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Brinksmanship On the Debt Ceiling

3:49 pm in Uncategorized by letsgetitdone

As the United States Government approaches “running of money” to pay its bills, news articles and pronouncements by politicians about the debt ceiling dispute focus on several things. First, they talk about the dire consequences of defaulting on our obligations. Second, they talk about the need for spending cuts that will put us on a long-term path to balancing the budget, getting a Government surplus, and improving the debt-to-GDP ratio. Third, they talk about the debt ceiling preventing the Government from issuing further debt instruments to “fund” paying for its obligations. Fourth, they talk about the Republicans holding the economy hostage to force the Democrats into accepting spending cuts in very popular domestic programs, while excluding the possibility of closing the deficit by raising taxes on the wealthy and corporations. Fifth, they talk about the brinksmanship and game-playing by both major parties, and the expectation that the debt ceiling will be raised in the end because failing to raise it will subject Wall Street and the banks to very real consequences. And sixth, they talk about the many little ad hoc things Timothy Geithner can do to put off the date when the Government “runs out of money” (now projected as August 2nd).

Geithner’s expedients for putting off the day of reckoning include: draining a special $200 Billion cash management account held at the Federal reserve; borrowing money from a pension fund for Federal workers; postponing scheduled auctions selling Federal debt instruments; raising revenue by selling Federal property; raising revenue by selling the almost $600 Billion in gold held by the Federal Government, any other tricks he can think of to squeeze a few more pennies of revenue out for the Treasury General Account (TGA) at the Fed.

Amidst all this talk and writing, there’s a notable absence of talk about two things that can easily be done to remove the need to raise the debt ceiling: one by Congress and one by the Obama Administration. Let’s talk about Congress first.

What Congress can do to end the debt ceiling crisis, other than raising the debt ceiling, is to allow the Executive to deficit spend Congressional appropriations without issuing any additional debt. Congress can do this at any time, and the Treasury will never have to issue debt instruments again in order to deficit spend.

I know, I know, some of you reading this will think, “Is he crazy? If Congress does that there’ll be runaway inflation.” Of course, I think this is just a false theory, not a fact. There won’t be any more inflation resulting from deficit spending without issuing debt than there will be from deficit spending with dollar-for-dollar debt issuance as currently mandated, because deficit spending without debt, produces no more net financial assets for the private sector than deficit spending accomapnied by new debt.

But my point here is not to argue the inflation/hyperinflation issue. It is to simply point out that this way out of the debt ceiling isn’t being discussed by any politicians or MSM writers or broadcasters. Their field of vision is restricted to the brinksmanship over the debt ceiling, and they’re not debating the pros and cons of what Congress can do to both keep the debt ceiling where it is, while at the same time it allows the Executive to deficit spend that part of its Congressional appropriation that exceeds its revenue. Everyone seems to love the brinksmanship, and the drama, and the risk, and won’t even take the trouble to compare the consequences of repealing the requirement to issue debt prior to deficit spending, with the consequences of default, increases in the debt, or cutting of popular programs.

So, why won’t the MSM explain that the very existence of the national debt is most directly caused by Congress’s own appropriations, coupled with their mandate that debt must be issued when the Government deficit spends? Why won’t they write about the alternative of Congress just repealing that mandate and point out that it may be a way out of the brinksmanship, while, of course, being “objective” and pointing out the downside of Congress doing that, compared to the downside of Congress raising the debt limit, or raising taxes, or cutting popular programs in order to seek smaller deficits and even budget surpluses?

In general, why is it that the MSM, in case after case, filters out some solutions to problems and arrives at a small number of alternatives that from a broader perspective seem inadequate to solve the problems they’re directed at. Take the stimulus program. There were many ways to pursue it. Why did the MSM focus in on President Obama’s “trickle down” program and negotiations surrounding it, without ever writing about more direct stimulus measures like State revenue sharing, payroll tax holidays for employers and employees, and direct Federal job creation in the context of a Federal Job Guarantee Program?

In the area of credit card reform, why did the MSM say hardly a word about limiting Federal Card Interest rates to roughly 5 points over the credit card companies’ cost of borrowing? Why didn’t they say anything about the importance of immediate implementation of the reform, so the companies would not be able to raise rates and impose new fees before reforms went into effect? In the area of health care reform, why did they stop talking about Medicare for All so early in the reform process, when surveys showed that a majority of people wanted just that? More recently, in the face of many polls that show that a majority of people are against deep cuts in entitlements, or specific discretionary spending programs like Head Start, or in social safety net programs, while they also favor much heavier taxation of people with higher incomes and corporations, why isn’t the MSM running stories about how much revenue would be forthcoming from these sources, if only the politicians would stop taking fair share taxation off the table?

The MSM is failing the American people. It’s interpreting its job as being one of tracking the thinking of elites on policy issues and as only discussing the ins and outs of alternatives the politicians view as “serious.” MSM reporters claim that this is objective reporting because alternatives “taken off the table” are not news. But this kind of thinking means that the politicians and their paymasters determine what is news and what is not, rather than the problems we all face and alternative solutions that might best solve those problems. So, the MSM is not doing its duty in “telling the people” what’s really going on.

And when it comes to the debt ceiling, it won’t tell the people that the very existence of the debt isn’t caused by deficit spending alone, but by deficit spending coupled with Congressional rules forcing the Government to issue debt when it deficit spends. The continuing very existence of the national debt is Congress’s fault, since with no more debt issuance, the national debt would be largely extinguished within 5 years, and mostly extinguished within 10. Why don’t we hear about that in The Washington Post amidst all the writing we’ve seen warning America about the unsustainable deficits and debt-to-GDP ratio?

Getting to what the Executive branch can do to end the debt ceiling crisis, here too, we have politicians and the MSM unable, or unwilling, to talk or write about anything the Treasury can do about the debt ceiling that goes beyond temporary expedients. The MSM is willing to talk about all kinds of Rube Goldberg schemes that Geithner might use to put off the day of reckoning implied by the debt ceiling, but they won’t report on, discuss, and evaluate, the one thing that Treasury already has authority from Congress to do, that would render the debt ceiling irrelevant, and enable Treasury to deficit spend all of the appropriations that Congress has already approved for this fiscal year.

That one thing is to use coin seigniorage to generate revenue without either increased taxation or increasing debt by borrowing. In fact, coin seigniorage, can be used to extinguish the national debt, without either reclaiming currency from the private sector by taxing, or, technically, even running a Federal deficit (provided “deficit” is defined as spending – Federal revenue raised from all sources, including, but not limited to, tax revenues.) Here’s how a coin seigniorage initiative by the Executive might work to end the brinksmanship on the debt ceiling, and any risk of Government default proceeding from it. The President would:

– Direct the mint to create a jumbo platinum coin with face value $500 Billion.

– Direct the mint to deposit the coin in its account at the New York Federal Reserve.

– Direct the Treasury to “sweep” the mint’s account to collect profits from coinage (this would result in marking up Treasury’s General Account at the New York Fed by $500 Billion).

– Inform Congress and the public that the previous actions were taken to head off any possibility of default or Government shutdown due to the House’s possible refusal to raise the debt limit in the course of implementing its strategy of extracting severe budget cuts from the Administration. The President should also mention that increasing the size of Treasury’s account balance at the Federal Reserve will not be inflationary because Government spending will remain exactly the same as it would have been if the coin had not been minted.

– Wait for reactions to this move. The ensuing uproar from many quarters including the business community, many economists, and the Federal Reserve, will focus on fears of inflation, and it’s likely that top economists, and some Federal Reserve officials such as Ben Bernanke will claim that spending without issuing debt to absorb the new money placed into the private economy is inflationary, because the quantity of money in the economy will increase. It’s likely that this view will create quite a stir in the media, and even that the value of the dollar will go down in international markets briefly, because the expectations of people will be affected by this argument, and a limited period of “self-fulfilling prophecy” will occur.

– Respond to this reaction by pointing out that it was forced on the Administration, which could not stand idly by while the full faith and credit of the United States was threatened by irresponsible Congressional partisans whose purpose was to take the economy hostage to force an agreement on spending cuts that are against the wishes of a substantial majority of the American people, as indicated by every public opinion poll appearing in recent weeks. The President should also point out, that even though he doesn’t believe that the minting of jumbo coins to pay for spending is inflationary, for reasons he previously stated, he is willing to work with Congresspeople who think there’s a possibility of inflation enduring beyond the initial psychological reaction to minting jumbo coins, and then he can suggest two proposals that Congress may want to consider to remove the need for the Executive Branch to issue jumbo coins to meet debt ceiling crises.

1) Congress could eliminate the debt ceiling so that the US has no more crises of this sort again. Congress can still cut/control spending through the appropriations process, even in the absence of a debt ceiling, and this is the appropriate way for Congress to do it so that individual Congresspeople must go on record for any cuts in Federal programs they want to make.

2) Congress could eliminate the requirement that Federal deficit spending must be matched by issuance of new debt dollar-for-dollar. The President could emphasize here that if this was done, not only would there be no more debt ceiling crises, but the Federal Government could pay off most of the national debt, except for very long-term instruments, within ten years, because the only thing that is maintaining that debt is Congress’s requirement that new debt be issued in response to deficit spending.

He can also point out here that he doesn’t think that the rollover of Federal Government debt is any problem for the long run because of the way the US’s fiat currency system works. But for those who do think it is either a short or long-term problem, this option will eliminate any possible generational debt problem because it will eliminate the national debt which we will not then have to hand on to our grandchildren. He can then add that he knows that many will react to this proposal by saying that it will be inflationary to try to eliminate the national debt this way. But he thinks that since the amount of Government spending won’t change if we implement this proposal; and the amount of Net Financial Assets Government is injecting into the economy also won’t change, he doesn’t think so. But if it should turn out that inflation results from this effort to pay off the national debt; then the Treasury will simply begin to issue debt again, and also adopt other measures to control inflation.

– The President, after making these proposals, should add that the $500 Billion in revenue from coin seigniorage will probably take the Government through August or September without its having to issue new debt, and that if Congress can’t come to agreement on what to do about the debt ceiling before then, he will issue a new jumbo coin, this time one having $1.5 Trillion in face value, and that he will use the new coin for program spending and also to pay off $1 Trillion of the national debt. He can also say that he hopes he doesn’t have to do that, but like institutions in the private sector, the Government can’t operate well in an atmosphere of psychological uncertainty. Government workers have to know that their work and family lives will not be placed under stress by partisan conflict in Washington. In addition, private sector businesses and workers are greatly impacted by any freeze in Government spending caused by attempts at hostage-taking by Congress.

I think that Mr. Obama is a winner in the scenario I’ve outlined. He will be much more popular than he is now by virtue of rendering the debt ceiling threat impotent, and because he will be perceived as acting strongly and cleverly to get around the Republican House to avoid a shut-down of the Government and the possibility of default. He will even be perceived as more “adult” than the other participants in the “debt ceiling crisis” because he will be implementing a technical solution to the problem that prevents the “hostage-taking” temper-tantrum foot-stamping element in the Congress from inflicting real damage on the American people.

The Republicans will come back for another bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won’t be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using coin seigniorage he can take the deficit and debt issues completely off the table, and that Congress can’t simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

This lesson won’t be as clear in the case of the $500 Billion coin, even though some of that money will be used to pay off debt. But, once people see that the national debt doesn’t need to rise if seigniorage is used; it will be easy to explain that if it is used more, the national debt can actually be paid down or paid off. Of course, if the President ends up having to use the $1.5 Trillion coin, then there will be a very graphic demonstration that having a national debt is a matter of a policy choice which Congress is now making, not a matter of necessity.

After that, objections to Government spending based on the idea that it will increase the deficit and the debt will be “off the table.” And then we can move on to handle the many real problems of the American people without worrying about the purely political and psychological, but non-financial and no-economic, problems of the debt, and the deficit.

In considering either the Congressional or Executive options for defusing the debt ceiling issue, our politicians and the MSM writers who track our political games ought to keep in mind and in their many broadcasts and writings on this subject the juxtaposition of two aspects of US law, and thanks to beowulf for pointing out the juxtaposition. First, there is Sect. 4 of the 14th Amendment. It reads in part:

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

I think that office holders and others who through their brinksmanship create conditions that may cause the US to default certainly are questioning the validity of that debt.

And second, there is this Criminal Mischief statute

18 US 1361. Government property or contracts

“Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.”

Members of Congress and the Executive Branch have all taken oaths to uphold and defend the Constitution and Laws of the United States, so they are all obligated to end the debt ceiling crisis and the brinksmanship surrounding it. Congress should end the crisis now by ending debt issuance and the welfare stream it provides to the rich and foreign nations.

And, if Congress fails to do so, the President should quickly implement coin seigniorage to end the debt ceiling crisis, and also make it clear that there will be no more opportunities for hostage-taking and blackmail arising from other debt ceiling crises in the future. If members of Congress want to cut Federal programs, they would no longer be able to hide behind the deficit or debt ceiling excuses while doing it. Instead, they’ll have to stand up like honest men and women and say that they’re against unemployment insurance, or Medicare, or Jobs programs, or Social Security and admit that while they’ll support subsidies and tax cuts for big business, and debt issuance welfare for the rich and foreign nations all day long, they’re just against assistance programs for the poor and middle class because working people, unlike their privileged friends and campaign, must stand on their own two feet, subject to the vagaries of their manipulated markets, or the moral character of the nation will be a thing of the past.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

TARP: Wasting A Crisis

11:12 am in Uncategorized by letsgetitdone

Last Sunday, my son asked me what I thought about the WaPo article “Treasury Secretary Timothy Geithner tackles five myths about TARP.” Here’s my reply.

There’s a lot of truth to the specifics, but his overall evaluation is way off because he looks at it by cherry-picking specific points, and also restricting his evaluation to the bank situation alone, and assuming that the proper goal was to save the big banks at low cost rather than to save the economy. So here are things the Administration and Geithner could have done if they had ended TARP and taken a different course.

1. They could have opposed the change in accounting allowing the banks to dismiss the mark-to-market rule and then taken the banks into resolution since their balance sheets would have shown insolvency.

2. They then could have gotten the toxic assets off the books of the banks

3. They could also have ensured that loan funds would flow to business because the Government would have been managing the banks and simply could have directed it. Instead of holding on to bailout funds and using them to gamble in the international “casino” they would performed one of their most important social functions – lending to business. This would have helped with the very much needed bailout of Main Street

4. If the Government had control of the banks then the finreg bill could have been passed much more easily and would have been much stronger in regulation of the FIRE sector, since the Government would have prevented many bank millions from going into lobbying efforts to oppose finreg, and ensure that it would be watered down. Under Government management the big Banks would have ceased to be a political force. This is one of the most important advantages of taking them into resolution for anyone who wants to fix the FIRE sector.

5. The Government could also have ensured that credit card interest rates would have been at 6 points over prime (or 6% or so) right now, rather than the 15% average we are seeing from the cc companies. The difference is a very appreciable stimulus to the economy. Also, if the banks were in resolution they would not have been able to oppose the credit card reform bill. So a much better and stronger regulatory bill would have emerged

6. With the banks gone as a political factor, the opposition to Obama’s stimulus would have been much less powerful. So he may well have gotten the $1.6 Trillion stimulus needed to end unemployment and bring the economy all the way back. We’d be seeing prosperity by now.

7. If the Government had the banks in resolution, the huge bonus payments to the already overpaid would have been avoided, and that political issue would not have been there to bedevil the Democrats.

8. With the big banks in resolution there would have been much less opposition to health care reform from Wall Street and the FIRE sector. The health insurance companies, which are tied very closely to the FIRE sector, might also have had far less in resources to bring to the health care reform fight. Bottom line? The Democrats might have gotten Medicare for All, or at least a bill that extended Medicare to far more of the population.

9. If the Government had taken over the banks, it could have opened up the books to the Justice Department and discovered the fraud that lies at the basis of the real estate/home mortgage/CDS nexus. It could have prosecuted and jailed executives involved in the fraud and brought a measure of justice to the situation. It could have cleaned up the foreclosure mess a long time ago, instead of having the mess explode now and threaten us all with that second dip, perhaps into a full-blown depression, if the political system falls prey to austerity disease.

10. If the Government had taken the banks into resolution and done all these other things, then the banks could have been spun off to private capital by now, but would surely be politically much weaker. So the Democrats would not only have a much better track record than they have now, having bailed out Main Street and cleaned up Wall Street; but they also would have far less in FIRE special interest money to contend with in this election. The Dems might now be looking at a victory, and Obama would be in the process of moving forward with our other critical problems: energy, education, the environment, climate change, ending the wars, the $3 Trillion infrastructure problem, extending the social safety net, and so on, instead of facing two years of paralysis working against a Republican Congress going nuts over balanced budgets, and waxing eloquent about their wedge issue of the month.

So, all in all, I have to say that one’s evaluation of the TARP depends on what one’s goals and expectations were in the first place. If you assume the goal was to save the banks and stop a total crash of the economy, at a modest long-run cost, then it’s probably a success.

But if you assume that the need was for a policy that would contain the damage to the economy, lay the foundations for recovery, strengthen the Governmental framework for regulating the financial sector, bring a measure of justice to the situation, take consumer interest rates out of the usury territory, contain the home foreclosure problem, make sure loans flow to business, and also move the balance of power in the political system away from the corporations and towards the people, prove the effectiveness of Government in handling a crisis, and maximizing the chances of the Democratic Party to stay in power, then the Administration’s handling of the banks through continuing TARP has to be counted a miserable failure for us all, and a fine example of “wasting a crisis.”

When I sent this reply to my son, I also copied my friend, Warren Mosler, one of the World’s great economists in my view, and currently the Independent Party candidate for the US Senate in CT. Warren was kind enough to reply, and some of his comments recorded very interesting disagreements with my views. So I hope he’ll favor us with comments here too.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).