Rationalization and Obligation, Part I: No Magic Bullets?
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.
(Cross-posted from New Economic Perspectives.)