Rationalization, Obligation, Part I: No Magic Bullets?

By Joe Firestone

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 had this to say about other options, mentioning 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.

24 Responses to Rationalization, Obligation, Part I: No Magic Bullets?

  1. Unfortunately, you are right Joe. Obama has been wanting to do the chained CPI and to make changes to Medicare and Medicaid. I read somewhere that he likes Paul Ryan and I suspect it’s because they agree on these issues. Boehner could never get the tea party people to accept what Obama proposed because they don’t accept anything from Obama. If Ryan can get them to accept it, it will happen. Oddly, it’s the tea party that has been preventing those changes.

    • I think the TP and some “progressives” have been blocking a grand bargain for close to 4 years now. Whether they can continue to do so is up for grabs. The combination of the debt ceiling and shutdown crises, and the sequestration coming out previous crises, create a favorable climate for that “Great Betrayal” deal. Progressives are fighting back with a partial approach emphasizing SS expansion calling for the SS earnings cap to be lifted. Unfortunately they’re not denying the basic premises of the austerians by spreading the idea that entitlements can’t face solvency problems unless we voluntarily create them.

  2. The political duopoly that runs this country is indeed like a chronically dysfunctional family that is totally obsessed with its tit for tat bickering, rendering it unable to adapt to the realities of the world that it lives in. The politicians of both brands of the single party are not seriously interested in fixing the problems of the government and the economy. They are simply focused on scoring sound bites that effect their standing in the polls. That is why the idea of President Obama seriously pursuing alternatives that might break the impasse is one that is just not going to happen. It would place him and his fellow wearers of the D jersies in terra incognita.

    • Maybe it won’t happen, but nevertheless, we need to make it widely understand that this the politics of bad choices, not the politics of necessity.

  3. Tactically Obama is either stupid or acting stupid. If he was smart he can defuse legalistic concerns by declaring that for the sake of maintaining the American economy’s continuing improvement he is breaking the debt ceiling limits stalemate or logjam by using his legal powers to roll out the “Big Coin” for an interim period. At the same time he would announce the setting up of a Commission to report back on the rational creation and use of money within the American economy by both the government and non-government sectors since that is the big bone of contention within Congress and the nation at large. The Commission will be instructed to consult the public on a wide basis concerning monetary theory. The interim period would be until the next president assumes office and the Commission Report deadline six months before the presidential elections.

    • Unfortunately, the President would probably stack the commission with fiscal conservatives representing Peter G. Peterson and the Koch brothers.

  4. Here’s the way it should be for comparison:

    1) The monetary sovereign should simply spend its (inexpensive) fiat into existence and tax some of it out of existence again. No borrowing and no lending either. Also, fiat should only be legal tender for government debts, not private ones.

    2) The private sector should be free to create private monies for private debts only with NONE of them privileged by government.

    Money creation should be, above all else, ethical and straightforward.

    • “The private sector should be free to create private monies for private debts only with NONE of them privileged by government.”

      What would stop the private sector from creating their own alternative government to enforce private debts?

      • Well, the government has a legal monopoly on the use of force and should take extreme pains to retain it.

        But you should not take much debt as a given to begin with because:
        1) Monetary reform should include a universal bailout with new fiat to eliminate as much private debt as possible without causing severe price inflation or disadvantaging non-debtors (similar to Steve Keen’s “A Modern Debt Jubilee”).

        2) The elimination of all government priviledges* for the banks would greatly limit their ability to create liabilities without risking bankruptcy. Two or three-to-1 leverage might be the new norm instead of 20 or 30-1.

        3) The use of shares in Equity (common stock) as private money requires no government privileges yet allows unlimited new shares so long as a majority of existing share holders agree.

        Debt should be the exception, not the norm (Deuteronomy 23:19-20). Investment is the Biblical ideal (Matthew 25:14-30).

        *Including implicit ones such as the deplorable lack of a convenient Postal Savings Service for all residents which would have a monopoly on the risk-free storage of, and with, the government’s fiat since government deposit insurance would be abolished.

      • …haven’t they all ready.

  5. Say it isn’t so Dan.

  6. I do not believe the President will succumb to Grand Bargain because the Republicans will still refuse to negotiate on tax inequities or give any concessions. Republicans want huge cuts to Social Security, Medicare and Medicaid programs and do not believe they have to offer any revenue concessions in return. They will threaten another shutdown when next 6 week deadline approaches. Even with today’s NBC/Walls St.Journal low poll numbers Republicans will not give up until they have made US social safety net a fading memory.

    The Ayn Rand mentality of Republicans like Paul Ryan where everyone is just responsible for themselves and no one else pervades their approach to government. Even though the contradiction in his own family wealth comes from government largeness (Ryan’s family have very profitable construction company that made part of its fortune by building roads and other services for governments) doesn’t seem to change his political view.

    The sad truth is that Americans do not really understand how deficit spending contributes to health of its economy. They fixate on paying off a large national debt without realizing as GDP grows that debt repayment becomes a smaller fraction. I still come back to the fact that if America had focused on just paying off its debt after WWII and not spend billions of dollars to provide education for its veterans, infrastructure and make housing affordable that we would have never had the huge economy we have now. They also made huge investments in Europe and Japan to create a better World economy and a market place for US products.

    Why is so hard for most Americans to understand that huge successful corporations don’t spent their time worrying about the debt it borrowed to built its business but concentrate on how better to sell more of its products or service.

    Federal government not only provides protection, services and benefits to its citizens but helps create long term investments and provide research into areas that private enterprise does not have resources or interest to pursue. Americans still do not give credit to government early spending on creation of world wide web.

    And as to worrying about how to improve social security Americans should ponder what
    Alan Greenspan’s response to Paul Ryan question on privatizing social security:

    “PAUL RYAN: “Do you believe that personal retirement accounts (Wall Street accts.) can help us achieve solvency for the system and make those future retiree benefits more secure?”

    ALAN GREENSPAN: “Well, I wouldn’t say that the pay-as-you-go benefits are INSECURE, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”

    So America needs a growing economy with educated and trained future citizens that can provide goods and services and contribute taxes that provide the necessary future social security payments (which are spend into the economy anyway).

    Annually CBO makes estimates on how many people will receive SS benefits and how many will contribute into social security fund. But why do we put so much stock in what CBO predicts for 15-20 yrs out. Did CBO predict a huge recession for 2009 in their 1994 analysis? … no they didn’t. Did IBM predict it would be out of pc hardware business? We are no where near a fiscal cliff as far as our national debt is concerned. But we are moving toward stalling the recovery of 2009 recession by focusing on debt rather than producing a a larger GDP with deficit spending.

    • Right!

      “Did CBO predict a huge recession for 2009 in their 1994 analysis?”

      Did CBO even predict a huge recession for 2009 in July of 2008?

      In Washington, they create lies for the public and then trap themselves in their own lies. All the politicians know CBO projections aren’t worth a damn, but that doesn’t stop them from evaluating the budgetary impact of any new legislation by consulting CBO projections and requiring deficit neutrality. Nobody dares say “teh emperor has no clothes.”

  7. Prohibited free gifts; in substance, if not in form…hmm, much like the 5,000,000 shares of AIG created out of thin air then sold by Treasury in the open market?

  8. Joe, I have a question on the following two statements:
    “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” and “canceling Treasury debt would affect the balance sheets of the regional Fed banks negatively so that their net worth would become negative.”
    What happens when the bonds held by the Fed reach maturity? Does the Treasury issue another bond to the Fed or does the Fed transfer money from the Treasury’s account to the Fed and cancel the bond? And if the Fed returns this money to the Treasury (the Fed gives money above normal operating expenses back to the Treasury) will this leave the Fed banks with negative equity? What happens? Thanks.

    • Right now, the Treasury must pay the principal and interest due. The Fed is prohibited by law from granting credit to the Treasury. The Fed already gives 94% of its profits to Treasury. If the Fed were to cancel Treasury debt, then it would be giving a gift to Treasury at the cost of assets on its balance sheet. If enough assets are involved, the yes, the Fed banks could have negative equity. A big question is whether that matters or not since the Fed can keep operating no matter how negative its equity goes.

  9. Unfortunately, Obama will refuse any option so long as he can lay the blame on the Republicans- surfing “progressive” (what a self-righteous title) pages on Facebook, no one seems willing to hold his feet to the fire. Of course, Fox News is more than willing to hold him accountable for the wrong reasons, but it does no good for people who would never vote for a democrat to do so. It does no good for Democrats who will never vote for a Republican to blame Republicans. You need the Democrat base to hold Obama accountable for not using any of the options available; one idea that’s an expansion of one I’d like to hear more about is swapping intragovernmental debt for consols. I’m not sure about the legality, if it’d fall under executive or congressional authority to do so, but it’d eliminate ~$6 Trillion in debt, iirc.

  10. Pingback: Rationalization and Obligation, Part II: Coins, the 14th, and Consols | New Economic Perspectives

  11. Pingback: Rationalization and Obligation, Part V: Differences Are Everything | New Economic Perspectives

  12. Pingback: Rationalization and Obligation, Part VI: What He Ought to Do, What He Probably Will Do | New Economic Perspectives

  13. Pingback: Rationalization and Obligation, Part VI: What the President Ought to Do, What He Probably Will Do | OzHouse