Obama just caved on the debt ceiling, won’t #MintTheCoin

by pdxblake

Word out of the Treasury (ht Ezra Klein) is that the White House/Treasury have given up the platinum coin option to mitigate the damage that a default would cause.  The key part:

The White House seems to agree [that there is nothing they can do to sidestep the debt ceiling]. This is, in fact, the second time that the Obama administration has ruled out a possible end run on the debt ceiling. In December, Press Secretary Jay Carney said, “This administration does not believe the 14th Amendment gives the president the power to ignore the debt ceiling — period.”

The administration’s position is that raising the debt limit is Congress’s responsibility until the day that Congress votes to make it the White House’s responsibility, which is a resolution the Obama administration would happily accept. Until then, White House officials say, they will not negotiate over the debt ceiling, and if congressional Republicans attempt to use it as leverage, then the consequences will be theirs to bear.

The last paragraph is a farce, as Obama has shown multiple times that he  is unwilling or unable to use leverage and force the other side to really give up what they want.  In the debt ceiling, despite having the leverage of allowing all the Bush tax cuts to expire and then proposing a bill reinstating them for people earning under $250,000, Obama caved and raised the limit to $450,000 in order to get some Republican support.  Obama still apparently believes that there is value in pandering to a Republican party led by extremists, and eventually the party may split between the quasi-moderates and the fanatics, but it does not need any help from Obama for this to happen.  It either will or it won’t and any accommodation by Obama will only result in worse legislation.

Having refused to use the 14th Amendment option (which disallows the government questioning its obligation to repay creditors who are banking on the ‘full faith and credit’ of the US government) and the platinum coin option (which would circumvent the debt ceiling and allow already appropriated spending to continue until the technical legislation is passed to allow the issuance of new debt, Obama’s promise to not negotiate has zero credibility.

After all, the last time he had leverage and could allow to have the full Bush tax cuts ended if the Republicans didn’t pass a law along the lines that he wanted, Obama caved in to some of their demands.  The consequences of “going over the cliff” for several weeks or even a month were real, but relatively minor.  Certainly compared with the debt ceiling where not having an increase passed before “X” day (sometime between February 15 and March 1) will lead to the default by the US government, something with far worse consequences.  His threat to not negotiate is now just talk.  Unless…

There are still two options that would allow the country to pass the ‘X’ day without defaulting on its debt.  Obama shows no willingness to use these workarounds, but they haven’t been ruled out yet.  First, the Federal Reserve (which sends all its profits back to the US Treasury, since it is a quasi-governmental body) could make a ‘dividend’ payment to the Treasury in the form of some of the government bonds it holds.  If these bonds were returned to the Treasury, the Treasury could cancel the Treasuries (it would after all, just owe itself money) and then issue new bonds to investors in an equal amount.  The end result would be funds with which the government could make the payments it is legally obligated to make (interest payments on the debt, Social Security and Medicare payments and Congressionally authorized spening).

Or, it could issue what Paul Krugman calls “Moral Obligation Coupons”, which are essentially IOUs that the US government is not legally obligated to pay, but which it will say it will pay (and for now, that promise would probably be viewed as solid).  California did a similar thing in 2009, when it issued IOUs.  These IOUs (technically Registered Warrants) were issued in lieu of payment for tax refunds and for companies that did business for the State of California when the state government was unable to agree to a budget.  If you got one, you could take it to the bank and exchange it for cash (and the bank held it until the budget was passed and it could be exchanged with the state for cash).  However, some of the big banks started to not accept the IOUs, so it is only a stopgap solution.  Presumably IOUs from the US government would be accepted more broadly and for longer since the US government will most certainly get past the political issue with the debt ceiling and then redeem the IOUs.

There’s no indication that Obama would be open to either of these ideas, and history suggests that if he had a choice between giving into the Republican demands for some entitlement cuts and using unorthodox means to prevent a government default, he would choose the former.  He already, after all, offered to modify the calculation of social security benefits (switching to chained CPI), which would have amounted to a benefit cut in his negotiation to have the debt ceiling limit raised in the fiscal cliff bill (I thought he said he wasn’t going to negotiate over the debt ceiling).  So, we are now entering the territory where the GOP has seen success in holding the creditworthiness of the US hostage over their demands to cut entitlements (that’s right, cut your Social Security and Medicare) and there’s no reason why they are going to stop now.  It’s a sad day to see Democrats allow hostage-taking by the Republicans to become an effective political technique.

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