The New Republic

The government owes the social security "trust fund" almost $2.7 trillion, having borrowed every penny to offset the Bush income tax cuts. How does the government intend to repay the "trust fund"? There are three options: one, increase income taxes, two, increase payroll taxes, and three, borrow. The fiscal cliff "deal" foreclosed option number one, leaving options two and three. The luminaries in DC (Bowles-Simpson and Senator McConnell among them) prefer option number two, but inertia (along with a natural tendency of most folks to seek political as well as actual survival) will leave us with only option number three. And thus the intersection of progressives like myself and the crazy Republican hostage-takers. I'd be more than happy to force a showdown on the debt-ceiling if it forced Congress and the President to produce a plan for repayment of the "trust fund", a plan besides more borrowing, borrowing being the hostage-takers' objection and principle (the principle of not stealing form the "trust fund" in order to give income tax cuts (deferrals, actually) to the wealthy) being the progressives' objection. I've commented many times that progressives and crazy Republicans have much in common, if only they would open their eyes (and minds).

- rayward

January 4, 2013 at 8:36am

"Savvy not judgement" Spot on. Been feeling this sentiment for some time, but putting it so concisely was beyond my, well, savvy. So, how to fix in a marketplace of ideas using clicks as currency?

- Wonderland

January 4, 2013 at 8:39am

Oh, heck, Rayward, America has been running 1 TRILLION dollar deficits for several years now, and seems willing to run them for quite a bit longer. How to pay them back? Just sell more T-Bills. Somehow, running 1 trillion dollar deficits is just fine when it's for military spending, but a measely 100 billion a year to keep paying seniors Social Security benefits is appalling? I don't think so. And of course, right now the Social Security tax is producing a surplus -- if only they weren't using that surplus to make the deficit look lower.

- AllanL5

January 4, 2013 at 9:06am

a big flaw in this way of thinking, eventually you have to shoot a hostage to be taken seriously. if people start to yawn when you take a hostage and change the channel all the Republican leverage will be gone. Obama rolled everything up into one big negotiation; the continuing resolution, the sequester, and the debt ceiling. He will claim he is only negotiating on the first two, Republicans will have to say it is on all three thereby surrendering their leverage, and the American people are not going to want each deal negotiated separately. Obama can double down on defense cuts, threaten to close every base in every red district...furlough every single soldier and midshipman on all those bases. The first hostage Republicans will have to shoot will be their own constituents. Lets see if they pull the trigger.

- blackton

January 4, 2013 at 9:47am

If the Administration thinks that the business community and newspaper editorial boards are going to be enough to get Republicans not to pursue another debt ceiling showdown, they are truly clueless -- and I say this as someone who generally supports this Administration and their view of the economy and the possible political landscape. Obama simply cannot talk about the debt ceiling as something that "might" damage the economy or "might" cause a global economic crisis, or other theoretical stuff. He needs to talk about exactly what will happen to average Americans from a failure to raise the debt ceiling AND prepare the government on a glide path toward that eventuality starting, oh, about now. And this is the "exactly what" will happen: if you are a government employee (including a member of the military and, heck, a member of Congress), your paychecks won't be deposited; if you do business with the government (paving roads, supplying paper or food, or managing government bonds), you won't get paid for your work; if you receive reimbursement from a government program like Medicare or Medicaid for treating patients, you won't get reimbursed; if you rely on Social Security payments or a Federal pension, you won't get your check. And get ready to start the shutdown right on the day when the Treasury Department tells you that it's run out of options to shuffle funds between various Federal pension accounts. In 1996, the theoretical threat of Social Security checks not being issued was enough to get the Gingrich Congress to stop entertaining the notion that a debt ceiling fight was desireable. In 2011, the theoretical threat wasn't enough to get the Boehner Congress to move and obviously a theoretical threat won't be enough this year. The threat needs to be real, and really understood by American voters. A little bit of good, old-fashioned panic is in order to make Republicans understand what the stakes really are. Starting now.

- wildboy

January 4, 2013 at 9:55am

Of course, my point (besides expressing some sympathy for the crazy Republican hostage-takers) is that, by continuing with low income tax rates, the government will continue to use regressive social security (i.e., payroll) tax collections to fund a big part of government, and, other than more borrowing, has no plan to raise the taxes (taxes besides regressive payroll taxes) to repay the "trust fund" for past and future theft (a/k/a borrowing) from the "trust fund". What the luminaries in DC and their observers missed is that the debate during the past year over income tax rates was actually about how to repay the "trust fund", with a significant increase in income taxes (i.e., the taxes paid by the wealthy) or a significant increase in payroll (or other regressive) taxes (i.e., the taxes paid by ordinary working Americans), the only other alternative (to repaying the "trust fund") being a significant cut in social security benefits. Unfortunately, we now know the answer. McConnell (who has stated many times that, if it were up to him, he would not use income tax receipts to repay the "trust fund") won! Happy New Year!

- rayward

January 4, 2013 at 10:08am

Gee, blackton. I see that suddenly you are not in favor of the president making whatever deal he can to avoid going over the debt ceiling cliff - even though millions of working people and unemployed people will be hurt if we do. What changed your thinking so abruptly? Are you perhaps now aware of the advantage of calling the Republicans' first, less dangerous threat, the fiscal cliff, in order to create the necessary fear, not only amongst the public but within the ranks of Republicans?

- roidubouloi

January 4, 2013 at 10:24am

"I see that suddenly you are not in favor of the president making whatever deal he can to avoid going over the debt ceiling cliff - even though millions of working people and unemployed people will be hurt if we do." Roid, blackton can speak for himself of course but I would posit that abruptly raising income taxes on everyone (private and public-sector) is a worse economic result than temporarily and gradually shutting down governmental services and payments because the debt ceiling hasn't been lifted. The result of the first would be an immediate reduction in almost everyone's take-home pay and a corresponding reduction in their spending -- especially their discretionary spending, which would probably disappear altogether among those who represent the bottom third or half of their respective economic markets. That's a recession right there, as evidenced by history both recent (Great Britain, Ireland, Spain) and not-that-recent (Japan). On the other hand, gradually shutting off the spigot of government spending harms a lot of people but not all the people everywhere. It harms government contractors, medical care providers, retirees and communities which are dependent upon government spending. And, of course, it harms the stock market and maybe bond markets, though the harm to the latter would be contained as long as it was obvious that the government was paying its bond holders 100%. But that's not the whole economy, or even the majority of the economy. It is disruptive and potentially dangerous, but doesn't push the economy into a sudden recession. The whole idea of the debt ceiling as economic catastrophe reminds me of the impact of a Papal interdict in the Middle Ages, which hit England in the early 1200's as a response to King John's meddling in episcopal affairs and some other countries at different times. For a religious society, the whole concept was terrifying in theory -- no sins committed during the interdict could be confessed and no church-sanctioned penance was available for those sins, and everyone who died during the interdict was going straight to hell. But, after the interdict was imposed, nothing much happened -- people continued to go about their lives, those who thought themselves virtuous were convinced they were not going to hell one way or the other, the Crown helped itself to ecclesiastical property to fund its expenses and the nobility were relieved that the Crown had another ready source of income besides their own holdings. After some months, the Papacy gave up and lifted the interdict without any meaningful concessions from the Crown. This is the same situation that we find ourselves in today. Educate the public about a shutdown, don't negotiate the debt ceiling and launch the shutdown gradually as necessary. If it's done right and the bond markets are satisfied that they will get theirs, the harm will only come to a discrete portion of the public -- but that discrete portion will kick and scream enough to convince enough GOP legislators to give up. Not all, not most, but just enough to lift the debt ceiling.

- wildboy

January 4, 2013 at 11:19am

thanks wildboy, I don't think it will ever come to that, Republicans love to talk about government overspending but are always loathe to talk about what they want to cut except food stamps and the like. And no way would that ever pass a Democratic Senate. Really the only areas that can be cut are in entitlements and defense and we see already how Republicans are screaming about the sequester cuts to defense. About 800,000 Defense Department civilian workers still face the possibility of three-week unpaid furloughs on a rotating basis if Congress fails to deal with the coming threat of sequester in two months, Pentagon officials said Wednesday. Under federal law, civilian DOD workers can be furloughed for up to 22 days, and all 800,000 could possibly be subject to furlough on a rotating basis, Little said. This is just from previous Republican cuts. I truly think Republicans don't have the balls to gut the military and entitlements. The only reason they agreed to the sequester is because they thought they would win in 2011 and would then scrap the whole thing. I think the whole package will be mostly smoke and mirrors, there will be cuts stretching out over 100 years to pay for 1 years debt.

- blackton

January 4, 2013 at 12:10pm

Since this post is about the "Washington establishment", I can't ignore the dimwitted article by Bob Woodward now posted on the WP website. According to Bob (or is it Bob), the staffs of the Democratic and Republican leadership had solved the budget impasse in 2011. That's right, 2011. Again according to Bob (or is it Bob), the staff had crafted a $1.2 trillion deficit reduction package and were a mere $40 billion apart, chump change. It's right there in Bob's file, a "one page, typed document". "Some staffers were ready to break out the champagne", says Bob (or is it Bob). It's unclear whether the champagne was included in the "one page, typed document", but we will take his word for it (his word about the champagne, not the "one page, typed document"). Now, I don't have a copy of the "one page, typed document", but I suspect it omits a few relevant details. I seem to recall that the Republican plan to reduce the deficit relied heavily on cuts to the social safety net and on voodoo economics (more tax cuts to generate more government revenues). Perhaps Bob (or is it Bob) could send copies of the "one page, typed document" to Obama and Boehner and Biden and McConnell. I'm sure they can find some use for it. Fish wrapper, maybe.

- rayward

January 4, 2013 at 1:41pm

"So: a threat to plunge the nation's into default and with it imperil the nation and world's economy, seen only a year and a half ago as the political equivalent of a nuclear option, is now viewed as "better political ground." What to make of this? The shift in mindset is surely in part a function of basic human nature: our remarkable ability -- for good or ill -- to adapt ourselves to new realities. More than that, though, it is a function of that far more Beltway-unique tendency, to report and comment on politics and governance as pure gamesmanship in such a way that conveys savvy but not judgment. And if it's all a sport, who's to object if one side has radically shifted the goalposts? Good for them, if they can get away with it. And after all, the higher the stakes in the clash, the better the story." Exactly. A very big part the problem with our political culture is the vapid, lazy reporting and analysis produced by the Beltway media culture. As for what Obama should do, I'm with wildboy. As for what Obama will do, I'm much more skeptical.

- Thunderroad

January 4, 2013 at 2:43pm

Oh maybe instead of Washington just acclimatizing to GOPers, journalsits are once again failing to do their job and instead, becoming part of the false equivalency propaganda machine. Journalism has been a joke for the last ten years and a major cause of our nations problems. Most journalism today is intentionally partisan and most stories have the authors opinion slathered all over supposed factual reporting, and Politico is one of the worst, but a favorite of other journalists it seems. So much for the fourth estate.

- smabry03

January 4, 2013 at 5:12pm

The House Republicans should have all been brought up on charges of treason over the debt ceiling nonsense. How else could one characterize such a brazen and deliberate threat to the integrity of the United States?

- zuludown

January 4, 2013 at 6:38pm

I think wildboy is exactly right. The President needs to go to the people, campaign style, between now and the debt ceiling default date stating exactly, with precision what will happen. He needs to reinforce this message by issuing an Executive Order directing Treasury to start the process of reprogramming federal computers to either not pay federal bills, including social security, or to reduce all payments by a specific percentage - probably about 20%. All federal agencies should be told to notify all their beneficiaries and vendors about the anticipated actions. And the president should go around the country -- including to deep red districts - explaining just what the debt ceiling is and what the Republicans are doing.

- CABChi

January 4, 2013 at 7:03pm

Sorry, wildboy, but you have it backwards. The fiscal cliff, if we actually went over it, would reduce the deficit by half. If we can no longer borrow, then we are immediately at complete balance, a zero deficit. This is mitigated somewhat by the trust funds that can sell previously accumulated debt, debt that was already issued under the extant debt ceilings. Thus, i don't think social security or Medicare would be affected by either the fiscal cliff or the failure to lift the debt ceiling. They both have accumulated "savings" and are solvent for quite a few years yet. This, by the way, only reinforces the observation I have made before that our current problem is not entitlements -- as the wackos keep falsely claiming -- but the deficit in the operating budget, some of which is due to the weak economy but most of which is due to the intentional failure to collect sufficient taxes. The Republican scam is to push entitlements into balance, or nearly so, so that we can afford to run deficits in the operating budget and keep taxes on the wealthy low.

- roidubouloi

January 4, 2013 at 11:06pm

"It is disruptive and potentially dangerous, but doesn't push the economy into a sudden recession." Maybe, or maybe not. If people abruptly stop spending out of concern for what this completely unprecedented event means for their own fiscal health, we could indeed have an instant recession, and maybe even a deep spiral. I am still in favor of calling the Republican threat and letting them pull the trigger, unless they agree either to go away or to achieve or approach structural balance in the operating budget (meaning at full employment) chiefly through cuts to the military, which is the big spending cause of the deficit, contrary to Republican lies. I still think Obama is going to pretend not to negotiate over the debt ceiling and will in fact make painful cuts to the social safety net to buy off the Republican threat. Good chance the Republicans will then take credit for saving the credit of the US by ending the "dire deficit threat" and most of the country will think that is indeed the case. Bye-bye election 2014.

- roidubouloi

January 4, 2013 at 11:14pm

Some side notes: The US will not default on its debt because of the debt ceiling. It would have to cut its spending to equal its revenues. It might default on a bunch of contracts as a result. The "trillion dollar coin" option is getting more play in the press, the notion that the Treasury can mint a trillion dollar coin and deposit it in its account at the Fed so that the Fed will than honor Treasury checks. Without a thorough investigation, it seems to me that 31 US 5112, defining the denominations and physical characteristics of coins that the Treasury can mint, renders this impossible. A better solution, that I have suggested before, is for the Fed simply to honor Treasury checks in the ordinary course regardless of what is in the Treasury's account at the Fed. I have looked. The Fed is authorized to acquire any Treasury instrument so long as it does not acquire it directly from the Treasury. The debt limits do not apply to checks, only to bonds and notes issued under specific sections of the US Code. Hence, the Fed could it my opinion do this. Thing is, it would require the cooperation of a legally independent Fed. Would the Fed cooperate? I sure would if I ran the joint.

- roidubouloi

January 4, 2013 at 11:46pm

If Obama does not have a secret understanding with the Fed to honor all Treasury checks issued in the ordinary course, I think his best tactic would be to publish a schedule prioritizing the payments that will be made if the Republicans do in fact refuse to increase the debt ceiling. go on TV to explain that entitlements, because they have trust funds, have nothing at all to do with the debt ceiling and will continue to be paid regardless, acknowledge the need for entitlement reform, but refuse to consider any changes to entitlements while the Republicans engage in what amounts to a terrorist threat to destroy the economy. Finally, he should invite the Republicans to make public the cuts to the operating budget, not to entitlements, that they propose as the basis for raising the debt ceiling. He should of course explain that the president has no authority to spend a penny that has not been authorized by Congress, and no authority to refuse to spend a penny authorized by Congress, that the debt ceiling merely allows the executive branch to spend what the Congress has already instructed and legally obligated the executive branch to spend. Then do nothing, other than noisily gear up the government to allocate cuts according to his published schedule. This is an über-fiscal cliff because, as explained, it produces immediate balance rather than halving the deficit as the fiscal cliff would. But we should still go over that double height cliff rather than let the Republicans succeed with political terrorism. If the Republicans don't fold, let the public see what the Republicans are actually willing to do to the country. Let all those vendors and employees in all of those Republican districts start howling in pain.

- roidubouloi

January 5, 2013 at 12:02am

The most dangerous result of failing to increase the debt ceiling is not an inability to pay Social Security beneficiaries and other ordinary citizens. It is the government's inability to pay holders of government debt. Why is that dangerous? Banks and other financial institutions hold collectively trillions in U.S. government debt, and they treat it, for risk purposes, as cash. They can go into a market at any time and sell U.S. government securities on the basis that they are risk-free, they will be paid no matter what. So government debt is a substantial ingredient of the global financial sector's liquidity. But if government debt will, by government fiat, not be repaid, all those assets in the banks become worthless. Nobody will know whether a given bank will be able repay a debt, including debt represented in a demand account, like a checking account. Nobody will know whether a demand for cash at at ATM machine will be honored. That sort of fear would likely result in a run on banks, which would cause banks to fail. And the FDIC? I haven't checked, but I would bet dollars to donuts that the FDIC is limited by law to investing in securities of the U.S. Treasuries. Nobody mentions a run on banks for fear that it will be a self-fulfilling prophecy, but that is the catastrophe that would result in failure to increase the debt ceiling.

- peterpalys

January 5, 2013 at 11:07pm

Not really, peterpalys. The debt is never paid off, it is re-financed. And when it is rolled-over in this way it does not increase, hence it is not impacted by the debt ceiling. The debt ceiling is impacted by the current operating deficit (including interest). What the government cannot ostensibly do (although I think it can) when the ceiling is reached is spend more than its revenues. It still has revenues, just not enough for the current budget appropriation. Thus, either the ceiling is lifted, the ceiling is ignored, or the government has to reduce its current expenditures to match its revenues. That does not imply not paying its debts. It might imply breaching contracts. When any claims arising therefrom are reduced to liquidated debts, they will be paid too. The debt ceiling also does not impact any time soon entitlements that are backed by trust funds, because the debt held by those trust funds is already within the debt ceiling. If it were not counted for that purpose, on the grounds that it is not publicly held, we would have an extra $2.7 trillion of room under the current debt ceiling (perhaps more as I think the total non-publicly held debt is more like $4 trillion, although that is my seat of the pants recollection). The effect off not raising the debt ceiling is like that of the sequestration, but much larger. Government expenditures would have to be reduced immediately, implying furloughs of employees and vendors not paid, a partial shutdown of the Federal government. That is bad enough, and might generate such a loss of confidence that people immediately reduce their spending, but it does not imply a debt default. Of course, there is no law that tells the executive what to pay and what not to pay in this event as nothing like it has ever happened. Somewhere here it was suggested that the president should invite the Congress to specify. Since no such legislation would pass, and since all spending has been previously authorized, I happen to think that continuing to spend what Congress has instructed should be spent would be perfectly legal, indeed required. The question is whether the Federal Reserve would honor the checks by giving reserve credit to banks presenting Treasury checks. I think that is permitted by law under !2 USC 355 which states, in part: "Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market." If a Treasury check is authorized to be issued by Congressional appropriation and the Treasury issues it, the Fed can acquire it in the market. But this is not mandatory, whereas the Fed must honor a Treasury check if the Treasury has funds in its Fed account. In effect, I think the Fed can give the Treasury an overdraft line without violating either the provision that it cannot acquire obligations directly from the Treasury or the debt ceiling, which does not by its terms apply to checks. This is the same thing your bank can do, with or without prior agreement, honor your check even when you do not have adequate funds in your account. We don't know the answer to what the Fed would do, but I think the Fed ought to state publicly what it will and will not do under the circumstances. The situation is not at all helped by ambiguity about the consequences. It should be borne in mind that this works only to the extent that Congress has already authorized the expenditures. Otherwise, the Treasury cannot legally cut the checks and would not do so. The Republicans can shut down the government whenever appropriations run out -- meaning at the end of any budget cycle -- simply by refusing to authorize new appropriations. What we are talking about is a more extreme form of something we have lived through -- a government shutdown -- but without Congressional guidance as to what should and should not be paid, leaving it to the executive to make those decisions. it is because we have endured a partial government shutdown without the sky immediately falling that I don't think the sky would fall if the debt ceiling is not raised. The question is how long the Republicans would be prepared to keep the government partially shutdown. Wasn't long under Clinton. I don't believe it would be that much longer under Obama. It simply doesn't work politically, as they learned. But Clinton wasn't afraid to let them do it. Obama should not be either. It is NOT a default on the Federal debt.

- roidubouloi

January 6, 2013 at 1:26am

Spending to the end of the budget cycle by in effect printing money would actually be a good thing. Unlikely to result in much if any inflation, any more than the Fed's "qualitative easing" has, but, if it did, it would help us get out of the recession by encouraging people to spend and reducing the value of outstanding debt. It would be most ironic if the Republicans' debt-ceiling hostage taking resulted in moderate inflation that finally jolted us out of the recession. With the cooperation of the Fed, it is just possible.

- roidubouloi

January 6, 2013 at 1:31am

roi, I don't think financial markets would take as sanguine a view as you do of a failure to increase the debt ceiling. Breaching contracts including liquidated obligations to pay but not labeled "debt" would not exactly inspire confidence in holders of debt, let alone ratings agencies, and would certainly result in increased interest rates (estimated by CBO to cost $100 billion per year indefinitely into the future). Markets will look more to what the Treasury is doing than to assurances from the Treasury that it will pay. In any event, the Treasury would fail to pay huge amounts of legal obligations to pay, which would inevitably, I think cast doubt on the Treasury's ability to pay Treasury securities when due, which would call into question their value when held by a financial institution, which would result in financial markets seizing up. The debt limit does not count obligations held by the Secretary of the Treasury, which includes securities in the Old Age and Disabilities Account, popularly known as the Social Security Trust Fund. If expenditures from this account exceed receipts, presumably managers of the account would count on receipts from the general Treasury fund in payment of Treasury obligations to the Social Security account. There is no exclusion from the debt limit for debt held by the Fed. Nevertheless, the government is coming close to hitting the statutory debt limit, even excluding obligations held by the Secretary of the Treasury. I don't understand how 12 USC 355, which on its face authorizes buying and selling Treasury obligations in the open market, authorizes payment of checks. Those are two entirely different acts.

- peterpalys

January 6, 2013 at 5:44am

roi, Reinforcing my interpretation of 12 USC 355(2), which you quoted, is the last sentence of 12 USC 355(1): Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market.

- peterpalys

January 6, 2013 at 5:53am

I was quoting the last sentence of 355(1). 355(2) states the Fed's authority to acquire direct obligations of Federal agencies, such as Fannie or Freddie. A check is the direct obligation of the drawer of the check, not of the bank it is drawn upon. The drawee bank has no obligation on the check until it accepts or certifies it. Your bank's obligation to pay your check is an obligation to you. Hence, a US Treasury check is an "other obligation which [is] a direct obligation of the United States . . . [that] may be sought and sold without regard to maturity but only in the open market." This gives the Fed the power to acquire Treasury checks in the open market. It can do so at par. However, it has no explicit duty to do so under this provision. The authority of the Treasury to issue checks are the Congressional appropriations, laws adopted by Congress and signed by president, that both permit and require the executive to spend the money appropriated. If the check is properly issued under Congressional appropriations, it seems pretty clear to me that the Fed can honor the checks, without regard to the debt ceiling. Bear in mind, this is only so until the appropriation runs out. I don't think the US has many if any liquidated obligations to pay that are not labeled as debt. It has debts, represented by instruments of different types, and it has contracts. Certainly, rates would increase with the uncertainty, but I wouldn't think by much or permanently as long as debts continued to be paid when due. There would be more than adequate cash flow to do that. I don't think that hitting the debt ceiling and either issuing checks anyway through the end of the budget cycle or selectively shutting down government would have effects vastly different than the government shutdown. Not good, to say the least, and growing worse with time, but not a cliff. Bear in mind that, when appropriations run out, the Republicans could in theory completely shutdown the government by refusing to appropriate any more funds. The debt ceiling is a weaker version, not a stronger version, of a government shutdown by lack of appropriation, something that has occurred before.

- roidubouloi

January 6, 2013 at 8:28am

The debt does include the trust funds, otherwise we would not be close to the debt ceiling as the public debt is only about $11 trillion, considerably less than the "gross debt" of $16 trillion. But this also means that selling trust fund debt to pay benefits does not increase the debt for purposes of the debt ceiling Indeed, this is something which has to occur even within the debt ceiling unless the Congress transfers funds to make up a shortfall in entitlement revenues. In round numbers, the operating budget is about $2.5 trillion and the operating deficit about $600 billion. The deficit in the trust funds is only about $300 billion, contrary to the right-wing myth that it is entitlements that are our current problem. Krugman has estimated that we could run deficits of $400 billion without increasing debt relative to GDP. Thus, if we were not running operating deficits, debt would be falling as a percentage of GDP, even with the deficit in entitlements (funded by the trust funds). Taken altogether, about 1/4 of the Federal government's non-entitlement functions would have to be shut down for expenditures to match current revenues, staying within the debt ceiling. This is not much different than the sequestration of the fiscal cliff, which as I understand it would reduce spending by about $500 billion. However, Congress has, understandably, not provided guidance as to what not to pay in the event we hit the debt ceiling. I don't know what percentage of government was allowed to continue during the Gingrich/Clinton shutdown, but I doubt it was much more than 75%. We are not quite in the uncharted territory that people seem to think, although market reaction to an unprecedented event cannot be predicted with confidence. "The United States public debt is the money borrowed by the federal government of the United States through the issue of securities by the Treasury and other federal government agencies. US public debt consists of two components:[1] Debt held by the public includes Treasury securities held by investors outside the federal government, including that held by individuals, corporations, the Federal Reserve System and foreign, state and local governments. Debt held by government accounts or intra-governmental debt includes non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries, such as the Social Security Trust Fund. Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities." http://en.wikipedia.org/wiki/United_States_public_debt

- roidubouloi

January 6, 2013 at 8:49am

The debt limit, by its terms, applies only to bonds, notes, bills, and certificates of indebtedness issued pursuant to the chapter in which the debt limit appears. It does not apply to checks.

- roidubouloi

January 6, 2013 at 8:53am

Also, the debt limit, by its terms, applies to the balance of instruments outstanding. Thus, as I stated above, the Treasury can roll over principal without being impacted by the debt ceiling.

- roidubouloi

January 6, 2013 at 8:54am

Looks to me from wiki that the magnitude of the cuts in discretionary spending required by the sequestration was about $120 billion per year. This is certainly a lot less than the $600 billion per year that would be compelled if spending were limited to revenues by the debt ceiling. That would certainly produce a recession pretty quickly. Upon reflection, the amount of additional money "printed" if the Treasury were to keep writing checks at the rate of $600 billion per year and the Fed were to honor them wouldn't likely increase inflation much if at all, although the psychology would also matter. Continuing to write Treasury checks seems to me by far the better approach, but cutting off the spending that most affects Republican districts wouldn't be a terrible idea. Probably couldn't be done explicitly, but clever people could figure out what classes of Federal expenditures are disproportionately flowing to red states.

- roidubouloi

January 6, 2013 at 10:47am

Checks are not debt, and paying checks is not acquiring them on the open market.

- peterpalys

January 6, 2013 at 5:02pm

You are mistaken, peterpalys. See, Uniform Commercial Code, Sec. 3-104, defining both "negotiable instrument" and "check." A check constitutes the unconditional promise of the maker to pay, not of the bank. When the bank honors the check, it does not pay the debt, it acquires the instrument, in the open market, as does each bank in the payment chain since checks are not in general presented to the very bank on which they are drawn. The maker then owes the debt to the bank, or anyone else to whom the bank might subsequently assign the negotiable instrument. By prior agreement, the checking account agreement between the maker of the check and his bank, the bank is obliged to the maker to honor the check and also permitted to offset the debt represented by the check against the account balance, the debt that the bank owes the maker. The Fed is the Treasury's banker. The relationship is the same. Indeed, if you look at a Treasury check, you see that it is not even explicitly drawn on any bank, including the Fed. The check is simply a negotiable instrument issued by the Treasury. A Treasury check most certainly is an "other obligation" that is a "direct obligation of the United States." Indeed, a Treasury check IS money, just not in a very convenient form is it is not a bearer instrument, as cash is. It is the statutory function of the Fed to honor the Treasury's check by giving Federal Reserve Bank credit, which we find much more convenient then trading Treasury checks in odd denominations and worrying about the identity of endorsers, but the fact remains that the Fed, like any other bank, is acquiring the Treasury's check, not paying the Treasury's debt. Now, you might argue that this is technically correct but that the statute giving the Fed authority to acquire Treasury instruments never contemplated this situation. True. But the statute says what it says, and the situation in which the Congress both ordered the Treasury to pay bills and did not give it the authority to issue debt to raise Federal Reserve credits with which to pay them wasn't contemplated either. The Fed also has the power to "neutralize" the money-issuing effect of honoring Treasury checks by selling from its own inventory of previously acquired Treasury notes, bonds, and bills. Thus, the Fed has the perfect ability to finance the Treasury's payments by, in effect, taking in Treasury checks in de facto exchange for Treasury notes, bonds, and bills. The defined debt remains the same. The only thing the Fed is prohibited from doing is acquiring Treasury instruments/obligations directly from the Treasury. That means that the Treasury instruments must be issued in the first instance into the open market for value received. But, of course, Treasury checks in payment of expenditures appropriated by Congress are indubitably issued into the open market for value received. I do think the only question is whether the Fed would cooperate. It is really not that big a deal in legal terms, although it is politically, since we are only talking about making expenditures that Congress has both authorized and directed be made. It is not as if the executive can just buy whatever goods and services it wants. Plus, this only works until the end of the budget cycle when Congress can again decide that it only wants to authorize this and not that, or indeed will not authorize anything to be spent. It is not the proper place in the constitutional structure for a minority to undo a law, such as appropriations, that has been adopted by both houses of Congress and signed by the president. Thus, what the Republicans are attempting does much greater violence to the constitutional order than would the Treasury and the Fed by together paying the bills authorized by Congress to be paid. I would love to know what the Treasury is discussing with the Fed. If any of them had the necessary combination of brains and guts, they ought to announce before the fact the intention to keep paying the bills. If Republicans want to scream, let 'em. They can then pull down the country when the budget cycle ends and all discretionary spending must be re-authorized, if, that is, they are stupid enough and willing to see themselves destroyed politically. Somehow, I doubt it. Stupid, yes. That politically suicidal? Unfortunately, no.

- roidubouloi

January 6, 2013 at 5:54pm

To amplify: a check is a subspecies of an order, and "order" means a written instruction to pay money signed by the person giving the instruction. A check instructs a bank to pay on demand. It is not a direct obligation of the signer. The payee of a check cannot present the check to the signer and demand payment directly from the signer. Even if an order issued by the United States Treasury says, "Pay roidubouloi $300," it is not a direct obligation of the United States Treasury. A probable reason Congress wanted to clearly limit Federal Reserve Banks to buying and selling direct obligations of the United States was to exclude it from dealing in checks or drafts, which would normally be issued to make payments in the ordinary course of business, like paying vendors, making tax refunds or distributing benefits mandated by law, like Social Security.

- peterpalys

January 6, 2013 at 6:30pm

A check is most definitely not an unconditional promise to directly pay the check's payee. If the Fed is the Treasury's sole banker, how does the Fed acquire a check it pays in an "open market?" In this scenario, the Fed is the drawee. There is no open market to establish who the drawee is. Granted, the definition of "open market" will be a question of federal law, but the Fed's acquisition of Treasury orders does not in any reasonable sense of the term look like an acquisition on an open market.

- peterpalys

January 6, 2013 at 6:59pm

There is another problem with the Fed financing governmental operations by holding on to orders issued by the Treasury and seeking reimbursement only when the Treasury has the money to make the reimbursement. The Treasury would be borrowing from the Fed, and Congress has the sole constitutional power to authorize borrowing by the United States. Congress has not authorized this borrowing scheme, so it appears to be unconstitutional.

- peterpalys

January 6, 2013 at 8:14pm

Sorry, peter, but you are mistaken. You need to know something about checks and negotiable instruments. A check is in fact, under the law, an unconditional obligation by the drawer to pay the drawee, because a check is defined to be a negotiable instrument. It is a type of obligation otherwise called a "draft." See this, in particular paragraph (c): Uniform Commercial Code U.C.C. - ARTICLE 3 - NEGOTIABLE INSTRUMENTS ..PART 1. GENERAL PROVISIONS AND DEFINITIONS § 3-104. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money . . . (b) "Instrument" means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of "check" in subsection (f) is a negotiable instrument and a check. (d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article. (e) An instrument is a "note" if it is a promise and is a "draft" if it is an order. If an instrument falls within the definition of both "note" and "draft," a person entitled to enforce the instrument may treat it as either. (f) "Check" means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check. An instrument may be a check even though it is described on its face by another term, such as "money order." __________________ A check is an instrument and the "obligation" of the drawer, not the drawee bank. It is a debt due to the drawee. A Treasury check is the obligation of the Treasury. As such, it can be acquired by the Fed. Checks do in fact circulate in a market for checks in which money is repeatedly exchanged for them. The heading of the relevant section on Federal reserve powers also make clear that the intention was to allow the Fed to acquire any sort of direct obligation of the United States, so long as it does not do so directly from the Treasury itself as opposed to the "open market." Treasury checks are presented by banks to which they are deposited to a Federal Reserve Bank which "honors" them by giving the presenting bank reserve account credit on its books. At that point, the Fed owns the check. If it debits the Treasury's account with it, then the debt is paid and the check is cancelled. But the Fed is not obliged to debit the Treasury's account, even though it does so in the ordinary course. It can continue to own the check as a Treasury obligation just as it owns Treasury bonds, notes, and bills that it has acquired "in the open market," rather than from the Treasury itself. And, just as the Fed acquires other Treasury obligations without regard to the amount that the Treasury has in its account with the Fed, as a means of managing the money supply, there is nothing I can find that obliges the Fed to limit its acquisition of Treasury checks to what is in the Treasury's account. You have to appreciate that, now that we are no longer on a gold or silver standard, the Treasury has nothing with which to pay its obligations of any kind other than other Federal government obligations, its own or those of the Fed. These are all considered "liabilities" or obligations of the Federal government, bu there is nothing with which they can be paid other than other liabilities or obligations of the Federal government. This is a source of enormous distress to the libertarians and other "hard-money" nuts, but it works just fine, because all money is ultimately credit, the belief that if you give something in exchange for it today, you will be able to receive something in exchange for it later.

- roidubouloi

January 6, 2013 at 8:30pm

PS It is likely that many, if not most, lawyers and bankers don't really know what a check is, only what happens with it, more or less like anyone with a checking account. But I studied commercial transactions and the UCC with J.J. White himself, the man who, as they say, "wrote the book." Literally. And then I practiced as a commercial banking lawyer. It is a bit of arcana, to be sure.

- roidubouloi

January 6, 2013 at 8:52pm

roi, As it happens, I practiced commercial law for over 20 years. I see nothing in the material you copied that would make a check an unconditional promise by the drawer to pay the payee. A check is indeed a negotiable instrument, because it is an unconditional ORDER to a bank to pay the payee. A check is not an unconditional PROMISE by the drawer to pay the payee. In the context of our discussion of the Treasury and the Fed, the distinction is important, because a Treasury order ("Pay Joe Blow $100") is not, I would maintain, a direct obligation of the Treasury or guaranteed (which is a contractual obligation) by the Treasury and therefore not something the Fed could acquire, even if it could do so on an open market. Do you mean to say that a payee on a check, let's say for $10 million, could, without presenting the check for payment, sue the drawer for $10 million? Section 3-414 of the UCC addresses the liability of a drawer. § 3-414. OBLIGATION OF DRAWER. (a) This section does not apply to cashier's checks or other drafts drawn on the drawer. (b) If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the drawer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Section 3-415. (c) If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained. Although 3-414 does not quite explicitly say so, I read it to say that a person entitled to enforce a check must present it for payment and can enforce payment against the drawer "[i]f an unaccepted draft is dishonored." If the check is accepted by a bank, the drawer is discharged. There would at least seem to be an equitable requirement that the payee present a check for payment before suing the drawer. BTW, do you still think having the Fed finance the government by floating the Treasury's payment instruments is a viable idea?

- peterpalys

January 6, 2013 at 10:07pm

I didn't say that a check is an unconditional "promise to pay." That would be a note, not a draft. Yes, it has to be presented. But the only person obligated on a check, unless it is drawn on the drawer, i.e., a bank check, is the drawer. It is the direct obligation of the drawer because it is solely the obligation of the drawer. The drawer is obliged to have it paid upon presentment or to pay it if it is dishonored. You can never enforce an unaccepted or uncertified check against the drawee bank, only against the maker. It is "unconditional" not because it does not have to be presented, but because there is no performance that has to be satisfied by the presenter for payment to be due, as for example with a documentary letter of credit. Furthermore, as I pointed out above, although the Fed serves as fiscal agent for the Treasury, a Treasury check is not drawn on the Fed, by analogy to a customer with a checking account. A Treasury check is drawn on the Treasury itself. Hence, it is in every sense the direct obligation of the Treasury, just as a bank check is the direct obligation of the bank You have to present it to collect it because it is a negotiable instrument. You cannot just say, "I have a check" and ask to be paid. But that would also be true of a note (leaving aside that their are procedures for lost instruments). Accordingly, there really is no question that a Treasury check is a direct obligation of the Treasury. The relevant authorization of the Fed does not speak in terms of debts, nor did I. It says, "Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market." Even if you were correct, that the Treasury were only secondarily obligated on a Treasury check (who, pray tell, would be the primary obligor), it still wouldn't matter, because then the check would be fully guaranteed by the United States. Either way, a Treasury check is the obligation of the United States, and no one other than the United States. It is not the obligation of the Federal Reserve Bank, an independent agency. As it is either a direct or, if you prefer, an obligation guaranteed by the United States, it can be bought or sold by the Federal Reserve. The statute says nothing at all about the balance in the Treasury's account at the Fed. I do indeed think that this is exactly what the Treasury and the Fed should do, but the Treasury has no effective means of forcing the Fed to cooperate. The institutional structure is that the Fed, not the Treasury, decides what the money supply shall be, which is why the Fed cannot acquire Treasury obligations directly from the Treasury. That would make the Treasury the issuer of money. But, as I also pointed out, even if the Fed acquires Treasury checks without regard to the Treasury's account balance, the Fed has ample means to neutralize the monetary effect, in its discretion as is its mandate merely by selling from its inventory of other Treasury instruments. The "debt ceiling," by its terms, does not limit the Treasury's issuance of checks. Nothing that you have identified in any statute prevents the Fed from acquiring these obligations of the United States in contradistinction to other obligations of the United States that it is permitted to acquire.

- roidubouloi

January 6, 2013 at 11:17pm

If you google direct and indirect government obligation, you find that indirect obligations are generally understood to be agency obligations, whether or not fully guaranteed. You seem to have some idea that the Treasury is not obligated to pay a Treasury check. But it is, upon presentment.

- roidubouloi

January 6, 2013 at 11:27pm

We had this argument once before, didn't we, with you using a different name? Was it PeteBeck? You have to present a note too. That doesn't mean it is not the direct obligation of the maker.

- roidubouloi

January 6, 2013 at 11:29pm

This is getting too deep for me. Let me know when the United States economy (not to mention, the world economy) has been saved.

- skahn

January 6, 2013 at 11:57pm

We will let you know. You can go back to sleep.

- roidubouloi

January 7, 2013 at 12:21am

I thought we agreed that payments by the Treasury are issued in the form of drafts: "Pay X $___." I suggest that a draft is not a direct obligation of the drawer, for purposes of the federal statute authorizing the Fed to acquire certain Treasury obligations, and the Fed is therefore not legally authorized to acquire drafts. Whatever Google says, I think that is a sensible interpretation of the statute. You conflate primary and secondary with direct and indirect. In any case, there is no open market that I know of in which Treasury drafts are traded, and it would not make sense to have one, because they would be overwhelmingly if not exclusively payable on demand, and payments by the Treasury are in the financial markets regarded as risk-free (pending a refusal by Congress to increase the debt ceiling). If there is no open market in Treasury drafts, the Fed is not statutorily authorized to acquire them, contrary to what you claim (unless you can point to another statute that applies). Furthermore, if the Fed pays Treasury drafts and and does not seek prompt reimbursement from the Treasury, it surely looks like Treasury is borrowing on behalf of the United States. The constitution grants Congress the power to borrow for the United States, and if Congress has not authorized this procedure, it would appear to be unconstitutional. I have never heard of PeteBeck and have never had this argument before.

- peterpalys

January 7, 2013 at 1:05am

If PeteBeck and I have both made the same arguments on this multivariate issue, it would seem more likely that we are both right than that we are both wrong in the same numerous ways.

- peterpalys

January 7, 2013 at 1:15am

I'm not conflating anything. You can "suggest" what you want, a check and a draft are the obligations of the drawer, and only of the drawer, hence they are direct -- primary -- obligations of the drawer. Any sort of non-primary obligation, including the implicit obligation with respect to non-guaranteed agency debts, could be considered indirect, as in not direct. You simply don't want to acknowledge the long history that the maker of a check is liable for it. It is the drawer's obligation. What constitutes an open market is arguable, but, for better or worse, the language that describes what the Fed can acquire, which includes all US obligations, and the language of the debt ceiling, which limits only the issuance of certain types of instruments, is not the same. You want to read it to be the same on the assumption that this is what is intended. The Congress wrote the statute that authorizes the Fed to acquire obligations of the US, either direct or fully guaranteed, meaning only that the credit of the US is completely behind the obligation. There is no constitutional issue. You just invented that to get out of a verbal jam. The issue is entirely one of statutory interpretation. When the Fed buys Treasury obligations, it is lending to the Treasury. The only stated restriction is that it cannot acquire them directly from the Treasury. Your best argument is that Congress never contemplated this situation and hence did not write the debt ceiling as it would have if it had thought about it. But you also avoid even attempting to reconcile the laws that instruct the president to pay designated expenses with the law that you say makes it impossible for him to do so. Normally, in such cases, the latter law is deemed to control. In this case, that would be the appropriation. You want to oonstrue a technical statute broadly, rather than narrowly, to frustrate that outcome, although that too is contrary to normal rules of construction. Your arguments are no better than PeteBeck's. You both argue based on your conclusion without addressing the language of either statute or the long history of the financial terms used and the implications of the use of different terms in each, inventing new theories, for example that "obligation" means the same thing as a "debt," as you go along.

- roidubouloi

January 7, 2013 at 4:35am

In interpreting a statute, words are given their ordinary meaning. There is no way the Fed's lending to the Treasury as it pays the Treasury's immediately payable drafts constitutes the Fed's "buying" drafts on an "open market." And you say I want to interpet a technical statute broadly! You can wave your hand and say the response of the financial markets to these shenanigans is "unpredictable." But in reality the response is somewhat predictable. Markets respond to what the Congress does and does not do. This technical sleight-of-hand would be no better received than the government not paying a third, or whatever it would take, of its obligations to pay money. Whether you call it debt or an obligation, hard-hearted lenders will notice. The constitutional argument turns on whether this scheme constitutes borrowing, and whether the Congress authorized it. To a lawyer who would argue "no" to the first question and "yes" to the second, I would only say, "Good luck."

- peterpalys

January 7, 2013 at 5:42pm

Of course it constitutes borrowing. But you want to ignore the fact that the debt ceiling was not written as a general prohibition against borrowing, but as a limitation on the outstanding balance of particular instruments. The statute actually says: "The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law . . . " Treasury checks are obligations, but they are not issued under that chapter. Indeed, if they were counted as issued under that chapter, then we would hit the debt ceiling faster as there is probably about $50-100 billion of Treasury check float out there. I quite doubt that anyone has ever suggested that the Treasury check float should be counted against the debt limit. Therefore, the question comes down, not to whether the Fed acquiring Treasury obligations is borrowing. That is irrelevant. It is, and the Fed has the authority to extend credit to the Treasury so long as it does not acquire the obligations directly from the Treasury. The question rather is, first, what is a "direct obligation" of the United States within the meaning of 12 USC 355, whence comes the Fed authority to buy and sell. I don't think there is even a colorable argument that a Treasury check is NOT a direct obligation of the United States. You only get there with ahistorical and idiosyncratic claims about what checks are and are not. It is necessarily the case that a direct obligation of the US can be bought and sold by the Fed in the open market, because the statute says so in no uncertain terms. You must therefore argue that when the Fed acquires a Treasury check through the clearing process it is (1) not in the "open market" and/or (2) not buying. I don't think there is much of an argument that it is not in the open market, because the clear intent of the statute is to prohibit the Fed from purchasing obligations directly from the Treasury. The caption of the section says, among other things, "purchases and sales from or to United States." So, ultimately, your technical argument is that, in paying a Treasury check presented through the clearing process, the Fed is not "buying" within the meaning of the statute enumerating the Fed's powers. That is at least a decent argument, as your others are not in my opinion. But money changes hands, the owner of the instrument transfers title to the Fed by delivery, the Fed becomes the new owner. That the medium is the clearing process does not seem dispositive or perhaps even relevant. The general meaning of "buy" is to acquire in exchange for money. That is what the Fed does when it takes title to a Treasury check in exchange for money. Could a court find otherwise based on your idea that the language of the debt ceiling should be construed broadly to include Treasury checks and the language of the Federal Reserve statute should be construed narrowly to so as to prohibit the Fed from acquiring Treasury checks without regard to the Treasury's balance with the Fed? It could. But that outcome is only as obvious as you seem to think it is if you ignore the language of two statues in favor of what you believe is the unexpressed purpose in an unprecedented situation. Good luck with that. That is not the manner in which cases are argued.

- roidubouloi

January 7, 2013 at 7:40pm

An older version of the same provision, extant around WWII, said this: "any bond, note, or other obligation which are obligations of the United States, or which are fully guaranteed by the United States as to principal and interest, may be bought and sold without regard to maturities either in the open market or directly from or to the United States, but all such purchases and sales shall be made in accordance with the provisions of section 12 (a) of this Act and the aggregate amount of such obligations acquired directly from the United States which is held at any one time by the 12 Reserve banks shall not exceed $5,000,000,000." This directly supports my contention that "open market" and directly from or to the United States are understood to be the alternatives. The direct acquisition from the United States is no longer the law, but there is no serious argument that acquiring a check from a third party to who it was issued in the ordinary course is somehow acquiring it directly from the United States. Also, we see here the use of "buy" and "acquire" interchangeably. One could argue that the ability of the Fed to acquire Treasury checks not subject to the debt limit renders the debt limit meaningless. This is plainly not the case. The ability to acquire Treasury checks lasts only as long as the Treasury has the ability to issue them which lasts only as long as the current Congressional appropriation. Thus, it enables the current appropriation, which constitutes the instruction of the Congress affirmatively to make payment and is not permissive, to be paid. The horror!

- roidubouloi

January 7, 2013 at 7:57pm

In the committee report that accompanied the 1981 version of the law that finally extinguished direct borrowing by the Treasury from the Fed, it says this: "This authority is a leftover from the days of explicit Fed support for Treasury financing, when monetary policy was clearly subordinated to the Treasury's aim of cheap deficit financing. I hope we are all agreed that monetary policy should not be thus subordinated, and that we can do without the mechanisms through which the Treasury called the shots for Federal Reserve open market operations." This speaks directly to the point that I made above, that the intention of the no direct acquisition provision is that the Fed, not the Treasury, control monetary policy. But the Fed does not loose control of monetary policy if it keeps Fed checks in its portfolio rather than collecting from the Treasury. It has ample ability to neutralize any resulting monetization if it chooses to do so by selling Treasury bonds and notes from its inventory. Moreover, the Treasury cannot compel the Fed to monetize its checks. The authority to do so, or not, remains exclusively with the independent Fed. Should the Fed have the authority to prevent economic meltdown by providing liquidity to markets on a temporary basis when the Congress cannot agree on what comes next? Damn straight. That's what it is supposed to do. That's why it is an independent agency. Will the Fed cooperate if the Republicans refuse to lift the debt ceiling? I don't know. But if I were Bernanke, I would be willing to risk even impeachment to do so (and the Senate would never convict any more than it did Clinton). Bernanke does not call the shots by himself, however. What is interesting is that it might not require any approval from the Board of Governors of the Fed. It may be that the authority is lodged with individual Federal Reserve Banks. (I don't know and haven't attempted to look.) The could mean the NY Fed as a practical matter. I have more faith that the NY Fed would do what is necessary as it is not burdened by some of the more knuckle-dragging Fed governors from the hinterlands.

- roidubouloi

January 7, 2013 at 8:08pm

Under the original Federal Reserve Act, the 12 regional Federal Reserve Banks were to engage in: "discount[ing] notes, drafts, and bills of exchange arising out of actual commercial transactions.. . . The time, character, and volume of sales of [this eligible] paper . . . shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country." Treasury checks -- drafts -- pursuant to Congressional appropriation arise out of actual commercial transactions in which the government obtains goods and services or furnishes them to citizens.

- roidubouloi

January 7, 2013 at 8:14pm

That about wraps it up. It is mostly a question of whether the Fed has the balls to do the right thing. The chances of any adverse repercussions for the Fed or its governors or its chairman are exactly nil. The possible repercussions for the economy of inaction are rather large.

- roidubouloi

January 7, 2013 at 8:15pm

You concede in your first sentence that what you propose is borrowing. So the constitutional question, which you ignore in your most recent comment, is: did Congress authorize this method of borrowing? You would argue, if I understand correctly from previous comments, that Congress authorized this method of borrowing because it enacted a statute that allowed the Fed to act as the Treasury's banker, in the sense of holding deposits and paying drafts. I believe that courts would reject that argument, because it does violence to the word "borrow." In other words, your scheme is an attempt by the Treasury, an executive department, and the Fed to usurp Congress' authority to borrow on behalf of the United States. Where is the open market embedded in the clearing process? Who are the buyers and sellers of Treasury drafts? Where do they bid and accept bids? Where is the clearing process? Where are prices posted (which would seem to be a minimal requirement for an "open market")? The clear intent of the statute goes beyond purchases and sales directly from and to the Treasury. If Congress wanted to frobid only direct transactions between Treasury and the Fed, it cold easily have done so. Open market means open market. It is suprising that someone who cites Article 3 of the UCC for the law governing the processing of Treasury drafts would say that the bank with the deposit relationship buys Treasury drafts. In your work for banks, did you ever argue that Article 2 of the UCC, which governs sales (and is often applied by analogy to the buying and selling of things other than goods) governs in any way the process of banks paying and processing drafts on a bank? Banks do not buy drafts drawn upon them.

- peterpalys

January 7, 2013 at 8:31pm

You make a complete hash of the argument. First, there is no constitutional issue. This is purely a question of statutory construction. When Congress authorized the Fed to acquire bonds, notes, and other obligations of the United States it indubitably authorized the extension of credit from the Fed to the Treasury -- borrowing if you will. The question is the extent of the authority to lend and that is determined by the statute. If it is within the statute, it is authorized, if not, not. There is no constitutional issue whatsoever. What borrowing is authorized and what is not authorized by the statute is the only issue. Contrary to your claim, the statutory history shows that distinguishing between acquisitions of Treasury obligations from third parties and acquisitions of those obligations directly from the Treasury is EXACTLY WHAT CONGRESS DID IN FACT INTEND TO DISTINGUISH. At one point, the provisions for "open market" and direct acquisitions co-existed in the statute as clear alternatives to each other. Open market means not directly form the Treasury; not directly from the Treasury means open market. When the direct acquisition provision was removed, it was for the express purpose of lodging control over the money supply exclusively with the Fed, not because there was an expectation of a particular market structure. Open market means acquired from market actors. There is no implication of bids, asks, quotes etcetera. That is what you assume a market has to look like but there are lots of markets that don't function that way at all. Check clearing most certainly is a market, albeit highly regulated and with features peculiar to its function. Today, drafts are not typically discounted, but that is only because the clearing time in the modern world is so short and it is more efficient not to and to assume that the time value of money lost pretty well evens out. In the not terribly distance past, drafts were discounted because the time between a bank's advance against a draft, acquiring it from the drawee, and its final collection of that draft was long. And, yes, everyone understood that drafts were being bought and sold. That is still the legal structure, but the awareness is suppressed because of the speed with which the process now takes place. Rather obviously, the provisions of the UCC that directly govern the clearing of checks would take precedence, when applied to checks, over the more general provisions regarding sales. This is a trivial application of the rule of construction that specific provisions will govern more general provisions. However, if some question arose that were not answered by the provisions on banking and checks, you can be drop-dead certain that lawyers and judges would be looking for analogical answers in more general provisions of the UCC regarding such matters as sales, title, and so forth and of the law beyond the UCC. The provisions of the debt ceiling pertain by their terms not to borrowing generally, as you want them to, but to the issuance of particular types of instruments. That is what the statute says. It does not apply to checks, although anyone who pays close attention to what checks actually are understands that when you accept a check from someone you are extending credit and when you issue a check you are borrowing. When the Treasury issues its check, it is borrowing. When the Fed acquires the check, it is extending indirect credit to the Treasury exactly as it does when it acquires Treasury bonds, notes, or bills. The Fed statute authorizes the Fed to acquire ANY obligations of the United States. Congressional appropriations, and other statues, authorize the Treasury to make payments by check -- borrowing for the period that the checks are outstanding. There is in fact no reason to look to apply the debt ceiling to the issuance of checks when the language by its terms does not do so. The debt ceiling applies to term debt with a stated maturity. It does not apply to commercial bills and drafts arising in the ordinary course of business. So what? Conversely, the powers of the Fed classically do include the acquisition of commercial bills and drafts, and there is no implication that there have to be bids, asks, or quotes in the manner that you envision as a predicate to that power. The Fed can acquire these obligations in its role of managing the overall credit balance in the United States. Period. You may disagree, but you cannot get there by refusing to address the language of the two relevant statutes and the received meanings of the commercial and financial terms used therein based on some general notion of that the Congress intended to limit borrowing rather than intending to limit what it did in fact expressly limit.

- roidubouloi

January 7, 2013 at 9:30pm

So, wouldn't the Fed's delay in seeking replenishment of the Treasury's cash account after paying a draft be a direct extension of credit by the Fed to the Treasury, which even you seem to say is not permitted? Surely, you understand that since Scalia, legislative history and backstories weigh much less with courts, especially when, as here, "open markets" is not ambiguous. Saying there is no constitutional issue is not much of an argument for showing that there is no constitutional issue. You do recognize that Congress has the sole power to borrow for the United States? Floating checks indefinitely is not even back-door borrowing; it is subterranean, under the foundation borrowing. Even you concede it is borrowing. The idea that Congress authorized this kind of borrowing would surprise, I submit, every member of Congress. And the question is not merely whether Congress authorized the component activities of the process, but whether they authorized this method of borrowing as borrowing. Nobody, I submit, would have contemplated that the Fed would violate normal banking practices in its otherwise routine administration of Treasury's accounts to effectvely allow the Treasury to borrow whatever amounts the Fed sees fit to approve. When you say, "The Fed statute authorizes the Fed to acquire ANY obligations of the United States," you seem to read out of the statute the requirement that it be on an open market. The check clearing process is not a market, in any commonly understood meaning of the word. You say, "Open market means acquired from market actors." But there is no market for Treasury drafts in the process of being cleared, precisely because, as you point out, they are not discounted, they are treated as being worth their face value. The questions I posed are meant to point out that the check clearing process has no substantial attributes of a market. And if there is no market, there are no market actors.

- peterpalys

January 8, 2013 at 12:12am

No, when it acquires checks through the clearing process, it acquires them through the open market, not directly from the Treasury. That is the reality, you just don't like it because it doesn't get you where you want to go. No, there is no constitutional issue at all, only a question of what is or is not authorized in the Federal Reserve Act. That is purely a question of statutory construction, unless you think that Congress does not have the power to authorize precisely what I suggest. There is of course an open market for check clearing services. There are a zillion banks. They compete to provide these services. That the way in which banks make there money on check clearing services is through fees -- discounting the checks cleared although it is not called that -- or through use of the deposit balances is neither here nor there. An open market does not require that the fee or income structure be what you would like or what you imagine. The check clearing process not only is a market but has all the attributes of one. Instruments are bought and sold, income is generated by the market actors buying and selling them. Title changes hands, money changes hands in the opposite direction. Moreover, the legislative history is perfectly clear that "open market" as used in the Federal Reserve Act has always been understood to mean the opposite of acquisition directly from the Treasury, neither more nor less. The only thing that is not permitted is for the Fed to acquire Treasury obligations directly from the Treasury. There is no requirement anywhere that the Fed present instruments acquired in the open market to the Treasury for payment. That is the Fed's decision. Whether that is borrowing or not is completely irrelevant. The debt ceiling statute says what it says. The Federal Reserve Act says what it says. Neither prohibits extensions of credit by the Fed to the Treasury, INDEED THEY EXPRESSLY AUTHORIZE THEM, so long as the obligations involved are not acquired directly by the Fed from the Treasury. You really have to twist yourself into knots to avoid the language of the statutes. Even Scalia looks first to the language of the law. You think you know what it is supposed to mean, based on newspaper accounts or naïve notions about Federal finances, and don't want to be bothered. See my last comment here for a structural explanation of the roles of the Fed, the Treassury, and the Congress in controlling US finances: http://www.tnr.com/blog/plank/111692/the-polls-dont-say-what-you-think-they-do-the-debt-ceiling#comments

- roidubouloi

January 8, 2013 at 11:46am

The Fed does in fact charge for its check services and is obliged by law to try and recover all of its costs, including both explicit and implicit financing costs: http://www.federalreserve.gov/paymentsystems/pfs_feeschedules.htm The fact that market structure is not the same as in 1920 or 1890 is surely of no importance, and many of the changes in the market are due to Fed regulations.

- roidubouloi

January 8, 2013 at 12:08pm

The question is not whether there is an open market for check clearing services. The question is whether the Fed acquires Treasury instruments through an open market. You are confusing a market for check clearing services with a market for checks. When, after paying a Treasury draft, the Fed delays indefinitely replenshment of Treasury's cash accounts, Treasury is borrowing from the Fed, as you have said. With borrowing comes an obligation to repay, which is given by Treasury directly to the Fed. "The only thing that is not permitted is for the Fed to acquire Treasury obligations directly from the Treasury." Sound familiar? Repeatedly saying that there is no constitutional issue is not very persuasive on the point. It is obvious that Congress has not authorized this method of the United States borrowing. Congress has sole constitutional authority to borrow on the credit of the United States. So this method of borrowing is not done with constitutional authority.

- peterpalys

January 8, 2013 at 10:41pm

There is no difference between the market for checks and check clearing. Selling checks forward is the means by which checks are cleared. The only market for checks that has ever existed is the market for clearing them, although bank-written drafts and acceptances did at one time circulate as money. When the Fed presents Treasury checks to the Treasury for payment, the Treasury is obligated to pay them. If the Fed chooses not to present Treasury checks to the Treasury, the Treasury is not yet obligated to pay them. Do you have a citation for an obligation on the part of the Fed to present for payment Treasury checks that it holds? Do you have any authority for the proposition that the Fed is prohibited from holding these United States obligations as part of its function of managing money and credit in the economy? Please furnish if you do. Congress has authorized the Federal Reserve, and only the Federal Reserve, to manage seigniorage, in its discretion. In truth, this is not actually a method of borrowing, only formally so -- no one can borrow from himself including the Federal government -- it is a method of paying bills by printing money. That is the statutory responsibility of the Fed, to decide what portion of the nation's bills will be paid by printing money in the interests of maintaining a sound economy. Do you have some authority for the proposition that the Fed cannot take into account, among other things, the state of Federal finances in deciding how to manage the money supply? Of course you don't. That is indeed part of what it is supposed to do. If this method of managing seigniorage is authorized by the Federal Reserve Act, then there is no constitutional issue because Congress clearly has the power to so authorize. If it is not authorized by the Federal Reserve Act, then there is no constitutional issue because there is no authority. Saying there is a constitutional issue is not only not persuasive, it is flat out wrong. A constitutional issue arises over the scope of legislative or, absent legislation, executive authority. There is no issue here regarding the scope of congressional power, only the scope of Federal Reserve power under the enabling statute. Therefore, there is no constitutional issue, only one of statutory construction, no matter how much you repeat the same. The issue concretely is whether, in the absence of Treasury authority to borrow from the public, the Fed has the power to pay the nation's bills by printing money. The literal language of the Federal Reserve Act says that it does. That is not borrowing, it is printing money, the mechanics notwithstanding. Thus, in both form and substance, the authority lies with the Fed unless you can find some authority for the proposition that Congress intended otherwise. The debt ceiling isn't it because that applies to public borrowing, not to printing money.

- roidubouloi

January 9, 2013 at 9:02pm

In this context, the only express prohibition is the Fed acquiring obligations directly from the Treasury. If it acquires them buy paying for and acquiring title from banks in the open market, or even form the drawees of checks if it wishes although the Fed does not do business this way, it is most certainly not acquiring these obligations directly from the Treasury. Banks are banks, the Treasury is the Treasury. The two are not the same. According to the legislative history, the purpose of denying the Treasury the authority to sell obligations to the the Fed is so that the Fed will have the exclusive authority to manage seigniorage, the printing of money to pay bills. Nothing about the Fed deciding to purchase and hold Treasury checks in any way impairs the Fed's exclusive authority to manage seigniorage. It is and remains exclusively within the Fed's discretion to do this or not.

- roidubouloi

January 9, 2013 at 9:18pm

Except that the Federal Reserve Bank is not exactly "the government," is it? If paying the government's bills by having the Fed create money is such a great idea, why not dispense with borrowing altogether? For that matter, why not dispense with taxes? Perhaps it is the reason I raised way back in this conversation: real actors in financial markets, not check processors, would conclude that dollars are worth squat, because the full faith and credit of the United States amounts to someone behind a curtain pulling levers rather than the skilled people inhabiting the country and the capital deployed there.

- peterpalys

January 10, 2013 at 5:36pm

We do pay the government's bills by printing money, all the time. That is how the money supply grows. How much is good for the economy, resulting on helpful inflation, and how much is excessive, resulting in excessive inflation, is the very judgment that the Federal Reserve, exclusively, is charged with making and implementing. That is the point. The Federal Reserve has the authority to decide how much, or little, of the Federal government's expenditures to pay by printing money and it is expected, indeed charged, to take into account the finances of the government and the impact on the economy in making its decisions. You may not like the idea of printing money to pay bills, you may think it is the road to perdition, but the Congress of the United States has given the Federal Reserve the authority to make that judgment by acquiring obligations of the United States, as and when the Federal Reserve sees fit, with the caveat only that the Fed may not acquire those obligation directly from the Treasury. Was it contemplated that the Fed would do so under circumstances where the Treasury has run out of borrowing capacity sufficient to pay for appropriate expenditures? Of course not, because until now no one conceived of this being a possibility. Does that mean the authority of the Fed to pay bills by printing money lapses? It shouldn't. The possibility of unforeseen and unforeseeable contingencies is the very reason why discretion as to monetary policy is vested in the Fed rather than reducing monetary policy to a set of rules to be implemented automatically. It doesn't matter whether you think printing money to pay bills is a good idea or a bad idea. What matters is whether the Fed has the authority, it does, and chooses to use it.

- roidubouloi

January 10, 2013 at 9:08pm

"appropriated expenditures"

- roidubouloi

January 10, 2013 at 9:09pm

We agree that it does not matter whether I think printing money to pay bills is a bad idea. It certainly does matter what participants in financial markets think of the idea, and not in a moral or religious sense but what they think it reveals about the value of the dollar.

- peterpalys

January 11, 2013 at 4:50pm

Not as to its legality, it doesn't. And the relevant comparison is what markets will think about hitting the debt ceiling and the government no longer expending appropriated funds. I don't think markets would even hiccough at the Fed continuing to pay against presentment of Treasury checks. Why should markets care about that? Just the reverse.

- roidubouloi

January 13, 2013 at 1:42am