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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 →

Jack Lew: Avoiding Default Is Your Responsibility Too

5:11 pm in Uncategorized by letsgetitdone

Secretary of the Treasury Jack Lew

With the end of the Summer break, now comes the return of the debt limit dance. From Treasury Secretary Jacob Lew’s letter to John Boehner:

“Congress should act as soon as possible to protect America’s good credit by extending normal borrowing authority well before any risk of default becomes imminent.

“Based on our latest estimates extraordinary measures are projected to be exhausted in the middle of October. At that point, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash we have on hand on any given day, The cash balance at that time is currently forecasted to be approximately $50 billion.

“. . . A cash balance of approximately $50 Billion would be insufficient to cover net expenditures for an extended period of time. And, on certain days, net expenditures could exceed such a cash balance.

“. . . Protecting the full faith and credit of the United States is the responsibility of Congress because only Congress can extend the nation’s borrowing authority . . .“

OK. So, only Congress can extend the nation’s borrowing authority. But it doesn’t follow from that fact that protecting the full faith and credit of the United States is the sole responsibility of Congress.

The 14th Amendment, Section 4 of the US Constitution says in part:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. . .

As have all members of Congress, both Treasury Secretary Lew and the President of the United States have sworn to uphold the Constitution, and this means, among other things, that the duty of each one of these officeholders is to see to it that they do all they can do to prevent the validity of the public debt from being questioned.

As we approach the time when the debt limit, and the lack of agreement between the two parties in Congress, will force the Government to miss payments, Congress does have an obligation to raise the debt limit or remove it entirely. But, Treasury Secretary Lew and the President need to acknowledge that there are things they can do too to avoid a default on the public debt, apart from either reminding Congresspeople of their responsibility, or giving into Republican demands.

One method of getting around the debt limit that Jack Lew and the President have is Platinum Coin Seigniorage (PCS). The Federal Reserve Chairman and then Treasury Secretary Timothy Geithner took that option “off the table” in January of 2013, in the wake of a significant buildup of sentiment favoring its use. But off the table or not, that option is legal, and the Fed Chair’s opposition to using it isn’t controlling, since the Secretary can overrule the Fed Secretary on money matters they disagree upon, and force the Fed Chair to either get the face value of a Platinum coin deposited in the US. Mint’s Public Enterprise Fund (PEF) account credited, or resign.

There are any number of PCS options the President can use to get around the debt limit by generating coin seigniorage profits. I’ve outlined many of them here. Some stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging up to $60 Trillion and up.

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Can the Federal Reserve Really Refuse To Accept and To Credit A Platinum Coin Deposited By the US Mint?

10:42 am in Uncategorized by letsgetitdone

The issue of whether the Fed can really refuse to accept and credit a deposit of a platinum coin with its face value, is being raised frequently on blog posts about Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin (TDC). In the past, I’ve argued that the Fed cannot; and the final decision on taking the TDC off the table was actually made by the President, and not by Chairman Bernanke.

Ellen Brown, the well-known author of The Web of Debt, and also of this recent post on fiat money, direct financing of federal spending, and using platinum coin seigniorage made this comment in a discussion thread at Monetary Realism:

Per the Fed’s website (or maybe it was the Treasury’s), a gas station can reject a $100 bill before the gas has been pumped. You only have to accept legal tender after the service has been rendered or good delivered. The Van Nuys Flyaway won’t take dollar bills. Apparently then the Fed can reject a tender before it has rendered the banking services involved. It’s a privately-owned bank, after all!

Here’s my reply to this comment.

The coin being presented to the Fed isn’t tendered as payment for services, or for a product. It’s a coin being tendered as a deposit into the Treasury General Account (TGA). Also, note these three considerations.

First, the Treasury Department is mandated to deposit its money into Fed accounts if it wants to enter the banking system. So unlike the gas station; the Treasury can’t find another bank; and it needs a bank to spend and implement Congressional appropriations. A Fed regiional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.

Second, even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.

Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.

And third, consider the Board of Governors and the Chairperson of the Fed. What would they do? Well, they’ll tell the Secretary that they don’t want to do it. But if they say no; and the Treasury Secretary orders them to accept and credit the coin; then what? Then this:

12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”

So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242)

And as beowulf has pointed out, the Fed really doesn’t want to go to Court over this because they risk a Supreme Court finding of unconstitutionality due to the Unitary Executive theory, which, in this case, may well have the support of some of the most conservative justices. My own view here, is that the Fed would not even make it to the Court because they’d be denied standing under 12 USC 246, if the Treasury Secretary also ordered them not to contest his order legally.

If you read through the discussion thread where Ellen Brown left her comment, you’ll see that both Philip Diehl, former Director of the US Mint under President Clinton, and Carlos Mucha (beowulf, or beo), the lawyer who first proposed the use of PCS and the TDC, and the author of the blog post, believe that no Secretary would treat the Fed this way. But what if the Secretary were ordered by the President to do it? And what if the President were somebody like FDR or LBJ? Then I think it could happen; and depending on how tough things get in the next few years who knows what Obama will do?

After all he’s the guy with the drones. And the guy who throws people under the bus when he thinks he has to. So, why wouldn’t he throw Bernanke under the bus too, if he thought he needed to? Just sayin’!

(Cross-posted from New Economic Perspectives.)