiling law irrelevant, gets known widely among the public, then this could result in serious problems for Democrats facing both primary and general election opposition. I think the News will get out, because the Republicans will see to it without advocating for the alternatives themselves, in order to suppress the Democratic vote.
Fifth, it may prove impossible to get the Grand Bargain done any time soon because of heavy tea party and progressive opposition. If things work out that way then the President will have to decide whether he wants to conclude a short term CR and debt limit deal with the Republicans, and plan to try again for the Grand Bargain in December, or perhaps in February of 2014, if another debt ceiling crisis and/or government shutdown crisis is scheduled again as a consequence of the short-term fix passed now; or, alternatively, whether he wants to get off his “Grand Bargain” horse, for the foreseeable future, since as we get closer to the 2014 election, there will be less and less appetite in Congress to risk passing it, and give people a fresh memory of their representatives cutting their entitlements.
Sixth, if he does decide to forget the “Great Betrayal,” and turns to the problem of trying to get agreement by removing the debt limit tool from the Republican arsenal, and letting the increasing pressure of the Government shutdown break the resistance of Republicans to a “clean CR” bill that Democrats can live with, then that is where the options discussed in this series may come to the fore.
When that happens, I think the 14th amendment will go to the rear, and that he will seek to do the least he can do to restore “normalcy” to fiscal policy while departing as little as possible from current practices. That means using one of three options: consols, asset sales to the Fed, or platinum coins.
I don’t know which of the three methods or what mix of the three he will use. But I think his objectives will be to make as little use of the options as he can to avoid default. So, I think he will try to make available $90 Billion per month in increased reserves, for as long as the Republicans resist raising the debt limit, and he will try to make the point that he is using these emergency measures only to avoid the default, and to show the Republicans that they can’t use the debt ceiling as a way of extracting concessions ever again.
He will avoid using HVPCS (extremely high value PCS), because he doesn’t want to pay off the national debt and stop issuing Treasury securities, since doing that is against the interests of Wall Street, and doing that would also show that there is no need for the Grand Bargain he has been pursuing for nearly the past four years. In addition, using HVPCS would make clear to the American people that there is a third alternative to taxing and borrowing if the Federal Government wants to spend, and that PCS may be preferable to using either of the other two methods either as much as do or at all. The President doesn’t want to go near that Copernican Revolution in the public’s understanding of fiscal matters because he knows that the truths of that revolution would be unwelcome ones among his benefactors and his reference groups
If the three methods are used, he may use some mix of the three. Following Bruce McF’s line of thinking, that would be the safest thing to do to avoid a Court outcome disrupting the markets. If the coin is contested and then declared unlawful based on a reading of the “intent” of the coin-enabling legislation, then the slack in “funding” can be taken up by the other alternatives. If premium bonds are found to be contrary to law, then he can rely solely in consols. And if the Court, has the gumption to declare all three in violation of the law, then he can much more confidently assert that the 14th amendment mandates him to continue to issue conventional treasuries to avoid the default problem.
Apparently, Jack Lew can probably avoid default after October 17th for at least a week. So, if Congress hasn’t pulled back from the precipice by then, then I think the President will act in the October 22nd – 25th time frame to activate at least one of the three alternative methods, probably consols.
Then he will probably follow with asset sales and finally with “small ball” platinum coins in the $30 Billion range. As he introduces each alternative, he will try again to get the Republicans to agree to raise the debt ceiling and also get Wall Street to pressure them on grounds that the more alternatives he resorts to, the more their debt ceiling leverage will decline and the less they’ll be able to get for raising the debt ceiling. Eventually, the Republicans will get the message and pass a clean debt ceiling bill if the President actually wants one.
Update: At DailyKos Bruce McF offered the following clarifying comment on this post, which he has graciously consented to my re-publishing as an update:
(@BruceMcF on Twitter)
We’ve seen this Supreme Court in the Affordable Care Act decisions show a preference for a split decision, when it found the Exchange system constitutional, with the Mandate viewed as a tax, but the system of pressuring states into expending Medicaid to cover people up through ~140% of the poverty line found unconstitutional, leaving at present 26 states out of that system.
Which is why I have refined the Treasury offerings to:
- a 10yr 100% coupon Premium Note; and
- a Fixed Interest Payment Consol bond.
Unlike a classical Consol bond, this Consol would not be callable (it would be retired by buying it back on the open market). The statutory authority to set issue price and interest rate would be used to set the issue price as the result of the auction, and the interest rate to be precisely the rate that generates $1000 in payment annually.
It even more clearly has no face value than a Consol with rate at which it can be called back ~ with a Fixed Interest Payment, it has no face value at all. It has an issue price, but premium bonds are counted at face value, not issue price.
A $1,000 10yr 100% coupon Premium Note if priced to yield 5% would be worth about $8,300, so rolling over $40b in debt with Premium Notes would have a face value of less than $5b, so reduce the debt ceiling by $35b. $35b in the debt ceiling is sufficient to allows sale of $290b worth of Premium Notes for new debt, well over the normal net monthly deficit.
It clearly has a face value, since it pays $1,000 on maturity.
Selling a mix of both would mean that if the Supreme Court ruled one valid but not the other, the Treasury would be in a position to promptly use the valid instrument to buy back the invalid instrument.
(Cross-posted from New Economic Perspectives.)
Photo by Katie Harbath under Creative Commons license