Summary: The current crisis is one of governance: how our leaders work together combine with structural flaws to produce bad outcomes. Today we look at this from a legal perspective, which describes both the problem and an easy solution. Such situations show a society its problems, and provide the pressure for successful societies to fix them. Our unwillingness to confront our structural problems and interest in quick fixes suggests we are not one of those. This is part five of a series.
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Contents
- The problem is a trilemma
- The Trillion Dollar Platinum Coin
- Legal and Operational Difficulties
- For More Information
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(1) The problem is a trilemma
The structure of every government accumulates becomes weaker over time as its people discover and exploit flaws in its design. Successful regimes fix, even improve, themselves. As America has done with Amendments during the past two centuries. A regime “ages” or ossifies in the sense that it loses this vitality, as its people venerate the Founders and lose the willingness for the always difficult task of reform. That might be happening now to America.
Our “rotten boroughs” in the Senate, increased use of filibusters to block normal legislation and holds to block appointments — these and other things (see here for details) are the political equivalent of arteriosclerosis. Instead of working to fix them, we either live with them or seek quick fixes (often dysfunctional fixes). Today we examine one such problem, and a proposed fix. First, the problem …
(a) “The Constitution“, Neil H. Buchanan (Prof Law, George Washington U), New York Times, 15 January 2013 — Excerpt:
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The Constitution not only gives Congress the sole power to borrow money but to spend and tax. This Congress – or, more accurately, the Republican House majority – has threatened to use those powers in a way that would make it impossible for the President to faithfully execute all of the laws that Congress itself has passed.
Last year, Congress appropriated spending by the government through March 27, 2013. It has also amended the tax laws, most recently on Jan. 2. Those laws together would require the President to borrow more than the current debt limit, starting next month. The President will then face a “trilemma,” having to choose which power of Congress – spending, taxing, or borrowing – to usurp, in order to fulfill his duty to respect Congress’s other powers.
… We know that the president cannot simply enact across-the-board cuts. He will be forced to fully fund “emergency operations” of the federal government. To protect the government’s credit rating from further damage, he would almost certainly pay principal and interest in full on all bonds. The spending cuts, therefore, would have to come elsewhere. Nothing in the law gives the president guidance on how to make those decisions, because Congress expressed its priorities in the spending bills that it passed (but now will not finance).
Issuing more debt, on the other hand, is both modest and easily reversible. The president would not be upsetting Congress’s spending and taxing priorities, but would instruct Treasury to sell securities, as it always does. If, in its next budget, Congress wants to reduce the debt, it can do so. Until then, the president must do the least damage, and that is by issuing enough debt to tax and spend as Congress ordered him to do.
(b) Read the full analysis: “How to Choose the Least Unconstitutional Option: Lessons for the President (and Others) From the Debt Ceiling Standoff“, Neil H. Buchanan (Prof Law, George Washington U) and Michael C. Dorf (Prof Law, Cornell), Columbia Law Review, October 2012 — Conclusions:
We argue further, though more tentatively {if the debt markets break down} the president should unilaterally increase taxes rather than cut spending.
We then use the debt ceiling impasse to develop general criteria for political actors to choose among unconstitutional options. We emphasize three principles derived from a famous speech by President Lincoln {4 July 1861 to Congress}:
- minimize the unconstitutional assumption of power;
- minimize sub-constitutional harm; and
- preserve, to the extent possible, the ability of other actors to undo or remedy constitutional violations.
(2) The Trillion Dollar Platinum Coin
Carlos Mucha, an attorney, suggested the big easy way to evade the debt limit: minting trillion dollar platinum coins. as explained in his article at the NYT website:
Under the Constitution, Congress is given the authority to create money. Congress has delegated this power to create money to two agencies: the Federal Reserve and the U.S. Mint. For decades, the Fed has issued paper money and assisted the Department of the Treasury in issuing enough new debt to fund the budget deficit.
Meanwhile, the Mint quietly issues circulating coins to banks and numismatic coins to collectors (all U.S. coins are legal tender). … Then in 1996 … {o}ver the objections of a Democratic administration Republicans in Congress passed a statue, 31 USC 5112(k), permitting the issuance of platinum numismatic coins. The astonishing part was that Congress set no specific denomination, writing perhaps the biggest blank check in history.
… To create this debt free money, the Secretary of Treasury must instruct the mint to produce a platinum numismastic coin with, say, a $1 trillion denomination. This coin can then be deposited at the Federal Reserve, and the Fed will credit the account of the U.S. government for the face value of the coin.
The idea hit the news when Jack Balkin (Prof Law, Yale) mentioned in as one of “Three ways Obama could bypass Congress” (CNN, 28 July 2011). In December 2012 he described it as “All those other ideas [like the platinum coin option] are very uncertain, and they could lead to complicated litigation,”
The idea caught the imagination of many people, such as economists Brad Delong and Paul Krugman and Harvard Law professor Laurence Tribe.
(3) Legal Difficulties
Here are law professors explaining the complexities of the legal issues about the platinum coin. Read these articles to learn about the legal issues. Here are some excerpts raising other issues.
(a) “The Danger Lurking Behind the Platinum Coin“, Eric Posner (Prof Law, U Chicago), Slate, 10 January 2013 — Excerpt:
{T}he legal case for the platinum coin is not as strong as people think, and if the president gets this wrong, the consequences could be severe. … run for the hills whenever anyone tells you that the law is clear.
… Proponents of the coin respond that no one can challenge the platinum coin in court because no one has standing — it would be hard for anyone to show that he or she was injured by the minting of the coin, the standard for bringing a lawsuit. But it is hard to predict when judges will find standing, and if they allow someone into court in this case, then judicial repudiation is more likely than not.
… Volatile politics and ambiguous law make for a dangerous combination.
(b) Neil H. Buchanan (Prof Law, George Washington U), their website, 11 January 2013 — Excerpt:
{T}he Big Coin gambit is being misrepresented as “clearly legal.” … it is simply wrong to say, as some have done, that when a gap in a law appears to leave open a possibility that is clearly not what the law was passed to accomplish — in this case, using a law permitting the minting of commemorative coins to evade the debt ceiling statute — then there is no legal barrier to exploiting that gap. It might be allowed in some circumstances, but it is not an easy legal inquiry.
Second, I pointed out that the debt ceiling statute itself is broader than people have assumed. It limits the total national debt, not only as measured by standard Treasury securities, but also by adding in all other “obligations” of the federal government. Under the Big Coin gambit, the Treasury would clearly and openly be obligating itself to replace the coin(s) with “real money” when the debt ceiling is ultimately raised, allowing Treasury then to issue traditional T-bonds, T-notes, and T-bills. That means that the gambit is not even an effective end-around on the debt ceiling, because it merely puts a different label on a government obligation.
… A monetary system simply cannot work if people do not collectively take a leap of faith. We accept currency or precious metals — which have no inherent use value for everyday purposes — because we think that other people will accept them in turn. This group delusion allows us to say that money is money. If the delusion starts to fall apart, then there are very real, very negative effects.
… It is no laughing matter to expose the fundamentally unreal nature of money to public ridicule. … I continue to suspect that a standard debt issue would be less disruptive than scrip, but that is at least an interesting question. What the Big Coin people dismiss as mere concern about looking “undignified” is, by contrast, a question of the utmost importance. Financial systems cannot survive when people stop believing that money has value. Laughing about Big Coins looks like fun. It is, however, deadly serious.
(c) “Big Coins, Political Credibility, and Hatred of Lawyers“, Neil H. Buchanan (Prof Law, George Washington U), 10 January 2013 — Excerpt:
Of course, as we all admit, none of this would ever get to court. Tribe mentions the standing problem, and the “political question doctrine” strikes me as even more of a hurdle. If that is the case, however, then we have to ask what we are trying to accomplish here. If the ultimate arbiter of this is going to be public opinion, then it matters not to be snarky and cute.
And whatever else one might say about the platinum coins option, it comes across as extremely snarky and too-cute. As one of my research assistants put it: “This is the kind of argument that makes people hate lawyers.” Grabbing onto some loophole and spinning a too-good-to-be-true argument out of it is not going to convince anyone. And it can do real damage.
(d) More legal problems
- “Is the Platinum Coin Ploy Legal?“, Jonathan H. Adler (Prof Law, Case Western U), Volokh Conspiracy, 10 January 2013
- “Laurence Tribe Is Wrong On The Trillion Dollar Coin“, Tom Maquire, 10 January 2013
- “Post-Mortem Part 2: Zombie Big Coins, Chevron and the Quadrilemma“, Mike Dorf (Prof Law, Cornell), 14 January 2013
(4) Other posts in this series
- Most of what Democrats say is wrong about the Republicans’ recent actions in Congress
- Let’s learn from this inevitable crisis, which results from flaws in our system
- About the crisis: The GOP is right. So is Obama. That’s why it’s a crisis.
- A new political party for a New America: the Tea Party GOP
(5) For More Information
(a) FM reference pages, a guide to other posts about these matters:
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Pingback: Minting a trillion dollar platinum coin: the easy fake solution, so we can avoid fixing our problems - Global Dissident
Fake money, yet another violation of our rights. The gov’t constantly violates our rights.
They violate the 1st Amendment by caging protesters and banning books like “America Deceived II”.
They violate the 4th and 5th Amendment by allowing TSA to grope you.
They violate the entire Constitution by starting undeclared wars.
Impeach Obama, support Rand Paul.
Last link of “America Deceived II” before it is completely banned:
http://www.amazon.com/America-Deceived-II-Possession-interrogation/dp/1450257437
We already have the TDPC. It’s just called Quantitative Easing.
But QE is less “in your face”, and technically not infinite maturity the way TDPC would be.
The Fed was able to slowly ramp up QE to the point we are printing one TDPC-equivalent per year.
But don’t be concerned. The Fed can always shrink the size of its balance sheet in the future, right?
Except that QE does not add net financial assets to the economy. If I have a $100 treasury and a $100 dollar bill I have $200 NET. If I sell my treasury I still have $200 NET.
The coin is different in that it would allow congress to spend money into the economy and thus increase the net financial assets of the non-governmental sector.
DAB,
A coin — to the extent that it’s face value exceeds its physical value (as usually true for coins) — is an obligation in the same sense as is a dollar bill: perpetual non-interest paying debt.
This is discussed at length on one of the articles cited.
Bonesetter,
You are correct. But QE does not help the government in the current crisis over the debt ceiling.
Fabius
yes and yet… QE does not add net financial assets to the economy. If I have a $100 treasury and a $100 dollar bill I have $200 NET. If I sell my treasury I still have $200 NET.
The coin is different in that it would allow congress to spend money into the economy and thus increase the net financial assets of the non-governmental sector.
DAB,
To repeat: QE is not relevant to the debt-crisis debate.
Fabius
Exactly… but Brown stated that QE and TDPC were equivalent and I simply showed how they are not.
DAB,
Got it! I lost the thread of the converstation.
DAB & Fabius,
My comment was meant to be tongue-in-cheek.
The general reaction to TDPC ranges from “barely legal but too cute” to “absurd”.
If at the time of the first QE announcement (Fed balance sheet expansion late 2008, formalized Mar ’09), Bernanke declared a QE that would grow to the current rate of $80B+/mo in securities purchases with no defined end-point, the reaction would have been “that’s absurd”. But here we are.
Leading up to the 2011 debt limit debate, Ron Paul proposed in effect the anti-TDPC: the US could selectively and unilaterally declare default on the treasuries held by the Fed, a little less than $2T at the time as I recall. Voila! Debt limit solved — just like the TDPC.
To my eye the Fed is being set-up as the ultimate Bad Bank. Resolution Trust Corp on steroids. As QE continues to run its course, the Fed gets stuffed with lots of long duration bonds. Foreign bond holders cram into the short end. The Fed is effectively sub-ordinated. I will not be the least bit surprised if when we hit the Ultimate Debt Crisis, part of the resolution takes the form of selective default on Fed held treasuries, or restructuring of the term to 30 yrs, or something like that.
Bonesetter,
(1). Lots of folks, such as Krugman and Brad Delong (Prof economics, Berkeley) advocated use of the platinum coin if necessary to avoid default.
(2). “Leading up to the 2011 debt limit debate, Ron Paul proposed in effect the anti-TDPC: the US could selectively and unilaterally declare default on the treasuries held by the Fed, a little less than $2T at the time as I recall. Voila! Debt limit solved”
Ron Paul’s statements shows that know less than nothing about economics. He would have to shed his misconceptions to get to nothing.
The Federal Reserve Board (aka System) is a Federal agency. Any income after expenses from the bonds it owns is returned to the Treasury. Treasury bonds it owns are de fact already retired. You do not “default” on an IOU to yourself.
The bonds are operationally treated as outstanding because most will be sold as the Fed normalized interest rates. The Fed holding of them is akin to a trading position.
Both TDPC and default on Fed-held bonds are unorthodox. My point is the unorthodox gets increasingly put in play
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/ron-pauls-surprisingly-lucid-solution-to-the-debt-ceiling-impasse
Bonesetter,
Issuing a trillion dollar platinum coin is without precedent, so far as I know.
Organizations, including governments, buying back their own debt is a form of defeasement, and quite ordinary.
It is quite common for governments because government bonds often have unusually long call protection — i.e., they cannot be paid off early by the debtor. So when interest rates fall they buy them back on the open market, and issue new debt at the lower rates.
Less often, governments will buy back their debt when investors have driven down the price to what the government considers attractive prices — and the government has available funds. Greece did this in one of their restructurings.
That the central bank is the agency involved, not the Treasury, is a trivial detail resulting from the slight-of-hand mechanism we use to manage certain financial and regulatory policies. Opinions differ, but IMO this arrangement serves the interests of banks and the wealthy (an almost redundant way to say this).
That’s the thing about QE too, really. QE directly benefits those people who own the assets the Fed buys — that is the super-rich and large banks, etc. If we need more money in the system to counteract the deleveraging, QE does accomplish in a way that favors owners of financial assets, the rich. If rather than putting cash into the system with QE we had the government create money itself, like the TDPC, instead that money would go to actual people, social security recipients, and government employees, etc.
Notice the placement of the words “In God We Trust” directly below the Federal Reserve building…..Who do think THEIR “God” really is?
Incriminally Sane,
I too have wondered about the God of our (western) elites, looking back at the past two millenia.
My guess is that the evidence clearly suggests Mammon. Perhaps with Satan as the eminence grise
Another theory: they are atheist sociopaths.
what this article fails to take into consideration is that the PRIVATE FOR PROFIT CORPORATION called the federal reserve. Has never loaned the corporation known as the UNITED STATES, anything of value, no gold, no platinum, no silver, not even lead!
Since there has been nothing loaned, there can be NO DEBT!
FRAUD VITIATES ALL CONTRACTS!
If you disagree, please provide unequivocal proof that the PRIVATE FOR PROFIT CORPORATION KNOWN AS THE FEDERAL RESERVE loaned ANYTHING to the corporation known as the united states, I DARE YOU!
desertspeaks,
You confuse the privately owned Federal Reserve regional banks with the Federal Reserve System.
The latter is a government agency. Created by Congress, governors approved by Congress, its governors and staff are civil service employees, it is subject to the Freedom of Information Act and other legislation regulating Federal Agencies.
The key powers of “the Fed” are mostly those of the Governors and staff.
The Regional Banks have some regulatory functions, much like the other self-regulatory organizations operating under Federal authority (e.g., the New York Stock Exchange, the Financial Industry Regulatory Authority).
I can imagine the same kind of panic when GS was about to be canceled in 1933: But, but, but, but, ………nobody will trust the dollar anymore, uaahhhhhhha (cry)
FM, You presented experts on one side of the issue, i did present experts on the other side of the issue. Can we agree on future predictions ;-).
Debt crisis/savings glut are calling for radical solutions that are allowing for more options on how to solve problems. As we allow for more options on problem solving, the next crisis are going to be further apart and with less damage. Under GS we had depressions every 20-30 years due to bank credit creation that inflated the prices but government could not print money. Then GS was removed and next depression came 70 years later.
Now is about allowing government not to bother about public debt, and next depression might be not even noticable. (not to mention GS underwriting Civil War and WWII)
We, as humanity, are learning what money is and how to use it properly.
TDPC is only removing the thoughts about public debt, it is not spending more then Congress aproves. It could go through without any issues from the markets unless they still think as under GS. I can see that majority of market dealers know that we are not under GS anymore.
One small coin arbitrarily valued at $1 trillion sounds very much a medieval alchemy. One trillion dollar created out of blue with no physical or ‘faith’ backing, or circulation possibility. If it does not require the global market acceptance, or not meant for any transaction, isn’t it tantamount to creating a toy money or a counterfeit that is never to be used in the real world? Only on the book, you can cancel out the debt by $1 trillion, and the US would like the world to believe they solved the debt ceiling problem? I am utterly confused by the arguments by some supposedly reputable economists and lawyers thinking this ‘sting’ is a permissible action to be taken by a reputable nation.
If a nation is allowed to pull off a shenanigan like this, why not an unscrupulous individual to 3D-print a coin in $1 million denomination and demand a regional Fed Bank to accept it as a legal tender.
Further more, why not gradually switch all existing treasury bonds certificates to be replaced by $1 million – $1 billion (or whatever denomination) coins and conveniently avoid paying interests to the investors, and see what happens. WWIII? You cannot annul trust unilaterally and pretend business as usual.
“Only on the book, you can cancel out the debt by $1 trillion, and the US would like the world to believe they solved the debt ceiling problem?”
The “debt ceiling problem” is also a thing that exists only “on the book.” It is a procedural hurdle. Nothing but politics stops Congress from raising the debt limit by one trillion dollars. The platinum coin would exploit a loophole in one law to cancel out the exploitation of an originally unintended consequence of another law.
People understand, intuitively, that the platinum coin must be a trick. They don’t so readily understand that the debt limit has become a trick Congress plays on itself: forcing re-ratification of issues already decided, with no mechanism for resolving dispute when the political winds have changed just enough between then and now that previous decisions can neither be reversed nor confirmed.
To paraphrase the quote about lawyers, “This is the kind of thing that makes people hate politicians.”
(To be clear, in my opinion the platinum coin is a side-step, not a resolution. The usual consequence, for individuals or for nations, of side-stepping problems is that one soon encounters them again, in more virulent form.)
Coises,
While I believe the debt ceiling is a bad idea, I disagree with your characterization of it as a “trick”.
It can be see as a typical mechanism of the American political structure, one of multiple checks — or check points, or controls — that make policy more difficult by forcing re-examination of key issues.
That redundancy is a fundamental part of our system, much like having a dozen kinds of dish soap.
*. The Executive agencies study an issues.
*. Not one but two branches of the legislature study the issue.
*. If it involves money, the process must be repeated every two years.
*. If it involves points of law, yet a third branch of government reviews it.
The system was designed for stability, not ease of use. That puts more responsibility on its participants to make it work. So far they have done so, with a few glitches (e.g. The civil war).
“The system was designed for stability”
Now that’s irony for you.
The history of the debt ceiling isn’t that it was meant to add a checkpoint, but to remove one: Congress wanted to give the Treasury freedom to finance expenditures in World War I without independently legislating each bond issue.
As far as I can tell, this more or less made sense until 1974, when the budgeting process changed. The debt ceiling should have been repealed at that time, since it could no longer have any effect without creating a contradiction. Instead, the “Gephardt Rule” kept the budget and the debt limit consistent, until that was ended in 1995.
The debt limit was created for a purpose. When it became redundant, Congress decided to work around it rather than repeal it. Now it is being used as a trick by Republicans to attempt to force reconsideration of issues which they would not be able to revisit using means which have up to now been considered part of the normal political process.
Just words, maybe, but I can’t put the use of an unintended consequence of an obsolete law to circumvent the limits which previously accepted and understood political processes would place on the ability of a faction to reverse earlier decisions on a level with the checks and balances that were designed—with some forethought, even if with imperfect foresight—as the basis of our constitutional government.
Coises,
I do not understand how you conclude that the “debt ceiling” is a trick.
It was created to allow the Treasury to manage the outstanding debt load without Congressional action (e.g., changing the maturity structure), while allowing Congress to retain control over the amount of outstanding debt — which Congress has done since its inception.
A ceiling on the debt, whether by individual bill allowing a new debt issue or an overall ceiling, inherently creates a contradiction between available funding and authorized spending. Every entity has that — a household, business, or government. When, for example, funding comes in below plan someone has to decide to borrow or reduce future spending. There is no way around this.
Also, as I have repeatedly mention. legislatures have been using this mechanism to force policy changes for centuries. The public — the people — have been using this (broadly speaking) since Ancient Greece.
The GOP’s current use might be smart or foolish, but is neither illegitimate nor unusual. The efforts to brand it such are part of the increasing attempt by both left and right to control policy discussions by labeling. You’re a denier, anti-American, etc, etc.
IMO this is part of the infantilization of American discourse. Which is logical, since our ruling elites increasingly treat us like unruly children. The question for the next generation is if we prove them wrong — or right.
Harry and Sam own a business renovating houses. When they began their partnership, they agreed that they would not take on a new property unless both agreed; and that once they began work on a property, they would not dump it before completion of the project unless both agreed.
One morning, Harry says, “I’ve changed my mind on the Riverside project. We should stop work and dump it now.” Sam disagrees.
That afternoon, their accountant stops by, saying he needs their signatures for the next transfer from the business savings account to the checking account they use to pay bills. It’s a joint account, so he needs both to sign. They do this several times a year.
Harry says, “I’m not signing the transfer until Sam agrees to stop the Riverside project.”
Sam points out that they have never done things that way. Harry is free to try to convince him that they should stop the project, but unless he does agree, things stay the way they are.
The accountant warns them that they have obligations and he can’t meet them without the transfer. They would risk terrible damage to their business’s credit, lawsuits… maybe even lose the lease on their offices… if they don’t sign.
Harry points out that it’s a joint account, and Sam can’t make him sign.
Sam says this is ridiculous. The joint nature of the main business account was never intended to facilitate risking the reputation of the business so that one of them could force the other to agree to his demands. “Sign the transfer, like we’ve always done; then we can talk about the Riverside project, and if you can convince me we should kill it, we’ll kill it. But if I agree to kill it under these conditions, I’ll have agreed to kill the entire basis on which we’ve operated since we formed this partnership. I won’t do it.”
Harry says, “Bite me. I hate the Riverside project, and I’m not giving up the only leverage I have to get us out of it in return for promises to ‘talk about it.’”
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If the word “trick” is the problem, pick another one. This is not business as usual; this is using a technicality in a way everyone knows it was never intended to be used because business as usual isn’t getting one faction the result it desires. Which (and this was my point) is also exactly what the platinum coin would be. Only one democratic country, besides the United States, has a debt ceiling… so it’s hardly business as usual from that perspective, either.
I call it a “trick” because it’s not (under the current budgeting arrangements) meant to do what it says—limit the outstanding debt—but to force Congress to review previous decisions. It’s a poison pill never meant to be taken, just to scare politicians into doing what they don’t trust themselves to do otherwise. Now it’s proving to be a dangerous way to achieve that end.
“This is not business as usual; this is using a technicality in a way everyone knows it was never intended to be used because business as usual isn’t getting one faction the result it desires. ”
I suggest you run that sentence by an attorney. If such “technicalities” were ruled invalid, our legal system would look very different.
Also, much of our progress in civil rights has come from the “technicality” of using things “never intended to be used because business as usual isn’t getting one faction the result it desires”. That whole “all men are created equal” equal thing no longer means what it did in 1776. Through a “technicality” it includes Blacks and women.
Congress no more authorized a trillion dollar platinum coin than a trillion dollar United States note. Nor will it. But the one dollar coin is a different story, and a bill is already pending proposing to issue billions of new dollar coins–senate bill S.1105.
See my articles: