I Got the Fed to Release Its 2011 "Treasury Default" Playbook
crisesnotes.com
crisesnotes.com
How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? Imagine a policy that says, "In accordance with the Fourteenth Amendment, we will continue to pay bondholders their due monies" or something like that.
I don't think the 14th amendment gives the Treasury that power, but that's not what I'm asking. Imagine they decide to interpret it that way. The Supreme Court rules against them. They ignore the Court and continue to pay.
What happens then?
I guess what I'm getting at is: what is worse, a Constitutional Crisis? Or a default on our debt? To me it seems like the better outcome would be to ignore the Court altogether on this issue.
(I'm sure I'm making naive assumptions in this questions. Let me know!)
They would gladly facilitate an option the Treasury pursues in its role as fiscal agent, since they can always claim that it was the Treasury’s decision and they had no other option as fiscal agent (which happens to be true).
The Fed can't buy debt directly from the Treasury [1].
Also the Fed can just let Treasury run negative balances or any other number of accounting tricks.
So, Treasury decides to punch through the debt ceiling. What happens next?
That's true until it isn't. I hope you're right, but I worry that you're probably overestimating our politicians. They're not all playing 5D poker. Some are just plain stupid.
Our system of checks and balances didn’t really account for what happens when a sizable minority in government are bent in destroying it.
The debt ceiling debates every year are certainly theater though.
And it's not theater. When these debates occur the legislature is forcing the executive to face taking extraordinary steps. That's leverage used to negotiate budget deals.
Thus, the "extraordinary steps" I mentioned. Some have argued the executive has the authority to do any conceivable thing necessary to ensure that the "validity of the public debt ... shall not be questioned," to include ordering the Fed to honor Treasury overdrafts.
Another extraordinary step by the Treasury would be minting legal tender and depositing it with the Fed. The so called "trillion dollar coin" scheme.
At the end of the day they'll do what they have to do. This story makes it very clear that the Fed is not interested in becoming the political target over US default, so don't imagine they're going to take some heroic stand.
The Treasury hasn't come close to proposing over drafting. It would sell Treasuries and then have cash. If that became problematic, it would mint. The Fed cannot, by law, lend money to the Treasury. It can't even purchase Treasuries from them directly.
We'll see.
Others argue minting is more palatable. I think legally that's true. I think politically that's false: there is a visceral reaction to any talk of "printing." The various euphemistic ways the Fed can handle it will be preferred. Of course it will end up in front of SCOTUS, but that's a political win: SCOTUS becomes the bad gus trying to "destroy democracy". Or something.
The point is it’s unnecessary.
What does this mean? Even if a Treasury auction fails, the Treasury has the power to mint currency. It could literally just deposit paper representing the $200bn of gold at Fort Knox and have money in its Fed account.
Minting is more precedented than the Fed. Functionally doing this is trivial. It's legally asserting the supremacy of the 14th Amendment over the Public Debt Acts.
The US has defaulted on its debt several times.
For example FDR defaulted on the debt when he refused to pay back bonds denominated in gold with their face value and instead paid them back in devalued currency. The Supreme Court ruled that he had acted unconstitutionally, but also did not force the government to pay back the full value as FDR had said he would ignore such a ruling.
Now the ball is in the House's court. Are they going to vote to positively default? (Rather than passively not act before some deadline, like how they do it now?) I bet not.
But the treasury of course has many other ways of paying debts, including simply issuing currency. Even if the 14th amendment doesn’t invalidate the debt ceiling, the treasury still must pay the debts, and doesn’t have to do so by cutting spending. It would however be more orderly and strictly better for everyone if the 14th amendment did invalidate the debt ceiling in a situation that questioned the treasuries ability to make whole debts without resorting to disruptive measures.
It is strangely worded, but I think it could be interpreted to also mean that the government shall not do anything that would call the validity of the debt into question.
It doesn't really make sense to pass an amendment that tries to mandate the perception of the validity of the debt. if the government stops honoring it, then the invisible hand of the market will consider it invalid.
You could have "no one questioning the validity" but people are still going to either not participate in the auction, or bid only for high yields.
Do you arrest and imprison anyone who reveals that they are not getting paid on their bond at maturity? Do you force buyers to buy it at face value, even though they know it will not be honored?
See, that's why you aren't on the Court.
What the kind of people that actually get put on the Court would mostly due to allow the action without endorsing its legality would be:
(1) Be sticklers about standing and other threshold issues (ripeness, mootness, etc, but standing is the big and most useful one here); almost no litigant other than Congress acting as a whole will have the kind of particularized injury to allege that would give them standing to challenge paying the debt (an actual creditor might have standing the other way, but that's not the scenario we’re concerned with.)
(2) If you really can’t kick the case for standing or other threshold issues (well, first, amateur, but...) then invoke the “political question doctrine” to avoid it anyway.
But like, for other people who aren't so smart, thanks for detailing the mechanisms I would use :)
The House as a whole would probably have standing.
One stalemate averted by another!
If they wanted to raise hell they could simply make the worst decision and there’s nothing that can be done about it.
To be clear, that same gatekeeping can be and has a times been perverted into social exclusion, but the problem at hand IMO is the discarding of the baby with the bathwater.
The Supreme Court has been ignored before.
People who are aware of who Justice Thomas even IS would still be a vastly smaller circle than the number of people who would be affected and have very strong opinions on a US default (although not until it happens).
https://thehill.com/homenews/4019788-poll-thomas-has-highest...
Supreme Court Justice Clarence Thomas has been friends with Dallas billionaire Harlan Crow for 27 years. Crow said that he and his wife have been friends with Thomas and his wife Ginni since 1996.
Is there proof they were bribes as opposed to the innocent explanation that they are just family friends, and it's not unusual for billionaires to offer a free ride to their non-billionaire friends on vacation?
The answers are “you turn down gifts of far, far less, from much less-risky associates” and “not in the same multiverse, even”.
But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
The president would almost certainly not want to take responsibility for the resulting economic implosion, and would order the executive to ignore the court ruling. Then it comes down to a mix of loyalties and individuals' beliefs around what would cause the least damage.
It's far more likely that a ruling like that would be the end of the court's power.
That's not accurate:
Power in the US government is of course separated between the legislative, executive, and judicial branches, and each has checks and balances on the other two.
One check the executive has on the judicial is to ignore its rulings. The executive can't do it all the time, obviously, and afaik the US also generally embraces 'judicial supremacy', the idea that the judicial branch generally gets the last word. Also, I don't recall the judiciary sanctioning indiviuals in the executive branch, but I could be wrong [Edit: of course I'm wrong, see below]. I would guess they've never sanctioned a president.
Perhaps the most famous use of this power was in Worcester v. Georgia; when his favored side lost the case, President Andrew Jackson reputedly said, "[Chief Justice] John Marshall has made his decision; now let him enforce it." (Inspiring rhetoric, but it led eventually to Native Americans having their land stolen and many being marched to their deaths.)
Every time someone in the executive has been held in contempt of court in relation to (but usually exceeding) their official duties, the judiciary sanctioned individuals in the executive branch.
That said, the President could pardon everyone involved.
So in the scenario you describe, the Treasury writes checks, and they bounce. That would be... bad.
The Treasury would have to collude with the Fed. Something like, the Treasury sells some bonds to the Fed, and the Fed buys them, putting the money into the Fed account. That's illegal, because Congress didn't authorize it, and they try to put the Treasury secretary in jail.
The Supreme Court says "We have no idea what's going on, this is up to you jackasses. Go legislate something." A whole bunch of stuff happens, but it all comes down to DC in flames and the country gives up.
The Treasury banks with commercial banks, but it also has an account at Fed. That said, banks aren't legally obligated to accept its cheques.
> an additional player, the Federal Reserve
That's what this memo describes [1]. In essence, the Fed says it will defer to the Treasury on whether debt is legally issued.
> Treasury sells some bonds to the Fed
The Fed can't do that [2]. What they can do is announce to the market that they won't treat post-ceiling debt differently from pre-ceiling debt. That's what this memo says.
It may not be able to continue doing that if e.g. SCOTUS rules Treasury exceeded its authority. But at that point, the Treasury could start testing its minting power.
In summary, the Fed isn't a player in the legal part of this game.
[1] https://www.federalreserve.gov/monetarypolicy/files/FOMC2011...
I kept thinking about the Fed doing maneuvers as "one possible path", and the Treasury doing maneuvers as "another path", but they're kinda the same.
Thanks.
Why write a check?
As the article notes, the Treasury already does things to circumvent the debt ceiling, and nobody cares. The article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary.
In other words, I don't think the debt ceiling issue will ever trigger a Constitutional crisis. (Unless, of course, you think, not unreasonably, that all this circumventing of laws passed by Congress already is such a crisis, but that's a whole other discussion.)
Not even that. The Fed is saying they'll defer to the Treasury on whether debt is legally issued. (Presumably, until SCOTUS rules on it.)
Yes, while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued.
What are you hinting at? The Fed doesn't decide on whether debt is legally issued. It also cannot overrule Treasury absent a court order. It's saying that, absent court advice, if the Treasury issues debt it will treat it like any other. There is nothing behind the scenes they need to do beyond announcing they'll treat them equivalently.
I'm just restating what was in the article, for example when it talks about "accounting gimmicks" that the Treasury uses to circumvent the debt ceiling. The Fed, as you say, cannot overrule Treasury, so if the Treasury tells the Fed to play a particular role in its accounting gimmicks (which it does), the Fed has no choice but to do so.
The Fed’s conundrum is: do they possibly break the law, or do they certainly destroy the economy? I am supremely confident they will not destroy the economy. They’ve done gray-area actions to prevent economic catastrophe before. So the settlement will take place, Treasury will have cash, and everyone’s happy.
Then what? A lawsuit I presume, but who would sue the Treasury, and under legal theory? Not a lawyer, but I think you need to show injury to have standing to bring a case. But a case of this magnitude would be decided on political calculations as much as legal principles, and I cannot imagine the Supreme Court wants to be the party clearly responsible for world economic chaos.
And what kind of order could the Supreme Court issue? It would be weeks after the fact—maybe months. Some sort of unwind of the treasury auction, where the dealers put the bills back. (The bills might be expired though.) That would not solve a damn thing, because of the debt ceiling: there will be no money, and no way to raise any, to return to the dealers. I cannot overstate how damaging any such attempt to take back debt would be. This is similar to the collapse of a big bank or exchange, but orders of magnitude more so.
So since there really is not an effective legal remedy available to the court, why would they issue such an impossibility? I think the court will find a way to make the administration look bad, sure, but why would any court force a constitutional crisis? They are in a sense the weakest branch, especially in an emergency situation.
I think this falls into the same category. Inventing laws out of whole cloth to paper over political division is bad.
[1] https://www.james-macdonald.net/free-nation-deep-in-debt
https://moslereconomics.com/mandatory-readings/innocent-frau...
If savings incerease when the deficit increases, why don't we crank defecit so high that everyone can be billionaires?
And if the savings decreases when the deficit decreases the entire country must have been broke when we paid off our debt in 1835. Right?
Nominal wealth is relative. If everyone is a billionaire it doesn’t change the relative claims we all have on real resources.
What we can do however, and what MMT economists recommend, is using the power of the federal government as the issuer of the currency to ensure spending is maintained at full employment levels (meaning 0% involuntary unemployment). The best mechanism to achieve that is a federal job guarantee.
> And if the savings decreases when the deficit decreases the entire country must have been broke when we paid off our debt in 1835. Right?
Well sort of. Every budget surplus leads to a recession or depression[0]. However the US could retire all its “debt” overnight and stop issuing bonds and paying interest if it wanted to, without any surplus. The fancy terms for this are quantitative easing and overt monetary financing but fundamentally there is no difference between treasury issuing bonds “out of thin air” and issuing reserves “out of thin air”. Both reserves and government securities are high grade financial assets held by private banks, the nature of the liability held makes virtually no difference to the operation of the money system.
Bonds are simply used to set and defend the target cash rate which is also a pointless vestige, we should just have ZIRP forever[1].
[0] https://www.levyinstitute.org/pubs/pn99_3.pdf
[1] https://neweconomicperspectives.org/2014/07/debt-free-money-...
This is the MMT fallacy. Full employment != full production.
If you want your economy to be as efficient and productive as possible, the mandate cannot be "full employment".
This means inefficient workers must be paid to not work.
https://fee.org/resources/economics-in-one-lesson/#calibre_l...
It doesn't really matter if workers in a job guarantee program are productive in the sense of being profitable, because involuntary unemployment has a negative (not neutral) impact on productivity at an individual and a societal level.
Ensuring spending is at full employment levels through a job guarantee maintains a buffer stock of employed and employable labour, ready for work in either the public or private sector, or at the very least prevents intergenerational poverty cycles from forming due to the negative impacts of involuntary unemployment.
But what about all the people who we force to work who should not be working due to age or a disability? That's not "involuntary unemployment"; that's "involuntary employment"! We're using the coercion of homelessness and despair to force these people into roles where they are not suitable and then we pay a shift supervisor to hold their hand all day.
However you might find that there are some aged, infirmed or disabled people who do want to work, and almost anyone can do something. It may be in their best interests, and in the best interests of society, to support their efforts.
When you remove a private sector profit motive your definition of "useful work" can expand quite a bit.
For the most part, though, involuntary unemployment consists of people who are willing and able to work, but who can't find employment in the private or permanent public sectors.
The Constitution is a democratically-formed device, and the Constitution contains the 14th Amendment.
It isn't. The Federal Reserve Act, passed by Congress and signed by the President in 1913, allows the Fed to do all the things it does.
But this has no bearing on the debate around who has sovereignty over deciding things.
"That's bad, and the Fed intervening is therefore good" does not dispute its anti-democratic nature.
Then you wonder how all these reckless people ended up in positions of power.
Who is "they"? The Treasury?
We all know how to catch this falling knife, the problem is that you basically uproot the Rule of Law to do it. After that you are going to have a disgruntled population angry that someone didn't have to play by the rules and we picked up the pieces.
We get some Band-Aid legislation that says 'this will never happen again'. Sometimes it does happen again.
This is a red herring. The Fed doesn't "buy" treasuries. It can't, at least not with dollars. The Fed conducts an asset swap in which it accepts a treasury, and credits the Fed account of the seller with bank reserves. These reserves are not spendable outside of the Federal Reserve system. No new money is created.
QE has done nothing to aid economic recovery - not here, not in Europe, and not in Japan, except to influence the psychology of people who don't understand what's going on.
If it ever comes to the Fed doing QE on defaulted treasuries, the same thing will happen. Big psychological boost for gullible investors, but nothing in terms of actual help to the economy.
Of course it does.
https://www.federalreserve.gov/faqs/how-does-the-federal-res...
"The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process."