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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 III: Premium Bonds, and Asset Sales

7:34 pm in Uncategorized by letsgetitdone

In Part I of this six-part series I presented the President’s explanation of why he can’t use alternative options for coping with the default threat arising out of refusal to raise the debt ceiling, 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. In Part II I discussed the next three options, platinum coins, 14th amendment, and consols, and commented on the legal issues related to them. Here, in Part III, I’ll cover two options which have started getting attention most recently.

Premium Bonds

6. Premium Bonds (See wigwam’s discussion):

“. . . are those whose interest rates are sufficiently high relative to their principal that they are expected to sell at a premium (i.e., negative discount), bringing their full issue price (principal plus premium) to the Treasury while adding only their principal to the national debt.”

Matt Levine explains the idea in more detail here, and here. But what it amounts to is that the debt subject to the limit is the total face value of all the unredeemed fixed maturity date debt instruments of the United States. So, if the Treasury auctions off a bond and sells it for more than its face value, then it gets enough money to not only roll over debt equal to the face value, but also to pay down additional debt, or deficit spend, as well. But, how can it sell a debt instrument by more than its face value? The answer is to offer interest rates higher than the rates offered for conventional bonds.

How high the rates would need to be, and the duration of the premium bonds offered, would need to be determined by how much in additional funds would be needed to stay under the debt ceiling and spend all appropriations. Levine suggests a “. . . 10-year at a 1.836% yield and the 30 at 3.026%” for example. So, interest rates for the premium bonds would not have to be sky high. Nevertheless, there is a problem with the idea of premium bonds:

”Of course then you’d have to pay the interest! This would be a fairly short-term solution; after a year of doing this you’d be incurring an extra $250+ billion in interest payments that you’d have to fund by issuing ever-higher-coupon Treasuries, leading I suppose to a death spiral. If I were doing this on a tabula rasa I’d probably bump the interest rate a bit at the cost of deferring payments for a year or two, making this a breathing-room rather than permanent solution, but obviously the further you get from regular-Treasury-bond structure the weirder this looks.”

And there is another problem too. The Federal Reserve controls interest rates in the United States by targeting its Federal Funds Rate, which is currently very near zero. This rate in turn influences Treasury offering which are only a bit higher for short-term debt instruments, and progressively higher for longer-term instruments. These rates, in turn, percolate throughout the economy and keep interest burdens where the Fed thinks they should be in the current fragile economy. However, if the Treasury begins to offer securities at much higher interest rates, than this will affect other investments throughout the economy that will have to offer rates higher than Treasury premium rates throughout the economy. In short, premium bonds will undermine Fed monetary policy even as they stave off default.

Kevin Drum also offers some negatives to the premium bonds idea after remarking favorably on it. He hints at legal difficulties and wonders about what a judge would say about it. But he has no real legal objection to this. He also remarks on the confidence issue. I’ll take that up below.

sales of material and cultural assets to the Fed,

7. The last option, sales of material and cultural assets to the Fed, just arose out of a multi-party e-mail exchange about debt ceiling issues. Warren Mosler pointed out:

the coin is about the fed buying an asset from the govt.
they could buy other gov assets as well? national parks? military equipment? spr? etc. etc. any asset sale to the Fed by the gov. works same? legal restrictions?

And L. Randall Wray expanded on the idea and shortly thereafter blogged this piece offering the following proposal, a bit tongue in cheek.

. . . We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell–and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our Nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two.

This proposal shares with Jack Balkin’s “exploding option” proposal the idea that the Treasury Department can sell assets to the Federal Reserve to raise revenue. I’ve been able to find no prohibition in law that would make this illegal. And, as long as a fair price reflecting likely market value is paid by the Fed, I don’t think such transactions would raise legal problems.

This option is a temporary one. But it might buy enough time for Congress to become Democratic again, whereupon the Democrats could repeal the debt limit legislation, ending debt ceiling crises.

There is a problem with this option relating to who within the Fed system buys Treasury’s assets. The Federal Reserve Board of Governors is a self-funding Federal Agency; but it is nevertheless Federal, so the sale of Government property to it still leaves the assets in the hands of Government. But what happens if the assets are sold to one or more of the regional Fed Banks. These are agents of the Federal Government, but they privately owned. The transfer of Federal assets would surely raise the issue of turnover of federal property to the private sector. Also, if the regional Fed Banks ever sold any of those assets to private organizations that are not agents of the Government, for example, the big banks whose representatives sit on the regional Fed Bank Boards, we would see immediate charges of corruption and private sector looting of Government property. The next post, Part IV, will cover differences among options in their likelihood of having severe legal problems, or seriously undermining loss of public confidence in debt instruments.

(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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Rationalization and Obligation, Part I: No Magic Bullets?

6:59 am in Uncategorized by letsgetitdone

The media and politicians in both parties are still largely echoing the Administration’s framing of the fiscal situation and absolving the President of his share of the blame for the debt limit crisis. They’re reinforcing his message They’re 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,” including passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.

The mainstream news outlets still haven’t seriously questioned the President’s claims that There Is No Alternative (TINA) to just facing down the Republican’s shutdown and debt ceiling related threats without giving in or resorting to any options to de-fang the debt ceiling threat. They have begun to mention other options, but in a way that is largely supportive of the President’s reluctance to use them. In reinforcing TINA, the mainstream is allowing the President to escape from responsibility and obligation, while, ironically, allowing him to characterize himself as “the adult in the room.”

When it comes to our repeated and unwelcome debt ceiling crises, President Obama is like the person who says he has a problem, but when confronted with a variety of options for alleviating or even solving the problem, comes up with some rationalization about why each will not work. After awhile, it becomes obvious that the person with the problem doesn’t want any help help solving it, but actually loves having it, and is fixated on a single objective having little to do with solving the problem (“the Great Betrayal”), that is very difficult to get, and wants to claim that there is no alternative, because, as the problem produces more and more negative effects he/she will be able to push through that objective.

This post is the first in a series in reply to a part of the President’s recent News Conference in which he referred to debt ceiling crisis options people had been writing and talking about, and explained why the Administration will not be invoking those. I found his explanation to be misleading and overgeneralizing gloss on a process of complex decision making, designed to hide the real political considerations underlying his behavior. Hence this series. In Part I I’ll begin with the President’s explanation, briefly characterize the difficulties with it, and then analyze the first two of seven options he has: the selective default and exploding option alternatives. In Part II, I’ll cover his Platinum Coin Seignorage, 14th amendment, and consols options. Part III will analyze two options I haven’t written about before: premium bonds and asset sales. In Part IV, I’ll examine differences among the options in legal challenges and likely impacts on bond market confidence. Part V will evaluate these differences. And Part VI will deal with what he ought to do, and what he will do.

The President’s Press Conference: No Magic Bullets?
In his press conference yesterday, President Obama mentioned other options, including both the 14th amendment and the platinum coin:

Here’s the key piece of the transcript:

And I know there’s been some discussion, for example, about my powers under the 14th amendment to go ahead and ignore the debt ceiling law. Setting aside the legal analysis, what matters is that if you start having a situation in which there’s legal controversy about the U.S. Treasury’s authority to issue debt, the damage will have been done even if that were constitutional, because people wouldn’t be sure, it would be tied up in litigation for a long time. That’s going to make people nervous.

A lot of the strategies people have talked about, the president can roll out a big coin and — or he can resort to some other constitutional measure, what people ignore is that ultimately what matters is what are the people who are buying treasury bills think?

Again, I’ll just boil it down in very personal terms. If you’re buying a house and you’re not sure whether the seller has title to the house. You’re going to be pretty nervous about buying it. And at minimum you’d want a much cheaper price to buy that house because you wouldn’t be sure whether or not you would own it. Most of us would walk away, because no matter how much we like the house, we would say to ourselves the last thing I want after I bought it is I don’t actually own it.

The same thing is true if I’m buying treasury bills from the U.S. Government and here I am sitting here. What if there’s a Supreme Court case deciding that these aren’t valid? That these aren’t valid legal instruments, obligating the U.S. Government to pay me. I’m going to be surprised. Which means I may not purchase it. If I I do purchase them I’m going to ask for a big premium.

So, there are no magic bullets here. There’s one simple way of doing it, and that is Congress going ahead and voting.

There are many difficulties with this formulation. The first is neglecting any listing and analysis of most of the individual options the White House has considered. This prevents the Press and the rest of us from knowing how extensive their consideration of alternatives has been.

The second is glossing over the relationship of the 14th amendment option to the others. In his speeches, News Conferences, and interviews, the President has a tendency to be less than candid by giving explaining why he won’t do one of a number of things, by making an example of the worst alternative fitting his explanation, and glossing over the rest.

The third is a failure to recognize any differences among the options in relation to Obama’s main point above: that loss of public confidence caused by legal challenges would affect sales of all types of debt instruments, as well as, all other options equally seriously including Platinum Coin Seigniorage (PCS). Let’s look at and analyze the options the President has.

The First Two Options

In three previous posts, here, here, and here, I listed 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 with some additional comments, along with two new options I’ve not listed before, 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. This option may work even if the Fed doesn’t cancel Treasury debt, because failure to pay the Fed won’t have the impact on the private sector that other failures to pay would have, and may provide considerable room for Treasury to manage its payments to the private sector in such a way that market confidence isn’t damaged a great deal once it is seen that the Treasury has room for fiscal management.

On the other hand, canceling Treasury debt would affect the balance sheets of the regional Fed banks negatively so that their net worth would become negative. And if anyone believes they are damaged by the cancellation, sues, and gains standing, the Courts could rule that the Fed has, in essence, given credit to the Treasury, an action which is prohibited by law.

2. An exploding option involving selling a 90-day option to the Fed for purchasing Federal property such as 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. This option is based on the idea that the Treasury can sell Government assets to the Fed. This is an interesting alternative, but could also be upended by a suit contending that this too, is a prohibited free gift; in substance, if not in form, a prohibited grant of credit.

In Part II I’ll continue my discussion of options covering Platinum coins, the 14th amendment and consol securities.

(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.)

Why We’re Screwed

6:02 pm in Uncategorized by letsgetitdone

By L. Randall Wray

[Blogger's Note: This post was authored By Professor L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. It originally appeared at Economonitor's Great Leap Forward Blog and is cross-posted here with permission of the author.]

Sign: Our government has been hijacked by criminals

Banks got bailed out, we got sold out. Photo: Justin Ruckman / Flickr

As the Global Financial Crisis rumbles along in its fifth year, we read the latest revelations of bankster fraud, the LIBOR scandal. This follows the muni bond fixing scam detailed a couple of weeks ago, as well as the J.P. Morgan trading fiasco and the Corzine-MF Global collapse and any number of other scandals in recent months. In every case it was traders run amuck, fixing “markets” to make an easy buck at someone’s expense. In times like these, I always recall Robert Sherrill’s 1990 statement about the S&L crisis that “thievery is what unregulated capitalism is all about.”

After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.

Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets.

Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in firesales at prices rigged by twenty-something traders at the biggest and most corrupt institutions the world has ever known.

And since they’ve bought the politicians, the policy-makers, and the courts, no one will stop it. Few will even discuss it, since most university administrations have similarly been bought off—in many cases, the universities are even headed by corporate “leaders”–and their professors are on Wall Street’s payrolls.

We’re screwed.

Read the rest of this entry →

Americans Elect and the Emerging Oligarchy: Update

10:53 pm in Uncategorized by letsgetitdone

1%-ers Playing Their Tunes (Photo: fattytuna/flickr)

1%-ers Playing Their Tunes (Photo: fattytuna/flickr)

The Occupy Wall Street (OWS) movement has made many more Americans aware of the issue of an emerging oligarchy based on wealth inequality taking control of American Democracy. There are a number of ways to look at this:

– the growing economic inequality in the United States and around the world,
– the increasing control of politics both in the United States and most industrial nations by the wealthy and the giant multinational financial, energy, pharmaceutical, and other corporations which are viewed as having either the same, or in certain respects more rights than human citizens,
– the fact that neither of the two major political parties is preparing to run someone who is likely to represent the interests of the 99% (the President’s recent noises notwithstanding),
– the control of all the major media outlets by corporate interests promoting public debt hysteria,
– the persistence and growth of different standards of law enforcement for the 99% compared to the wealthy and well-situated (the 1%), and
– the increasingly powerful legal/quasi-military apparatus suppressing the constitutionally guaranteed rights of free speech and assembly in the name of order and defense against terrorism.

All of these perspectives come together to support a narrative and an image of the increasingly rapid takeover of democracies, including the United States, by a small global elite composed of the very rich and very powerful corporate executives. Most Americans and many more people around the world are recognizing this reality of an emerging oligarchy and are looking for ways to get out from under its domination and to re-affirm democracy and open society. But to do that they somehow have to counter the influence of wealth in manipulating the perception and construction of social, economic, cultural, and political reality by the 99% and in dominating electoral processes even though they are vastly outnumbered.

To accomplish that, people are increasingly looking to the Internet as a democratizing force that could provide the ability for people among the 99% to self-organize and create their own reality and political movements without recourse to massive financial resources. Web-based organizations are now creating web sites/platforms that claim to offer people the possibility of having a greater voice in politics and in determining its impact on their lives. But do these new efforts offer a way out of oligarchy and back to democracy or do they just reinforce the emerging oligarchy?

This is the second in a series of posts on some of these new web-based platforms and how they relate to this central question of oligarchy vs. democracy. The first, “A System-Changing Solution for the OWS Movement?”, which I co-authored with Nancy Bordier, compared and contrasted two alternatives available to OWS, the Interactive Voter Choice System and Americans Elect (AE). This one will offer a more detailed analysis of AE.

Description

AE is organizing people to participate in a national on-line convention that will nominate Presidential and Vice presidential candidates and place them on ballot lines in all 50 States. People who sign up as delegates will decide the issues, select the candidates, and nominate the President through participating in the on-line convention. According to its web site, any constitutionally eligible citizen can be a candidate, provided they meet AE’s eligibility and qualification criteria. They have ballot lines in 11 States at this writing, and are currently working on 16 more.

AE states that it is “non-partisan” in its approach, and also claims that it is not a political party. However, to get a ballot line in some States you have to identify as a political party. Also, their draft by-laws contain this section:

“Section 7.2. Transition to National Organization. Pending the formation of state committees, the Board of Americans Elect shall be deemed to be acting in each state as an authorized state committee and to perform and exercise all duties, powers and responsibilities of a state committee as may be required by state law. In states where Americans Elect has met all statutory requirements to form a minor political party, such organizations shall be considered separate legal entities from Americans Elect, and shall be governed by the Board pending qualification as a national political party in accordance with law in the 2012 election. Nothing in this section shall prevent the Board from appointing persons to act as local governing bodies or agents consistent with these Bylaws in any state where Americans Elect has met such statutory requirements.”

So, there is some gray in the position AE is staking out. Are they aiming to become a national political party? If not, then what does this section of their by-laws envision?

AE claims that it doesn’t represent any special interests, and it also welcomes any registered voter, whether party-affiliated or not, who wants to become a member and participate in their on-line national nominating convention coming up in the Spring of 2012. In addition, AE says that it is not committed to any ideology, and that it will not promote any candidate or platform before its on-line nominating convention. Nor will it promote the nominee selected by its convention delegates to run on the ballot lines it secures in the 50 States.

AE is run by a closed corporation whose funding sources haven’t been made public in the main. The corporation sets all the rules for its national convention, determines who can and cannot participate, which candidates can and cannot run, and then it registers and tallies all votes in secret and without any monitoring to prevent tampering with the vote for candidates.

Evaluation

As I pointed out earlier, AE says that it is non-partisan, and is not committed to any ideology or political party, and that it is not a political party itself. Well, it certainly isn’t a branch of either the Democratic or Republican Party. However, we’ve already seen that in getting on the ballot in many States AE declares that it is a political party. So is it or isn’t it? It seems that when it wants to get a ballot line in some State it says that it is a political party; but when it wants to raise funds it relies on its status as a 501 c(4) organization to secure contributions as needed with no specified limits and also to refuse to disclose its contributors as political parties must legally do.

Is AE really non-partisan? Well, it is in the sense that it doesn’t subscribe to the platform of the two major existing political parties, but that doesn’t mean that its Managers, Leaders and Boards of Directors haven’t agreed on definite positions that they are partisan about, and that are definitely ideological.

Their ideological bias is reflected in the framing and structure of the hundreds of multiple choice questions that it asks registrants to answer to define their “true colors” from a political perspective. I won’t review those here and suggest that you go to their site, take their “true colors” survey and see for yourself whether you think there is a clear framing bias in their survey instrument. I think there is, and that this ideological bias is illustrated very well by the “core questions” that every prospective delegate to their national convention must answer.

“To date, Americans Elect delegates from the across the political spectrum answered 5 million questions on AmericansElect.org. The 9 core questions that every DELEGATE has already answered include:

ECONOMY: What is your stance on the US budget deficit? Are in you in favor of more spending cuts, more tax increases or some combination of both?

ENERGY: What is your stance on America’s energy needs? Do you favor investment in renewables or more drilling or some combination of both?

HEALTHCARE: What do you think the government’s role in health should be?

IMMIGRATION: What is your stance on illegal immigration? Do you think that all or most illegal immigrants should stay in the country or all or most illegal immigrants be deported?

FOREIGN POLICY: When you think about the US pursuing its interests abroad, to what extent should the US listen to other countries?

EDUCATION: What is your stance on educational curriculae? Should it be set by the local school boards, by national standards, or some combination of both?

SOCIAL ISSUES: When you think about the rights of same-sex couples, do you believe they should be allowed to marry or only allowed to form a civil union?

ENVIRONMENT: What is your stance on our use of Natural Resources? Do you think it exists for the benefit of humanity or should it be completely protected or a combination of both?

REFORM: Should we make this country great by returning to the values of our forefathers or keep building and adapting for the future?”

Every one of these core questions has an obvious framing bias leading the registrants in a particular direction. The question on the economy assumes the deficit hawk framing of fiscal irresponsibility. It assumes that one should have “a stance” on the budget deficit, that one should want to cut it, and that the only alternatives are cutting Government spending, raising revenue through taxation, or a combination of both. This is not true, of course.

The question on energy issues is framed in terms of the present partisan split, implying that the center is a position following both approaches the question frames. The framing of the health care question doesn’t provide a preamble explaining the difference between the options provided to respondents. It assumes that people know the differences between Medicare for All, and and other types of Government intervention in health care, when there is plenty of survey evidence that there is no clear understanding of these differences.

The framing of the immigration question in terms of “illegal immigrants” isn’t even centrist, but biases replies toward a rightist view. The foreign policy question assumes that listening to other nations and pursuing the national interest of the US are in conflict. This is a nationalistic “framing” of the issue. The education core question frames the issue in terms of local vs. national control; but not in terms of the issue of excellence in education.

Social Issues are cast in terms of same sex marriage vs. civil unions. But there are many other social issues of importance such as those affecting Federal rules about a woman’s right to choose, continuing racial discrimination various areas, the role of religion in American politics, etc. Why select same sex marriage vs. civil unions as a “non-partisan” non-ideological social issue?

The environmental issue frame is very abstract in philosophy. There are a dozen other ways and more to frame this issue. Why is this framing the “non-ideological one” that all must respond to in order to elicit a “centrist position”?

Finally, the question on political “reform” is highly abstract, and it’s very hard to tell what responses might mean to the members. Why is this not framed in terms of issues like Congressional paralysis in the context of the filibuster, or reform of the electoral college, or the highly unrepresentative nature of the US Senate; or the gerrymandering of Congressional Districts; or whether greater regulation of Supreme Court Justices is needed to ensure that they disqualify themselves from hearing cases where they have an obvious conflict of interest; or the role of money in politics?

AE has many other questions people can answer that go beyond the core questions in dealing with some of the above issues. But 1) they are not the core questions that all must answer, and 2) even when many other questions exploring these issues are posed, they are posed with a definite ideological “centrist” bias. Whether or not, or by how much, it differs from major party formulations, these questions aren’t either non-partisan or non-ideological unless you mean, by those terms, formulations different from major party formulations.

One of the most important issues arising in evaluating AE is the discrepancy between the claims it makes about its purposes and processes, the scope it is trying to provide for people to influence the political process, on the one hand, and the reality of its structure and operation, on the other. AE says that people who choose to participate in its process will decide the issues, select the candidates, and nominate the President; but its actual functioning, both current and projected, as described on its web site and in its bylaws, belies these claims.

– So far, the issues embodied in AE’s questions are framed by its staff and leadership, not by the people who sign up as members. We’ve already written about the ideological biases present in the AE core questions, and also indicated that if one takes the trouble to answer the remaining hundreds of questions they ask of willing registrants, there are biases present in the comprehensive set of questions amounting to the staff and leadership framing “a centrist agenda” of issues to regulate the priority choices of members. The whole process of agenda selection occurs in the context of a “top-down” framing of the issues. There is no ‘bottom-up” influence on the framing of the agenda, even though the members/delegates can respond in ways favorable or unfavorable to the specifics of the centrist framing.

– When it comes to selecting the candidates, AE says that delegates will be able to nominate American citizens they favor. However, the AE leadership will review all candidates to see if they’re “qualified’ to run for the presidency. AE leadership may or may not specify explicit criteria, but whether they do or not, and whether a candidate meets them or not, AE reserves the right to eliminate candidates they judge as “unqualified.”

In other words, the leadership of AE is able to make sure that all candidates nominated by the delegates are acceptable to the leadership, and that the delegates won’t have an opportunity to vote on candidates that the leadership thinks is “unqualified.” the leadership can ensure that all candidates remain within a particular of range of opinion that the leadership finds acceptable. This seems like a selection of candidates by the leadership of AE rather than by the delegates.

– Going further to the on-line nomination contest itself, the AE leadership guarantees a completely secure and honest process. However, the delegates have no way of verifying that the process is secure and honest. AE mentions an independent evaluation mechanism to ensure the honesty and integrity of the nominating process. But it is the AE Board and leadership who will select the “independent evaluators,” not the delegates to their national convention.

So, the bottom line is that the delegates will have no control over the process, and no way of monitoring its honesty and integrity. The only thing delegates will have is the word of AE, an organization that has been very reluctant to implement transparency at this writing, that it will accept the actual nomination of the delegates rather than manipulating the results of the selection process in secret. Is AE’s word enough? None of us know. But we do know that deception in politics, in marketing, and in the financial sector is the order of the day.

The President promised change when he ran in 2008, but the change most of us see is certainly not the kind of change we think we voted for. The Republicans ran on creating jobs in 2010. But, no jobs have been created through programs passed by House Republicans. Corporations routinely offer ads about all they are doing for the environment; but the reality of their practices is very different. Local governments say they are trying to keep order; but then they engage in what appear to be little more than police riots violating the first amendment rights of Freedom of Speech, Assembly, and the Press. Systematic dishonesty and fraudulent behavior seems to pervade our culture in every aspect of it, and it is no big deal for our leading politicians and business leaders to look directly into the camera and lie to the public.

So, why would anyone take what a new organization intending to intervene in and change the electoral process says at face value? Why shouldn’t warning bells go off whenever an organization has a discrepancy between what it says are its goals, and its actual structure and practices? Why shouldn’t people question discrepancies between an organization’s claim of non-partisanship, and its clearly partisan and biased framing of issues?

Why shouldn’t people be skeptical when an organization says that it is subject to no special interests, but is clearly funded by $22 Million in contributions from a very small number of people, and then doesn’t disclose the contributors? Why shouldn’t people demand demonstrations of transparency and proof of sincerity and absence of elite control, before they commit any support to an organization that purports to give the public a greater voice in decision making?

– In addition, AE’s goal of holding an online presidential nominating convention that automatically puts the same ticket on the ballots of all 50 states simultaneously appears to be headed in a dangerous direction because it is seeking to eliminate the face-to-face primaries and caucuses at the state level that are one of the cornerstones of the U.S. electoral process, hard-won by progressives over many years in their efforts to create open and honest elections that escape for the old ‘smoke-filled’ rooms.

Again, AE is run by a closed corporation that is secretly funded and sets all the rules for the convention, determines who can and cannot participate in the convention, which candidates can and cannot run, and registers and tallies all the votes. Whether the substitution of a closed corporation run in this way as the source of electoral nominations is a democratic improvement over the U.S. political party system is, to say the least, an arguable proposition, whether or not its delegates can select a presidential candidate within the constrained parameters AE’s leadership chooses to impose.

Conclusion

So, if the problem the United States is facing is to provide a way of changing the political process to counter the emergence of oligarchy and to restore a Government that is “. . . of the people, by the people, and for the people . . .” then it’s pretty clear that AE won’t help us do that. Given its rules, governance, the lack of transparency in its funding, and the “guided democracy” style of its functioning organization, it won’t help us to repeal Michels’ “Iron Law of Oligarchy” and give the 99% a continuing influence in creating policies that serve them rather than enriching the 1%. Instead, it will simply provide a way for the discontented to vent their feelings through another political organization that is guided and managed from the top-down by people representing the oligarchy.

Now, to be entirely fair about this, it’s pretty clear from AE’s web site and interviews with some of their principals that Its purpose was never specifically to save the US from an emerging oligarchy. AE’s view of the US’s political problem is that it is legislative paralysis, caused by the two-party system and its excessive partisanship, in passing legislation aimed at our real problems. So, AE proposes a non-partisan President nominated through the AE online process and then elected, as a way of breaking partisan immobilism through a unity Administration that can broker consensus solutions among centrists in both parties. Its view of the world is through the right-center-left prism and so its solution is to strengthen the center giving it the balance of power, and allowing it to broker bi- or non-partisan solutions on which centrists of both parties can agree.

AE may succeed at developing a “centrist” balance wheel for the political system. But if this leads to legislative solutions that support or enhance the interests of the 1%, then how does that help the 99% and its problem of breaking the power of the emerging oligarchy?

For example, these days there is a Washington beltway consensus, and to a great extent a global consensus on the notion that the cure for our economic problems is austerity in public expenditures and restoring private solvency through savings. But how does that “old-time fiscal religion” help the 99%, especially since its short-term effects are likely to be a second and probably much deeper downturn than we have now?

If AE’s centrist balance wheel had been in place this past fall it would have imposed a “centrist solution” to our economic problems in the form of a long-term deficit reduction plan such as the Bowles-Simpson proposal, which would have raised more tax revenue from the wealthy, but also cut entitlement and other Government programs for the middle class and the poor. But, this is a 1% solution, not a 99% solution. It doesn’t represent what the 99% want. It is what the well-off people who run Americans Elect and many of the 1% seem to want.

So, the “non-partisan” solution to two-party polarization that AE is trying to mid-wife won’t fix the political system by restoring popular control, but instead will place that system even more firmly in control of the oligarchy by imposing austerity economics and impoverishing the 99% even further, while providing the balance of power in national politics to a third political force that is dominated by centrist establishment figures. In short, AE isn’t offering a way out for people, it’s offering them a way to dig a deeper hole than they find themselves in now.

A 99% solution is one that, according to the polls, would re-create full employment, punish the banksters, stabilize the financial system, bring order to the housing sector while keeping people in their homes, provide consumer protection against the financial sector’s predatory practices, provide Medicare for All, repair the nation’s infrastructure, create a first class educational system open to all, and strengthen the social safety net, while taxing the rich, if necessary, to allow those things to happen. This 99% solutions could possibly be facilitated by AE, if it were set up to allow people to self-organize in whatever ways they choose. But its guided democracy structure won’t let that happen. But the main point is that this 99% can only be brought forth by a change that undermines the emerging oligarchy and creates bottom-up accountability to the 99%.

You can also safely bet that whatever AE’s delegates want, there will be no AE platform coming from its nominee that doesn’t reflect the fact-free Hooverian perspective of fiscal responsibility = Government austerity, the current Washington consensus about what Government should do about the economy. And you can also safely bet that Bernie Sanders, Bill Black, Jamie Galbraith, Matt Taibbi, Dennis Kucinich, or Warren Mosler, provided it looks like they will be nominated by AE convention delegates, will then be disqualified by AE’s governing committees before the convention is convened. This will happen because it is the job of AE committees to keep the world safe for the emerging “centrist” oligarchy, and out of the hands of people who might bring about the renewal of bottom-up democracy.

Update: Day in and day out, the best coverage of Americans Elect is provided by Jim Cook at his Irregular Times site. Here are three recent entrees that collectively drive home the point that Americans Elect’s claims of being non-partisan and non-ideological have little, if any credibility, and that AE is primarily a marketing effort claiming these qualities, but belying these claims with almost every action it takes.

“Christine Todd Whitman Goes on TV and Promotes Jon Huntsman a Sixth Time, Violating Americans Elect Bylaws”

“Having Obtained Predictable Result, Americans Elect Erases Most of its Rating System”

and:

“Americans Elect introduces new “Priorities” Ranking System… Contradicting its Old System”

These three posts fit into the pattern of manipulation, systematic dishonesty, and the huge gap between AE’s stated policies and actual behavior that I point to in my post above. In addition, there is a strong suggestion in the ratings system errors and sudden changes in the system and resulting ratings, reported by Jim Cook, that there is more than a bit of political bias, confusion and perhaps even incompetence, either on the part of AE’s contractor “On the Issues” who handled the processing of data to obtain the ratings “matching” the candidates positions to the quiz choices given to Americans Elect “delegates,” or on the part of AE employees who used their results.

AE is an organization that has raised $22 million for its project. If it is true, as its apparent rating system problem suggests, that it hasn’t been able to get organized well enough to ensure that its process is unimpeachable, then that provides very little confidence that its online nomination process will be a reliable one that won’t be subject to manipulation by its contractors and/or staff.

If it has its way, then hundreds of thousands, and perhaps millions of people would be participating in that process. Shouldn’t those people have a nominating process whose integrity, reliability, and accuracy is beyond either reproach or the possibility of fraud by its administrators? How will AE ever be able to guarantee that? And how, given what they’ve done thus far, and appear to do on an everyday basis, in bringing centrist ideological bias to their web site and opinion instruments, can they guarantee to their delegates a non-partisan and non-ideological nominating process?

Perhaps AE needs to come clean and admit that it is not non-partisan, but actually a nascent political party with a definite centrist, austerity agenda, which it thinks is in opposition to the agendas of the two major parties. Then it won’t have to claim that it has no framing biases, or that, incredibly, it is nonpartisan and non-ideological, or that it is anything other than another political party representing the 1% and its full-on austerity, globalist agenda for the US. That might not be unpopular, or get many people involved in its activities. But, at least, it would be refreshing.

Think of it, a political organization that is honest about its intentions! That should be worth at least a few points for its nominee at the polls on election day!