Tornado Alley (PROG)

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Dancing on the Edge of Default

.. fwiw .. just it was interesting as i'd never seen the suggestion below that Treasury might break a law (yup,
it does come from a Wall Street guy) put as one possible consequence of this Tea Party creature mess ..

By VINCENT REINHART October 4, 2013, 4:08 pm 8 Comments

Even as the White House insists there is no alternative to Congressional action .. http://www.nytimes.com/news/fiscal-crisis/2013/10/03/obama-will-not-unilaterally-raise-debt-limit/ .. to raise the federal borrowing limit by Oct. 17, the options for an end run have spurred a raging debate, with armchair experts in the blogosphere as well as some of the top legal scholars in academia all weighing in .. http://www.nytimes.com/2013/10/04/us/politics/experts-see-potential-ways-out-for-obama-in-debt-ceiling-maze.html .

Former President Bill Clinton, Senator Max Baucus and Representative Nancy Pelosi, all Democrats, have also gotten into the act, with the three urging President Obama to at least consider invoking his powers under the 14th Amendment .. http://www.nytimes.com/2013/10/03/business/wall-st-fears-go-beyond-shutdown.html .. to break the logjam.

One of the sharpest economists on Wall Street, Vincent Reinhart of Morgan Stanley, has taken a close look at the options, both from a practical standpoint as well as how markets and investors are reacting. Here is his take.

– Nelson D. Schwartz

Mr. Reinhart, former head of the Federal Reserve’s monetary division, is the managing director and chief United States economist for Morgan Stanley.

The market price to insure against default by the United States government over the next five years is heading toward half a percentage point. The number of Google searches for the terms “government default” and “Social Security payment” have moved to all-time highs. Any prudent financial firm is assigning its operational risk management team to think the unthinkable: “What happens if the United States Treasury defaults on its debt?”

This is just part of the waste and worry created by the ongoing standoff on the budget and the failure to raise the debt ceiling. And it is a waste because the United States government is not going to default, ever.

As political theater, the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves as they will rightly shoulder the blame for the serious global economic consequences of a default.

This recognition of the depth of the chasm ultimately drives them to compromise each and every time. But why do they repeatedly dance so close to the edge? They flirt with such danger because, deep down, people on the Hill believe that the secretary of Treasury will save them from the consequences of their action at the last minute.

After all, the Treasury has indicated that it runs out of cash on Oct. 17 as long as the secretary limits himself to extraordinary measures that have precedent. Will he or won’t he? In that regard, the Hill standoffs over the years are similar to two siblings beating each other up in the backyard but always expecting their mother to step out on the porch and tell them, “You better stop before somebody gets hurt.”

Our elected officials are counting on the secretary to be the adult.

There are always other items below the line drawn by precedent. No official will ever admit that because it is the cataclysmic nature of default that drives politicians to the table. Most of these maneuvers are of questionable legality and worse precedent because if they were easy, they would have already been used.

The list probably includes warehousing revalued gold, extending the disinvestment of the Civil Service funds to other trust funds or swapping out the Federal Reserve’s holdings of Treasury securities for debt not subject to public limit. The list also includes the possibility of prioritizing payments to make principal and coupon obligations when due. By the way, the trillion dollar coin is too clever by half. If you are going to violate the spirit of the debt ceiling, then violate the debt ceiling.

But there is a bigger picture that is relevant and dominates the discussion. If the Treasury is unwilling to stretch the definition of extraordinary measures, on the day that the Federal Reserve predicts the Treasury will run out of cash in its account and the Treasury is bound by the debt ceiling, it suspends all payments and awaits instructions from the Treasury. As a result, the government’s principal economic officials will face the prospect of violating one of these three laws:

1. The Second Liberty Bond Act of 1917 that establishes the debt ceiling;

2. The Federal Reserve Act that prohibits the Fed from lending directly to the Treasury; or,

3. The 14th Amendment of the Constitution, which holds that the debt of the United States government, lawfully issued, will not be questioned.

They have to break a law. At the end of the day, officials will avoid violating the Constitution by indicating that they have been given inconsistent instructions and are obeying the one with the most important precedent.

If it is the secretary of Treasury that decides to contest No. 1, then the Treasury will issue debt and raise cash. However, the debt arguably does not have the protection of Amendment 14, as it was not necessarily lawfully issued, so it may not be default free. That is, similar to some proposals to resolve the European fiscal crisis, the Treasury will issue “red” bonds to pay the maturing principal and interest on “blue” bonds. Market participants will figure out how to price those securities on the assurance that the reds turn blue when the debt ceiling is increased.

If it is the chairman of the Federal Reserve that decides to contest No. 2, then the Treasury account goes into overdraft and all Treasury operations continue.

An official anticipating stretching the law ranks alternatives by precedent, punishment as specified in the law and standing as to who can claim a violation of the law. Either a secretary of the Treasury who holds No. 3 as the overriding instruction or a chairman of the Federal Reserve who waives No. 2 saves the global financial system and, at most, risks being impeached or fired. That seems to be a reasonable risk and reward trade-off.

Treasury Secretary Jacob Lew can look out the back of his building and see a statue of Alexander Hamilton. He will not be the first secretary to break the Hamiltonian promise. The shame is that the Congress threatens to put him in the position to have to choose the lesser of two evils.

http://dealbook.nytimes.com/2013/10/04/dancing-on-the-edge-of-default/ .. aha! .. permalink ..
http://dealbook.nytimes.com/2013/10/04/dancing-on-the-edge-of-default/?smid=pl-share

.. this guy disagrees ..

No Way U.S. Would Allow Debt Default? Don’t Bet on It - By ANDREW ROSS SORKIN
http://dealbook.nytimes.com/2013/10/07/no-way-u-s-would-allow-debt-default-dont-bet-on-it/

.. ok .. if i don't know someone i try to check .. Reinhart
i qualified by noting he was Wall Street guy .. Sorkin? ..

August 31, 2010, 9:50 am 175 Comments

The Unbearable Pettiness Of Being Rich

Andrew Ross Sorkin’s column .. http://www.nytimes.com/2010/08/31/business/31sorkin.html?_r=1 .. today makes Wall Street honchos sound like spoiled kids; they went for Obama because he seemed like their kind of guy, then turned on him with a vengeance because they think he’s looking at them funny.

Based on what I know, that’s about right.

I talked to some financial-industry backers of Obama back during primary season; they really didn’t know or care much about policy issues, but were in love with Obama over his style — and also over the prospect of being in his inner circle, something they knew wouldn’t happen with Hillary. Now they’re mad because they don’t feel that they’re getting enough stroking.

And you have to bear in mind that this comes after Obama has made immense efforts to placate the financial industry. There were no bank nationalizations; there were hardly any strings attached to bailouts; the financial reform bill was by no means draconian given the scale of the disaster. But Wall Street is furious that Obama might even hint that they caused the crisis — which he does, now and then, because, well, they did.

And as far as I can tell, hardly any of the new anti-Obamanites is thinking at all about what will really happen once John Boehner is speaker.

You know, one might have thought that having all the money in the world would make people less petty, less concerned about whether they feel that they’re in the in-group. But nooooo [/Belushi]
http://krugman.blogs.nytimes.com/2010/08/31/the-unbearable-pettiness-of-being-rich/

.. i know well enough now .. thanks, Paul .. rotfl! .. grin ..