If I’d spent the past five years living in a monastery or something, I would take the Treasury Department’s recent declaration that the trillion-dollar coin option is out as a sign that there’s some other plan ready to go. Maybe the 14th Amendment, maybe moral obligation coupons or some other form of scrip, but something.
And maybe there is a plan. But as we all know, the last debt ceiling confrontation crept up on the White House because President Obama refused to believe that Republicans would actually threaten to provoke default. Is the White House being realistic this time, or does it still rely on the sanity of crazies?
The thing is, the coin option sounds silly, but it clearly obeys the letter of the law. As far as I can tell, none of the other options — other than outright surrender — has the same virtue. Failing to pay debt service would be a breach of contract. Paying contractors, and maybe Social Security recipients, in scrip would violate the law, which says that they should be paid, not given I.O.U.’s. A decision that the president has the right to ignore the debt limit after all would avoid these legal breaches at the expense of another breach.
And default in any of these senses would risk a huge collapse of confidence. So is there a plan, or will it just be another case of tough talk followed by a tail-between-the-legs retreat?
As I said, if we didn’t have some history here I might be confident that the administration knows what it’s doing. But we do have that history, and you have to fear the worst.
Moral Obligation Coupons
Don’t like the platinum coin option? Here’s a functionally equivalent alternative: have the Treasury sell pieces of paper labeled “moral obligation coupons,” which declare the intention of the government to redeem these coupons at face value in one year.
It should be clearly stated on the coupons that the government has no — repeat no — legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value. Consider, for example, the fact that the government has no legal responsibility for guaranteeing the debt of mortgage entities Fannie Mae and Freddie Mac; nonetheless, it is widely believed that there is an implicit guarantee (because there is!), and this is very much reflected in the price of that debt.
So the government should have no trouble raising a lot of money by selling Moral Obligation Coupons. It’s true that if they’re sold on the open market, they would probably sell at a substantial discount from face value, so this would in effect be high-interest-rate financing. But that’s better than either default or giving in to blackmail.
And maybe the coupons wouldn’t have to be sold on the open market; why not just have the Federal Reserve buy them? Bear in mind that the Fed doesn’t always buy safe assets; it’s buying a lot of mortgage-backed securities (from Fannie and Freddie; see above), and during the worst of the financial crisis it bought lots of commercial paper. So why not slightly speculative pieces of paper sold by the Treasury?
Again, while this may all seem kind of dodgy, it’s important to realize that unless the president does something like this he will be forced to do something illegal: namely, fail to spend money that, by act of Congress, he is legally obliged to spend. Fancy footwork is by far a better alternative, and if it enrages Republican Senator Mitch McConnell, well, that’s just an extra bonus.
If there is a legal problem even with selling these coupons, there are still alternatives, such as paying suppliers with these coupons and then having the Fed buy them. The mechanics really don’t matter. As long as we’re in a liquidity trap, printing money, printing conventional debt securities or printing funny money with no legal standing that nonetheless lets the government pay its bills are all equivalent.