Saturday, July 23, 2011

The president's plan for avoiding default

"The president wanted to know that there was a plan for preventing national default" -- Republican Senate Leader Mitch McConnell.

Given that House Republicans seem to have a plan for causing a default rather than preventing it, the president needs to have his own default prevention plan. Here is what I would suggest:

Where it is not actually illegal for late payments to be made, the Treasury should delay payments to suppliers and contractors. Publicly asking them for forbearance would be decent and honorable and not, in my opinion, a solicitation of credit in violation of the debt limit act. He should not cancel orders made for authorized expenditures. Those remain legal requirements that the president is bound to respect.

In the case of other payments such as Social Security, veteran's pensions and federal employee payrolls as well as payments on Treasury issued debt I do not believe the president has any legal authority for delay and must make such payments as they come due and to the extent they can be covered by available funds. I would advise him to NOT attempt to avoid payroll payments authorized by law through layoffs or furloughs. That might be legal but it would be against the best interests of the government and the nation and I do not believe these are actions he is specifically required to take. If I am wrong about that, then he should do it only to the minimum extent legally required.

If on any day checks for all the payments described above are issued and some balance, however small, remains then there must be at least one government creditor, contractor or beneficiary that can be and, by law, must be at least partially paid. The lack of authority to further prioritize payments would actually require the Treasury to issue checks for all of them.

Besides this argument, the president can, and should, defend his actions by pleading the 14th:

"I respectfully decline to default on the grounds that it would put into question the validity of the debt of the United States."

He should do this less to supply justification for his own actions than for that which is yet to come.

The checks would, in due course, be presented for deposit at the Federal Reserve Bank which, incidentally, is a creature of Congress -- not a part of the Executive Branch. It would then be the choice of the Fed to either accept the deposit to the credit of the member bank presenting it or refuse the deposit putting itself in likely violation of the 14th Amendment. I believe it would have to honor the Treasury's overdraft. This points up how, by its nature, the default decision really belongs with the Fed, not the Treasury. If Congress objects then its argument is with the Fed and, in effect, with itself. The president has done all he could, acted in the best interests of the republic, covered himself, and is now out of it.

Note: The above, originally dated July 23, has as of July 30 been tweaked and clarified while remaining unchanged in basic substance .

/***** UPDATE *****/

The blogs are alive with discussion of an idea credited to to blogger "beowulf" that the debt ceiling could be side-steped by Treasury coin seignorage. In most of these commentaries, (although not in beowulf's original blog post), there appears the assertion "In this connection, the Treasury is prohibited from having an overdraft in its TGA at the Federal Reserve Bank.", overwhelmingly in just those words and with the same bold type emphasis. There seems to be a lot of cutting and pasting going on. What I can't find is any reference to the actual law prohibiting such an overdraft. The closest to it that I could find was in THIS document a statement that "Treasury seeks to maintain a balance in the TGA large enough to protect against an overdraft and attempts to keep the balance stable to avoid interfering with the Federal Reserve's monetary policy.", although at another point it states that the Fed is "not authorized" to lend directly to the Treasury, (but doesn't quite say it is prohibited).

/***** Another update *****/
In my continuing research I have found the Federal Reserve Act Section 13. Powers of Federal Reserve Banks 1. "Receipt of Deposits and Collections". It authorizes any Federal reserve bank to accept for deposit various financial instruments from various sources including drafts from the United States; i.e., the US Treasury. It specifies that deposits from a "nonmember bank or trust company or other depository institution" are acceptable only if such depositor maintains an account with the bank with a balance to be determined by the Federal Reserve Board. It omits to make that requirement in the case of the "United States" -- and even if a balance requirement were assumed to apply anyhow, its amount is up to the discretion of the Board. IANAL but it appears to me that the Board has more than enough gray area wiggle room to allow Treasury overdrafts.

An article by Robin Harding at Financial Times claims that a Treasury overdraft at the Fed would violate Section 14 of the Federal Reserve Act. However, that section makes no mention whatsoever of overdrafts by the Treasury. What it does specify, to state it simply, is that the Fed may not buy new US government debt but only old debt on the open market. This, I believe, is broadly interpreted as meaning that the Fed cannot extend credit in any form to the Treasury. However, I read it as applicable to securities transactions only, not overdrafts. Is this the best that those claiming the Fed cannot legally permit an overdraft can cite?

More discussion elsewhere:
Some Democrats In CONgress ...
Can The Treasury Department Really Run Out of Money?
3 ways Obama could bypass Congress
Can Treasury just go overdrawn at the Fed?
Overdrafting at the Fed
Rajiv Sethi: Some Thoughts on the Unthinkable:

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