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Off the Debt Limit Hook for at Least the Next Four Months

10:21 am in Uncategorized by letsgetitdone

(photo: L. Marie)

Provided that the Senate and House follow through on the scenario now on the table, it looks like the game of chicken worked for the Democrats this time. We’re off the hook on default and Government shutdown for now, and Washington village pundits are in full-throated cries of celebration.

Congress is off the hook too. They don’t have to offer any solutions to real, rather than manufactured, problems.

The President is also off the hook, he won’t, for now, need to exercise any of the options, like minting the coin, using consols, or premium bonds, or asset sales to the Fed, or others available to him to render the debt limit legislation impotent. So, he gets to preserve debt limit threats from the Republicans as a negotiating tool they can use to “force” him into entitlements cuts later on.

In fact, as I write Jay Carney is already talking about the President taking “a balanced approach” to future negotiations of fiscal policy so that the burdens of sacrifice will fall on everybody fairly. And, a bit later, there’s Nancy Pelosi echoing the Administration line on future negotiations. That, of course is also the Pete Peterson, Bowles-Simpson, catfood line for justifying further victimization of food stamp recipients, seniors, children, and the people who have paid the price for the Crash of 2008 and the neoliberal period in American fiscal policy beginning in 1977.

However, the deal that looks like it will happen isn’t a solution, but just kicking the can down the road including built-in pretty good possibilities for future Government shutdown and debt ceiling crises in just three – four months, if Congresspeople have the guts to subject the American people to this nonsense again in an election year.

Here’s Annie Rose-Strasser’s outline and analysis of the deal at Think Progress:

– Government funded through January 15 at sequestration levels

– Debt limit extended until February 7, subject to vote of Congressional disapproval, which Obama can veto

– A budget conference established to come up with long-term spending plans by December 13

– Income verification for recipients of subsidies under Obamacare’s newly-established exchanges

– Backpay for furloughed workers

Also, notably, here are some of the demands that Republicans have made in the last few days, but that are NOT in the bill:

No repeal of the “extraordinary measures” provision that allows the Treasury to do accounting tricks to avoid default

No ‘Vitter Amendment‘ that would have taken away employer contributions from the health plans of Congressional staff

No provisions related to birth control access

No flexibility in how government agencies make budget cuts to their programs, as they are required to under sequestration

No repeal or delay of the medical device tax

No repeal or delay of the reinsurance tax

No repeal, replacement, or delay of any aspects of Obamacare’s exchanges or individual mandate

It might look like this is overall a good deal for Democrats given the number of things that Republicans aren’t getting. It is good: It reopens the government and lifts the debt ceiling without doing any major additional damage to existing programs.

The word “additional” is the key here, since enormous damage has already been done to people and programs due to the various compromises made to avoid shutdown and debt ceiling threats since August 2011. These deals have placed increasing fiscal drags on the American economy and, increasing Government austerity that is preventing full recovery from the Great Recession. The current “deal” already involved a pre-surrender by Democrats to Republican proposed CR spending levels. Annie Rose – Strasser recognizes this.

But it’s important to remember that the baseline for negotiations wasn’t exactly even: Democrats accepted the major budget cuts of sequestration (slated only to get worse on January 15, the same day their budget deal expires), and their only demand was actually the status quo: Keeping the government running and having the country fulfill its financial obligations. They didn’t request to restore the funding sequestration took away, they didn’t demand any new programs or initiatives that Democrats support. And if the previous budget conference is any indication, the one established under this deal has the potential to blow up in Democrats’ faces, leading to more cuts instead of an actual, long-term budget. In that sense, while it is the best, cleanest deal we can get, the Democratic party has been pulled slightly from center to right, not from left to center.

Meanwhile, Republicans threw everything but the kitchen sink into their negotiations. It’s no surprise they’re taking a lot of losses.

Yes, we will have the Government open and the debt ceiling temporarily raised to get us through a few months, and the President is saved from going outside his comfort zone and giving the teahadists an excuse to try to impeach him, but the fundamental problem of the gradual imposition of increasing levels of government austerity creating economic stagnation is not being addressed, and, in addition, the even more serious problem of having laws in place that give a small minority in Congress the possibility of holding both the US and world economies hostage to their ideology is also neither being addressed nor solved.

So this is no victory, and no cause for celebration. The conditions are still there supporting a Great Betrayal, and another slide into recession, along with the possibility of another Global Crash due to financial manipulations in the mortgage international derivative markets.

Meanwhile, what can we look forward to? A brief respite from budget battles and then a rush through a manipulated membership budget conference designed to produce a Bowles-Simpson austerity “solution” to be completed by December 13, to be voted up or down, and with a good likelihood that this Conference will either fail to come up with a result, or that its results will be rejected by teahadists or fellow travellers who will never accept tax increases, and by progressives who will be unwilling to vote for entitlement cuts in the face of upcoming elections.

Meanwhile, the drag on the economy and the unhappiness of the 99% will continue with no real relief in sight because no in either party has the courage to repudiate the dogma that a sovereign fiat currency nation like the United States can have a long-term debt problem requiring a long-term deficit reduction solution. Truly, everyone in Congress needs to be replaced by people who understand the Modern Money Theory (MMT) approach to economics and who are willing to explain it to their constituents and to advocate for fiscal policies based on it.

(Cross-posted from New Economic Perspectives)

Photo by L. Marie under Creative Commons license

Rationalization and Obligation, Part VI: What He Ought to Do, What He Probably Will Do

6:46 pm in Uncategorized by letsgetitdone

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. Read the rest of this entry →

Rationalization and Obligation, Part V: Differences Are Everything

7:38 pm in Uncategorized by letsgetitdone

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. Read the rest of this entry →

Rationalization and Obligation, Part IV: Differences Among Options

7:05 am in Uncategorized by letsgetitdone

In Part I, Part II, and Part III, I listed and analyzed seven options, analyzed them and also pointed out that the President’s 14th amendment option, actually makes turning to the 14th as a justification for continuing to issue debt beyond the ceiling, a last resort, and also places an obligation on the President to exhaust other available options, whose legality is probable, but not finally determined by the Supreme Court. But, in his recent Press Conference, the President also failed to recognize any differences among the options in relation to his main point: that loss of public confidence caused by legal challenges would affect sales of debt instruments and other options including Platinum Coin Seigniorage (PCS).

Differences in levels of legal uncertainty among the options would surely affect the confidence issue. Option 1, selective default, seems legal, if not followed by Fed forgiveness of Treasury debt. It would probably have the effect of a partial government shutdown. But, as long as there’s no default on repayment of debt to everyone but the Fed, confidence related to buying Treasury debt should not be affected.

Option 2: the exploding option, is one of those that might result in both a legal challenge, and some uncertainty in markets, but I don’t think very much uncertainty, since whatever the Supreme Court decides about the legality of this, it’s hard to see them being able to do anything about it except ordering the Treasury and the Fed to stop breaking the law prohibiting the Fed granting credit to Treasury. Since the Treasury would be using the exploding option to acquire reserves from the Fed, but would not be issuing debt instruments, the Court wouldn’t be able to decide that the Government had no obligation to repay illegally issued Federal debt, which is the scenario the President used in his News Conference.

Option 3, is Platinum Coin Seigniorage (PCS). Legal questions about the coin have been raised, but as I said in Part II, the preponderance of opinion is that the coin is legal and will survive if challenged.

So, the question becomes whether a challenge to it will create a lack of confidence in markets affecting Treasury bonds? I really doubt that, however, since the “house ownership” metaphor, used by the President doesn’t apply to the coin, either. Its practical force comes from the idea that the market will reject debt instruments offered for sale after the debt limit is reached. However, the primary initial use of the coin would be to pay down the debt level, so no debt issuance would be involved in its use. Why should there be a problem with “bond market confidence” when debt repayment is continuing?

Only new creation of reserves by the Fed would be involved. So, the issue of confidence affecting debt marketability doesn’t arise in this case, since the private markets would not have to “buy” new reserves offered by the Treasury after the debt limit is reached, as they would questionable debt instruments issued by the President.

And certainly while legal challenges are going on, the President could be drastically reducing the debt subject to the limit by using coin proceeds to pay back debt, increasing confidence in markets with every significant payoff. Of course, this depends on whether the President mints a High Value Platinum Coin (HVPC), say $60 Trillion in face value, rather than “a small ball” TDC alternative, but that’s his choice, after all. So, in the end, whether there’s a problem with bond market confidence depends, in the end on the politics of choice, and not whether he uses PCS or not.

As for the Fed, it may or may not cooperate with the Executive on crediting the coin. But the law provides that in cases of disagreement in interpretation between the Fed Chair and the Secretary of the Treasury, that the view of the Secretary shall prevail.

In other words the Fed can be made to cooperate when it comes to crediting the coin, and it is highly doubtful that if the Fed is between the rock and the hard place of crediting the coin or allowing a default, that it will then choose the latter and risk the financial system collapsing. The Fed, after all, is pretty “chicken” about financial system crashes, and is likely to embrace its own version of There Is No Alternative (TINA), since, in addition to the rock and the hard place, the Fed’s compliance is unambiguously required in the law.

If the President did mint a really big coin, say the $60 T one, and then quickly paid off the intragovernmental and Fed debt, about $6.7 Trillion, and continued paying off short-term debt, and if the Court then granted standing, and, after six months or so, for example, declared his action unconstitutional, what would be the remedy the Court could implement to unwind the action, and the repayment of about $2 Trillion in debt to non-Federal entities? The Court might relatively easily be able to undo the $6.7 Trillion in repayment, but once the debt to non-Federal entities is redeemed; then it is redeemed. The former US bondholder “creditors” aren’t giving their money back.

As a practical matter the Court can’t do anything about that, since the reserves paid out are in private hands. Further, even if the Court ordered that the Treasury return the reserves used to repay the intragovernmental and Fed debt to the Fed and to issue new bonds to restore the status quo, all that would do is stop the President from paying down further debt, but still not eliminate the headroom under the debt ceiling he had created by paying down debt held by non-Government entities. So, even in this case of extreme reaction by the Court, he’d still improve the debt limit situation by minting the platinum coin, without taking the chance that the markets might reject the debt instruments without requiring higher interest rates.

Option 4, is the 14th amendment option nullifying the debt ceiling. The President has a point here, that if this were challenged in Court then bond markets might feel uncertain about buying bonds issued during the period the debt was exceeding the ceiling. However, even if the Court ruled not only that the debt issuance was illegal, but also that the debt instruments should not be honored, a very long-shot finding, I think, does anyone seriously think that the Congress would cause a default by refusing to guarantee those bonds after the fact of Treasury’s issuance of them? If you believe that, then I have the proverbial pretty big bridge to sell you.

The uproar would be far worse in that case than it was in relation to the issue of whether Federal workers would get back pay at the end of the shutdown or not. In any event as I said earlier, using the 14th amendment to justify violating the debt ceiling on grounds of constitutionality can only be a last resort when all other options haven’t worked. So, the President has an obligation to try the others before he even turns to this option.

Option 5 is the consols option. If challenged in Court, this is probably the least likely option to be overturned. The law doesn’t prohibit issuing consols, and while anyone with the money can sue over anything, the buyers of consols will certainly evaluate what the chances are that debt instruments of this type can be viewed as violating the debt ceiling, or as prohibited.

I think the chances here are slim and none, and that people would feel very comfortable buying consols because they would be confident a) that the Federal Government would not default on its interest payments, and b) that the consols would always be redeemable in private markets where buyers looking for these kinds of instruments would be willing to buy them. So, I think it’s incorrect to lump consol offerings into the same category as conventional bonds clearly issued in reliance on the 14th amendment and in obvious defiance of the debt ceiling. They would not be nearly as subject to doubt and uncertainty as conventional bonds would be.

Option 6, premium bonds, is another bond option that, like consols, seems to provide a way of escaping the debt ceiling while being less likely to shake the confidence of the bond market. I think that’s true because it’s hard to see what’s illegal about this kind of bond issue. All that’s different is a higher interest rate offering which allows Treasury to sell at a higher price at auction while obligating itself to a lower face value that must be repaid.

However, Matthew Yglesias and Kevin Drum are persuaded that such bonds are “. . . .bound to set off an avalanche of litigation and uncertainty about what’s really what.” Well, anything is possible, of course, but even if there is litigation aimed at this very simple and apparently legal expedient, why would that shake the markets very much? And if they did react with a bit of unsteadiness, wouldn’t there be a good deal less uneasiness than there would be with Treasury Bonds that might turn out to be unauthorized by Congress. I certainly think so.

Option 7, sales of Treasury material and cultural assets, is another option that involves the Treasury getting reserves from the Fed in return for an asset. It is in the same category, in this way, as the platinum coin, and the exploding option. But an asset sale, while possibly having the questionable political aspects I discussed earlier, is simpler and easier to understand than the exploding option, and less “out there” from the standpoint of financial practitioners and economists than the platinum coin. In addition, the Federal Government sells material assets continuously, but not to the Federal Reserve. However, I know of no legal prohibition against such sales. And faced with the choice of making such sales, or Government default threatening an international financial crash, I expect the Fed might well invoke TINA and take the plunge.

I also know of no reason why sales of assets like these would shake confidence in the markets. After all, the Treasury would be doing everything it can do to pay the debts of the United States and would be successfully doing so. So, why should that lead to “. . . an avalanche of litigation and uncertainty about what’s really what.” In Part V, I’ll continue this reply to the President’s TINA claim by summarizing my evaluation of differences among the options.

(Cross-posted from New Economic Perspectives.)

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Rationalization and Obligation, Part II: Coins, the 14th, and Consols

6:33 pm in Uncategorized by letsgetitdone

This six-part series is a reply to the President’s glossing over the options open to him apart from playing “chicken” with the Republicans over the debt ceiling. Part I, presented the President’s explanation, a summary of the kinds of difficulties characterizing it, and discussed two of seven options, selective default, and the exploding option, the President has to deal with it, apart from the way he seems to have chosen. Part II will discuss his platinum coin, 14th amendment, and consols.

Platinum Coins, the 14th amendment, and Consols

3. Using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt. This option, originating with beowulf (Carlos Mucha) in its Trillion Dollar Coin (TDC) form has gotten a lot of attention. But a variation of it in its High Value Platinum Coin Seigniorage (HVPCS) form, requiring a coin with face value of $60 Trillion for example, has received much less attention, except in my own writing.

The difference in the TDC and HVPCS variations in their political implications are great. The TDC looks like a temporary expedient to get around debt ceiling problems, whose use can be repeated when needed. But, it doesn’t quickly remove the political problem of “the national debt” from consciousness as one of our most serious political problems. On the other hand, minting a $60 T coin would change the background of politics by providing for relatively rapid payoff of the debt subject to the limit without balanced budget-creating recessions.

There’s been much analysis about the legality of using platinum coins with high face values for seigniorage revenue. There’s no overwhelming consensus on the matter; but most commentators with a legal background including some prominent law school professors and a former Director of the U.S. Mint, who was co-author of the 1996 law seen as providing the authority for PCS believe that its perfectly legal; but there are also law school professors, and the other co-author of the law, on the other side who argue that PCS violates the intent of the law.

My view is that the consequences of applying both laws and constitutional amendments often go way beyond any reasonable construal of intent; and that the Courts usually weight the plain language of laws more heavily than arguments about intent in determining their legality. In the case of PCS, with one co-author of the enabling law (Philip Diehl) currently writing about his view that PCS is consistent with the intent of the law, and the other co-author (Mike Castle) taking the opposite view, I think the Courts will be disposed to rely on the plain language of the law rather than trying to divine the intent of both Houses of Congress in passing it.

I also think that, with Government fiscal default at issue if the Courts overturn PCS, and with precedents in place denying standing to individual members of the House and Senate to sue to overturn laws, that it’s very unlikely the Courts would even grant standing to only one House of Congress to sue to overturn the President’s use of PCS. In short, the Supreme Court would not touch this at all if the President used PCS. But, even if they did grant standing to the House, then the explicit language of the law, the bloc of four Democratic justices on the Court, and the threat of default and its probable consequences for the financial system and the world economy, all weigh against overturning any use use of PCS by the President.

Indeed, since I can’t see either Anthony Kennedy or John Roberts doing anything to rock the boat of the financial system, I think any Supreme Court action, if it gets by the standing problem would likely result in a 6-3 vote in favor of PCS. But there’s even a possibility that Alito would align with Roberts, due to his strong corporatist orientation, and that Scalia would also support PCS, due to his love for the Unitary Executive Doctrine, producing a low likelihood, but not completely surprising, final outcome of 8 -1 in favor of PCS.

4. Using the authority of the 14th Amendment to keep issuing conventional debt instruments subject to the debt limit in defiance of the debt ceiling, while declaring that the debt limit legislation was unconstitutional, because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending. While the President mentioned the practical consequences of uncertainty over whether use of the 14th amendment would be declared unconstitutional he didn’t mention the most important point about this option.

That is, the President can’t validly claim that there’s a conflict between his duty to spend mandated appropriations, his duty to prevent default on US debts, and his duty to uphold the debt limit law, when he has what appear to be several legal options to enable him to spend those appropriations, but is refusing to implement any of them, and use his constitutional authority under the 14th amendment to avoid default, because he’s speculating that the Supreme Court might overturn one or more of the options he can use, if there’s a legal challenge to them. On the contrary, the President is obligated by the 14th amendment to exhaust those options, before he takes action on the basis that the debt ceiling law is preventing him from fulfilling his spending mandates. As long as those options exist and are untried by him; it is not.

So, the relationship of the 14th amendment option to the others is that it stands behind them in sequence priority, and cannot be invoked with validity unless and until they are exhausted. In addition, the 14th amendment binds the President to try these other options to comply with both his mandated spending obligations and his obligation to obey the debt ceiling law, before he tries to overturn it. So, the President has no free choice among all the options, but, from a legal point of view, must view the 14th amendment/debt ceiling nullification option as a last resort only after all other known options that have not been excluded by the Court have been tried.

5. Beowulf has offered yet a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit.

Consols seem to be a very clean alternative from a legal point of view. The Treasury is not explicitly restricted by law to issuing any particular type of debt instrument. Debt instruments with fixed maturity dates are the US instrument of choice. But, other debt instruments are not excluded from Congress’s grant of borrowing authority to Treasury. Of course, members of Congress can suit the Administration if it chooses to use consols. But, they would, once again, have a standing problem, and since the debt ceiling law is not an issue with consols it is hard to see what kind of argument would be used to challenge them. While consols do have face values, these values don’t constitute an obligation of the Government to ever repay. On the other hand, consols are callable by the issuing authority. So, if the Treasury wanted to buy them back at face value to avoid paying interest on them in perpetuity it could do so.

Update: At the European Tribune, my friend Chris Cook offers the following comment on my post:

Joe,

Credit to Beowulf for suggesting Consols recently, but the use of Consols to create a National Equity is something I’ve been publicly advocating for over 4 years in the UK (where of course they began, and still exist as an anachronism)

Debt Free or Date Free? What can we do with our National Debt?

Sovereign Equity can revolutionise financing of UK Assets

More recently in the context of solving Cyprus’s € problems

The Case for Cypriot National Equity

I advocate Obama’s Conversion, analogous to Goschen’s Conversion of 1888 when UK Chancellor George Joachim Goschen converted and consolidated existing fragmented classes of stock into a single class of perpetual Consolidated Stock (“Consols”).

A single class of US Consols could be issued and exchanged at a suitable price reflecting the tenor (date of redemption) and nominal rate of interest of all existing classes of US dated credit (mis-named as ‘debt’).

There would be a single market for a single instrument, and the question of default would disappear. The rate of return would literally depend upon the rate at which of taxation is collected by the US government. The market price would depend upon supply and demand.

Obama’s Conversion would literally be a debt/equity swap on a national scale, since undated ‘stock’ was the original form of funding which pre-dated a 300 year aberration into interest-bearing debt (Loan Stock) and distinctly inequitable equity (Common Stock).

The ethical dimension of such a 21st century debt jubilee, could also be thought of as a conversion in more than one way.

(Cross-posted from New Economic Perspectives.)

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Stop “the Great Betrayal”: Kabuki Update

10:19 am in Uncategorized by letsgetitdone

It now looks like the big media and leaders in both parties are no longer focusing on the Government Shutdown crisis, but are now moving on to the notion that the shutdown is melding with the upcoming probable breaching of the debt limit to create a combined mother of all fiscal crises. Along with this, the media and many politicians, encouraged by the President’s standing “strong, strong, strong,” are now directing attention away from whether ObamaCare will be delayed or compromised, to other types of ransom the Administration might pay in return for both re-opening the Government and also providing an increase of an undetermined amount in the debt limit. Meanwhile there are reports that under increasing Wall Street pressure John Boehner is preparing to negotiate with House Democrats and allow a vote to pass a CR and a clean debt limit increase bill, in return for concessions he can take back to his caucus.
We need to get this to the Fiscal Cliff! What could go wrong?
TINA does not apply in this case, and the President’s choices are not limited to just refusing to negotiate or giving in to ransom demands whether focused on Obamacare, the Keystone Pipeline, entitlement cuts,“tax reform frameworks” or any other measures that give “tea party” Republicans “the respect” they think is due them. By continuing to frame things in this way, the media and politicians in both parties are echoing the Administration’s framing of the situation and absolving the President of his share of the blame for the debt limit crisis. They are also preparing the way for a compromise, that will, almost certainly, result in hurtful cuts to Government spending including renewed consideration of “the Great Betrayal,” also known as the Grand Bargain, and probably passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.

In two previous posts, here and here, I listed the five options the Administration can use to lessen or nullify the impact of Republican intransigence on increasing the debt limit. I’ll now list them again to emphasize that there is no TINA. The President has options to defeat the debt ceiling without doing the “Great Betrayal.”

1. A selective default strategy by the Executive, prioritizing not paying for things that Congress needed, and perhaps not paying debt to the Fed when it falls due and working with the Fed to get the $2.05 Trillion in bonds that it was holding canceled;

2. An exploding option involving selling a 90-day option to the Fed for purchasing some Federal property for $ 2 Trillion. Then when Congress lifts the debt ceiling, the Treasury could buy back the option for one dollar, or the Fed could simply let the option expire; Read the rest of this entry →

Stop the Kabuki: It’s About “the Great Betrayal”

10:23 am in Uncategorized by letsgetitdone

MSNBC continues on with its campaign to cast the Tea Party Republicans in the role of principal villains in the imminent Government budget/ government shutdown crisis and the likely coming debt ceiling crisis. The teabots, you see, are using the Republican majority in the House to demand more austerity in government and defunding of the Affordable Care Act (ACA). They’re using their bloc of votes in the House, along with the Hastert rule requiring a majority of the majority Republican caucus to veto any possible compromise vote of the whole House on a budget or a continuing resolution that would get bipartisan majority support keeping the government open past October 1.

Speaker Boehner is coming in for his share of the blame, being called feckless, spineless, weak, a failed leader, and unpatriotic for his decision to respect the Hastert rule, give into teabot “lunacy,” and help them pass a budget implementing further budget cuts and defunding the ACA. MSNBC’s thrust is clearly to call the Republicans bad names while painting the Democrats and the Administration as the adults in the room, willing to compromise to keep the Government running and prevent a default which could crash the world economy. The Washington Post is also reflecting this Party line in its wonkblog Posts with Ezra Klein leading the charge supporting the Administration’s adulthood and the Republicans perfidy at both the Post and MSNBC.

I think this campaign is hiding the real story here, as it is designed to do. Let’s stipulate, to begin with, that the tea party Republicans are mean, evil, stupid, and crazy dudes and gals funded by Ayn Randian billionaires whose primary interest is to replace society with a state of nature in which life is nasty, brutish, and short for those of us who don’t have private armies. It’s still true that they do not bear the sole blame for this crisis, because it is simply not the case that there is nothing the Administration can do to both short circuit the crisis and defuse its impact. It has a number of options it can pursue to completely defuse the debt ceiling crisis and at least a few to create even more pressure on the Republicans to avoid a Government shutdown.

TINA does not apply in this case, and the President’s choices are not limited to just refusing to negotiate or giving in to defunding Obamacare. By framing things in this way, the media are echoing the Administration’s framing of the situation and absolving the President of his share of the blame for the crisis. They are also preparing the way for a compromise, that if it doesn’t defund Obamacare, will, almost certainly, result in hurtful cuts to Government spending including renewed consideration of the Great Betrayal, also known as the Grand Bargain, and probably passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.

In my last post, I mentioned the following five options the Administration can use to lessen the impact of the Republican thrust:

1. A selective default strategy by the Executive, prioritizing not paying for things that Congress needed, and perhaps not paying debt to the Fed when it falls due and working with the Fed to get the $2.05* Trillion in bonds that it was holding canceled;

2. An exploding option involving selling a 90-day option to the Fed for purchasing some Federal property for $ 2 Trillion. Then when Congress lifts the debt ceiling, the Treasury could buy back the option for one dollar, or the Fed could simply let the option expire;

3. Using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt; and

4. Using the authority of the 14th Amendment to keep issuing debt in defiance of the debt ceiling, while declaring that the debt ceiling legislation was unconstitutional because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending.

5. Beowulf has offered yet a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit.

Yves Smith at Naked Capitalism used the list in this recent post to make the point:

“. . . the larger point is that this budgetary Battle of the Titans is a phony war. Obama can finesse the Republicans if he needs to. . . .

So hang tight for way too much unnecessary melodrama over the next month. It’s another round of watching the two parties play chicken, with each posturing that it won’t be the one to steer out of the impending crash. The fact is that Obama really wants his Grand Bargain. All of this high drama is necessary for him to pretend to his base that he was forced to do what he’s been trying to do for years: sacrifice old people since he perversely believes that “reforming” Social Security and Medicare will get him brownie points in the presidential legacy ledger. . . .

Yves and I agree on that. The Administration is raising the zombie Grand Bargain, Great Betrayal again. In addition, she thinks:

Of all the items on the list, option 1 looks far and away the most likely, although an Administration with more guts might try a bit of option 2 along with it. Unlike a platinum coin, which just sounds too weird to people who haven’t heard about the idea (and the Administration would need to be selling it hard now to see if it could legitimate it in the court of public opinion), options are something the public hears about regularly and sounds less gimmicky.

This is a brief analysis of the relative likelihood of the various options. Let it serve as an introduction to this more detailed analysis.

Option 1: I agree that this is a pretty likely option. It allows the Administration to prevent default for a time with both skillful management of cash flow from tax collections and some risk (increasing over time), and to pressure Congress with partial government shutdowns. It also keeps the risk of default in front of people, and is consistent with the President’s likely goal of getting that Grand Bargain through, at last. The first part of Option 1 is classic shock doctrine, so it’s likely the President will select it. However, I don’t think the parts of this option relating to the Fed allowing the Treasury to default temporarily by not paying back the debt it owns when it falls due, or the Fed canceling part of the Treasury debt it owns, will work.

First, the Fed is prohibited by law from giving the Treasury any appreciable credit facilities, and letting Treasury be late in their bond principal and interest payments would be extending it credit. That’s what prevents the Fed from buying Treasury securities directly from Treasury in the first place.

Second, nor can the Fed just cancel the debts the Treasury owes it. The reason why not is that the actual debt instruments are owned by the Fed regional banks, which, in turn, are privately owned. The Treasury bonds are assets of the Fed regional banks. If they just canceled those assets, then they would be violating their fiduciary duty to their stockholders.

Option 2: I think this is less likely than Option 1. I don’t agree that it is less “gimmicky” from a person in the street point of view. People have heard of “options,” of course, but relatively few people could explain what an option is, or how one works, or have ever used an option. And the idea of options generating Trillions in reserves for the Treasury would sound at least as “gimmicky” to the lay public as minting a platinum coin will.

Just from a personal point of view, the idea of the Government minting a platinum coin with a particular value is very familiar to someone like myself who has worked widely in political science, and the social sciences and more recently in economics. I can easily understand the idea applied to a coin with a $60 Trillion face value, as long as I think that minting such a coin is legal.

So, to me the coin idea is not “weird,” so long as it can be shown that it is legal. I think that “it’s the law,” even though it has never been used before is the sound bite that has to be endlessly repeated to the public to get it legitimacy. And I think the President can make that claim and explain his authority to have it minted under the law in a speech announcing that one has been minted. If people get mad about it, then the proper answer is “This is a democracy, repeal the law if you don’t like it.”

Second, I also think Option 2 may be legally more questionable than Option 3. After all, the Fed is prohibited by law from simply creating money and giving it to Treasury without due consideration. But what is a $2 Trillion option redeemable by the Treasury for $1.00 other than a gift of $2 Trillion to it? Certainly, substance over form governs here, and such an effective grant of $2 Trillion to the Treasury from the Fed would be considered a violation of the law, and certainly a financial manipulation “gimmick” by the Fed and the Treasury.

Option 3: As people who read my posts know, I’m very much in favor of Option 3. But I wouldn’t say it’s the favorite Modern Money Theory (MMT) option. I think MMT economists, by and large, would rather the current crisis were resolved by repealing the debt ceiling law, or getting rid of it by exercising the 14th Amendment option. It’s true that many MMT writers have mentioned the platinum coin in the past in a favorable context, but MMT views reserves, currency, cash, and government securities as all debts of the Government, so the general opinion is that if the platinum coin has any special value over other expedients for facilitating deficit spending, that value is political, rather than economic or financial.

Also even though Option 3 is the one I favor. I agree with Yves that it is not very likely the Administration will use it. However, I don’t think its “weirdness” is the main problem with it from an Administration point of view. Instead, I think their problem with it is that if they use it, it will be very hard for them to explain thereafter what they mean by saying that “we need a Grand Bargain” or long-term deficit reduction, because “we’re running out of money.”

In any event, I’ve discussed the pros and cons of Option 3 voluminously in my e-book Fixing the Debt Without Breaking America, including the issue of “weirdness.” So anyone interested can read about the pros and cons there.

Option 4: My view of the 14th amendment option, is that a decision to continue issuing debt appealing to the 14th amendment, may very well work because the Supreme Court refuses to grant standing to the House to challenge it. However, if the Court does allow a challenge then I think it will find that the debt ceiling isn’t unconstitutional as long as Congress allows PCS and consols, because those can be used to get credits to pay off securities as they fall due.

I also think that using the 14th amendment option is a more likely move from the Administration, then using the coin, or the exploding option, because the balance of advantages and disadvantages will appeal to the President’s constitutional lawyer side. The 14th amendment option has the following advantages. 1) It makes the President look strong by standing up to the Republicans; 2) It continues current practices, so no one will say it’s “weird,” just illegal; 3) It maintains the air of crisis the President would like to have to go after the Grand Bargain, but also decreases economic risk by putting the debt limit problem on the back burner; 4) It has a good chance of surviving a Court suit through a denial of standing to the House; and 5) It carries with it the chance of getting the debt ceiling law invalidated by the Supreme Court.

Its disadvantages are a few. Unless the Court actually declares the debt ceiling unconstitutional, the House will probably impeach the President, claiming he acted illegally; so this option is risky. If something unexpected happens on the surveillance state front, the risk might unexpectedly increase through a sudden alliance of the left and right against the President.

Of course, the risk of impeachment increases even more if the Court both grants standing and upholds the debt ceiling law. All that said, I think the likelihood of the disadvantages happening is low, and it may be the kind of risk the President is willing to take because, as a lawyer, he will assess its likelihood as low.

Option 5: The advantage of Option 5 is that it would be quick, clean, and easy to implement. There is precedent in other nations for it as well. The UK has issued consols from time-to-time in its history.

The disadvantages are a few. First, it takes the pressure off people to come to the Grand Bargain. Second, the interest on consols will likely have to be higher than the interest on standard debt instruments. Third, this option is a bit “gimmicky,” but not a really strange idea, and only slightly “clever” as a way of getting out of a debt ceiling impasse.

On balance, I’d say this option is very likely if the Administration knows about it, especially after an initial use of Option 1 and possible strong resistance to compromise from Republicans. In that case, as the Administration sees increasing cash flow difficulties in coping with the debt limit, it may ease the way by using consols, and once their use becomes commonplace, then proceed further with a negotiation to get rid of the debt ceiling, since it will have been shown to be of little use anyway.

So, from the likelihood point of view, I think the most likely option is the first half of Option 1, followed by Option 5 (consols); then Option 4 (the 14th); then Option 3 (the coin); and last Option 2 (the exploding option), which I don’t think can withstand a legal analysis.

The option I prefer is Option 3, because, especially in the case of High Value Platinum Coin Seigniorage (HVPCS), it has the most positive effects relative to public purpose, including educating people about fiat money and MMT, and in addition, its political/economic impact over time is likely to be, by far the most favorable of all the options,because the size the reserves in the TGA and gradual repayment of the debt will be a source of constant political pressure on Congress to seriously consider solving our mounting problems regardless of whether the policies required will involve deficit spending.

And, finally, whatever the options one thinks are likely or one prefers, I think it’s very important that the blogosphere start debating the options once again, as it did in 2011 and during the fiscal cliff/sequester periods, so the President will find it more difficult to plead TINA when he wants to slip through his Grand Bargain. The TINA/kabuki game he is playing is the enemy of the economy, the safety net, and the public purpose.

In addition, the Grand Bargain, along with the upcoming Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TAFTA) are three more nails in the coffin of the middle class. We must not let him, the corporate partisans in both parties, and the cable networks drive the first of these nails home by getting people to accept their narrative about the issues involved here.

To stop it from coming about, the first thing we must do is unmask (as Yves and I have been trying to do) the news networks, the cable media, and the village progressives like Ezra Klein, as actively attempting to constrain debate by ignoring the options the President has, apart from a simple “I will not negotiate, or I must cave stance.” Let us make them come to grips with the alternatives and, in doing so, spread the news that there are a number available, and that whatever unpalatable compromises the President proposes, are his choices and his fault; not necessary expedients, he is being forced into because he has no effective weapons to use in countering the Republicans using the debt limit law to take hostages.

*Previous versions of this item on the list of options used the figure $1.6 Trillion in Treasury securities owned by the Federal. The revised $2.05 Trillion total is current as of close of business 09/18/13.

(Cross-posted from New Economic Perspectives.)

Ezra Is Terrified Because of His Framing

5:02 pm in Uncategorized by letsgetitdone

Here’s an exchange from last Friday’s Chris Hayes All In MSNBC show among Chris, Robert Costa of the National Review, and Ezra Klein of The Washington Post’s Wonkblog. In what follows I’ve slightly edited the MSNBC transcript to get rid of obvious verbal deviations but haven’t corrected for punctuation.

Robert: I think Ezra brought up a great point. you saw Eric Cantor trying to come up with this plan and that would allow conservatives, allow the right to have a vote on defunding, but not really attach it to the continuing resolution. The minute he brought this up, the conservatives they revolted. you have a republican leadership that wants to fund the government, but they don’t have the votes.

Chris: You’ve got 233 house republicans. You need 218 to pass something and 33 republicans want to fully defund obama care. You had Harry Reid today saying about John Boehner, I feel sorry for him. Rveryone’s constantly looking at him saying he has essentially the worst job in Washington. What is the way out of this box?

Robert: It’s a great question. I think as much it’s not a great way out of the box. what you see speaker boehner doing behind the scenes, don’t have a shutdown on the government. He is using the 2011 model. He says I was able to get concessions in 2011. We’ll fight for them in december. Come with me. Let’s fight on the debt limit. I don’t want to have a shutdown. It’s not going to help you with your races in 2014.

Chris: The thing about that is, that’s an even sick higher strategy.

Ezra Klein: This is terrifying that this is the argument. And the analogy I would use is this is like trading a bad flu for septic shock. It is the worst trade in the history of all trades you could imagine . . .

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Do the Democrats Really Want to Bear the Blame for a Crash that Wall Street Will Cause?

6:25 am in Uncategorized by letsgetitdone

This post by Lynn Parramore makes the point that the next crash is coming and probably will be blamed on the Democrats. It’s a great point, but it needs to be pursued further.

What if we have another Republican sweep in 2014, like 2010, but worse? Then we’re going to have more policies that increase inequality. Even less regulation, causing even more domination of our politics by corporations and the financial sector.

We’ll have more military spending and more wars, along with more shredding and privatization of the social safety net. We’ll have even less environmental regulation, and even more global warming; more drill baby drill, and less and less of public education. At the State level, we’ll have more of the war on women, blacks, seniors, and hispanics; more corruption from corporations and the rich giving “gifts” to officeholders; more voter suppression, even more police brutality and denial of first amendment rights, more religion in our schools accompanied by more guns everywhere, and more Scalias, Alitos, Thomases, and Robertses subjugating everyone to corporations.

And what’s frightening about all this is that the people who want to see this kind of America, also are the people with the power to gamble irresponsibly in the international financial innovation products gambling casino, and to bring about the very crash that will be laid at the door of the Democrats. Of course, the Democrats deserve this because when they had the power in early 2009, all through 2010, they cared more about the filibuster in the Senate, and their campaign contributions, and their possibilities of lucrative work after Congress, then they did about economic recovery with full employment, taking the big banks and Wall Street down, and getting truly universal health care through passing an enhanced Medicare for All program.

But whether they deserve it, or not, doesn’t change the likely result of a Republican sweep. It will be a disaster for most of us, even worse than the sweep of 2010, because now the Republicans are starting from a stronger position in the State and Federal Governments, and afterward they are likely to be even more unobstructed in working their will than in the past.

The only way to avoid another crash that would be blamed on the Democrats, is to act decisively to get the financial sector under very tight regulatory control, as soon as possible. But, in turn, to do that, we must hope that there is no crash before the election of 2014 and also, if we can get there without a crash happening first, to then manage a sound Republican defeat in that election, so that the Democrats can get back the House and keep the Senate. But how can that be done?

In only one way. The Democrats must bring about a radical change in the American political climate that places the burden of the Federal Government’s continued failure to ease the declining economic state, and anxiety about the future, of most of us, squarely on the shoulders of the Republicans, while leaving no rationalizations, or excuses the Republicans can use to place blame for those failures on the Democrats. The way to change that climate lies with the President and the Democrats in Congress.

The President must put an end to the normative standard of mandating fiscal neutrality for domestic programs and non-emergency domestic legislation having fiscal implications. When every fiscal policy initiative is evaluated first for its fiscal neutrality, rather than for the balance between its anticipated real costs and benefits relative to public purpose, then green eye shade private sector accounting norms replace the public purpose as the goal of government policy. The President can and should make fiscal neutrality an obsolete standard, by ordering the Secretary of the Treasury to have the US Mint produce a $60 Trillion platinum coin, and then deposit it in its Public Enterprise Fund (PEF) account at the New York Fed, where the Treasury can fill the Treasury General Account (TGA), the public purse, by sweeping the seigniorage from the PEF.

The President should then announce his action and explain its implications including:

– The seigniorage from the $60 T coin (nearly all of the $60 T) would be used to pay off all Federal debt subject to the limit as it falls due, so that eventually all such “national debt” will be paid down to zero.

– The seigniorage can also be used for 15 – 25 years to remove the need to issue any new debt instruments when the Executive wants to spend Congressional deficit appropriations.

– The US Treasury now has plenty of money to repay all previous Treasury debt and to perform all deficit spending Congress is likely to appropriate for a very long time to come.
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Declaring the Grand Bargain Dead Is Premature

6:25 pm in Uncategorized by letsgetitdone

Stories in The Washington Post and the New York Times have some in the blogosphere proclaiming that it’s time to celebrate the death of the Grand Bargain, and others at least raising a question about its death. I’ll go on record as saying that celebrating its death is definitely premature.

It is so because we’ve yet to go through the budget or continuing resolution-passing activities coming up in September, and also have yet to go through the debt ceiling conflict to come in October. Mainstream Washington commentators believe John Boehner is determined to avoid a government shutdown crisis of the budget/CR conflict and that one or the other will be passed before October 1. Assuming they’re right, that still leaves the matter of the debt ceiling “crisis,” which the same commentators are saying will happen because Boehner has to promise his tea party caucus a chance to coerce the Administration, if he’s going to get their acquiescence on the budget/government shutdown matter.

So, they think, we are looking at a debt ceiling crisis around October 15, when Jack Lew says the Government will run out of borrowing authority, and he will be reduced to juggling $50 Billion in available cash to both repay debt and pay for the other obligations of Government legislated by Congress. The position on the debt ceiling being taken by the Administration now is that it will not negotiate over it, and that it’s demanding a clean bill raising the debt limit to pay for spending Congress has already approved. Read the rest of this entry →