"In 2007, investors had, in Minksy fashion, been conditioned by the Great Moderation, abundant liquidity, and the Greenspan put to believe nothing that bad could happen, and if it did, investors would be able to exit with their hides intact. Now, these reflexes have been reinforced by the Bernanke put and Geithner’s attentiveness to the needs and wishes of banks. The assumption is that even if the Congressional gridlock continues, Timmie will find a way to keep paying Treasuries, even if everyone else suffers.
The troubling bit is that the Administration has said it’s unwilling to consider any of the creative ways out of this mess suggested in op ed pages and in the blogosphere: use of the 14th Amendment, canceling Treasuries held by the Fed, or using other loopholes to have the Fed monetize the debt. But Geithner dissed those ideas. From Bloomberg:
There’s “no way to give Congress more time” on lifting the debt limit, Geithner said after meeting with Democratic lawmakers on Capitol Hill in Washington. He has repeatedly said U.S. borrowing authority will end on Aug. 2 without congressional action.
Geithner’s remarks suggested the Treasury Department is approaching the end of its efforts to shift federal cash flows to avert a breach of the mandated borrowing limit.
Normally, one might view this rigidity as a negotiating posture. But this Administration doesn’t do negotiations, it does concessions ..."
and
"...the President could, as we and others have suggested in the past, simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.
Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here).
Curiously, the President won’t pursue any of these options. Why?
If, for example, the President genuinely believes that the 14th Amendment does not give him the right to ignore the debt ceiling, he has been loath to give any reasoning for this publicly. He is, after all, a constitutional law professor. Much like the single payer option in health, the President refuses to even put it on the table, even as a negotiating posture. Is it caution, or does the President genuinely believe this guff about the deficit?
By the same token, the President might well dismiss Professor Fullwiler’s idea as nothing more than a “gimmick”. But if the alternative is the economic apocalypse regularly described by Treasury Secretary Geithner, then why not deploy this “gimmick” if the alternative is (in the words of Mr Geithner), “catastrophic damage across the American economy and across the global economy”? As Bill Mitchell has pointed out:
[T]he whole edifice surrounding government spending and bond-issuance is also ‘just an accounting gimmick’. The mainstream make much of what they call the government budget constraint as if it is an a priori financial constraint when in fact it is just an accounting statement of the monetary operations surrounding government spending and taxation and debt-issuance.
Shane Mage
"scientific discovery is basically recognition of obvious realities that self-interest or ideology have kept everybody from paying attention to"