April 29, 2011
The vast majority of those commenting on raising the federal debt limit are certain that Congress will act in time to forestall a debt default, which would occur if the Treasury lacked sufficient cash to pay interest due that day or to redeem maturing securities. The smart money says that Congress could not possibly be so stupid as to permit a default and will raise the debt limit just in time. Americans would likely agree, however, that some members of Congress really are that stupid. But here’s the good news: An arcane provision in the U.S. Constitution gives the president the edge.
Over the last several weeks, a number of Republican congressmen have said that they will not vote to raise the debt limit unless massive cuts are guaranteed in advance. Some Republican senators have promised a filibuster against a debt limit increase should it pass the House. And Tea Party spokesmen have promised strenuous primary opposition for any Republican voting for a debt limit increase. A Republican running against a Tea Party member for the party nomination could be accused of supporting President Obama to increase the national debt — a charge that would assure an election loss
The Republican leadership is looking for a way to get just enough members to join with Democrats to raise the debt limit by attaching some sort of budget-cutting package or mechanism, such as a balanced budget amendment to the Constitution that would get the necessary votes. These negotiations will be protracted and any measure that attracted Republican votes would likely lose Democratic votes. It’s not clear to me that there is any way under current political circumstances of devising a budget package that could be appended to the debt limit that would get sufficient votes for passage before a default occurs.
Some Wall Street types are predicting a financial apocalypse in the event of default. But there is no evidence that this has moved Republican hardliners one inch. They heard similar warnings about financial apocalypse in the fall of 2008, leading to passage of TARP, the Troubled Asset Relief Program, which rescued many banks and prevented a meltdown in the banking system. Although most economists believe that TARP was essential and that the economy would be far worse off had it not been enacted, there’s not a single Republican who will defend it because they universally believe TARP was an unjustified bailout for fat-cat bankers-- a horrible mistake and set a dreadful precedent.
Only a trivial amount of spending was
actually cut by the [shutdown] deal,
leaving many Republicans to believe
they were sold out by their leaders.
More recently, Republicans and Democrats cut a deal to avoid a government shutdown and voted for the fiscal 2011 appropriation because it contained $38 billion in spending cuts and because their leaders predicted political doom if the government were forced to shut down. Subsequent analysis, however, showed that only a trivial amount of spending was actually cut by the deal, leaving many in the GOP to believe they were sold out by their leaders. They are determined to make sure it doesn’t happen again.
Given this experience, Republicans are disinclined to believe apocalyptic rhetoric about the consequences of defaulting on the debt. Indeed, some say they welcome it. Whatever pain is caused will be temporary, but the benefits of using such a crisis to slash government spending will be worth it, they say.
Republicans are playing not just with fire, but the financial equivalent of nuclear weapons. Perhaps at one time when the federal debt was owned entirely by Americans we could afford to take a chance on debt default because the consequences would only be internal. But today, more than half of the privately held public debt is owed to foreigners; the Chinese alone own more than $1.1 trillion of Treasury securities. Moreover, many countries use Treasury securities as backing for their own currencies. Thus the impact of default would be felt internationally, disrupting finances and economic policies throughout Asia, Europe and Latin America.
Therefore, a potential debt default is far more than a domestic consideration; it is a matter of foreign policy. This is why Secretary of State Clinton and Navy Adm. Mike Mullen have warned that the public debt represents an important threat to national security. As attorney Thomas Geoghegan recently put it, “Where the validity of the debt is concerned, our national security is at stake.”
Preventing default is no less justified
than using American military power
to protect against an armed invasion
without a congressional declaration of war.
The president would be justified in taking extreme actions to protect against a debt default. In the event that congressional irresponsibility makes default impossible to avoid, he should order the secretary of the Treasury to simply disregard the debt limit and sell whatever securities are necessary to raise cash to pay the nation’s debts. They are protected by the full faith and credit of the United States and preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war.
Furthermore, it’s worth remembering that the debt limit is statutory law, which is trumped by the Constitution which has a little known provision that relates to this issue. Section 4 of the 14th Amendment says, “The validity of the public debt of the United States…shall not be questioned.” This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting.
Some will raise a concern that potential buyers of Treasury securities may be scared off by a fear that bonds sold over the debt limit may not be backed by the full faith and credit of the United States. However, given that the vast bulk of Treasury securities are 3-month bills that will turn over many, many times before this issue ever reaches the Supreme Court, it is doubtful than anyone will be concerned about that. And the Federal Reserve could assure investors that it will always be a buyer for such securities.
People smarter than I am tell me that the Treasury has an almost infinite ability to avoid a debt crisis. I hope they are right. But I am hypothesizing a situation in which the Treasury reaches the end of its rope and a day comes when it needs $X billion to pay interest and it has less than $X billion in cash. Under those circumstances, when default is the only possible alternative, I believe that the president and the Treasury secretary would be justified in taking extraordinary action to prevent it, even if it means violating the debt limit.
Constitutional history is replete with examples where presidents justified extraordinary actions by extraordinary circumstances. During the George W. Bush administration many Republicans defended the most expansive possible reading of the president’s powers, especially concerning national security. Since default on the debt would clearly have dire consequences for our relations with China, Japan and other large holders of Treasury securities, it’s hard to see how defenders of Bush’s policies would now say the president must stand by and do nothing when a debt default poses an imminent national security threat.
Given that the Supreme Court in recent years has been unusually deferential to executive prerogatives –I feel certain President Obama would be on firm constitutional ground should he challenge the debt limit in order to prevent a debt default. Should the Court rule in his favor, the debt limit would effectively become a dead letter. Is that really the outcome Republicans want from a debt limit showdown?
Debt, Default and Dysfunction (The Fiscal Times)
Treasury Borrowing Advisory Committee of SIFMA Urges Raising Debt Ceiling (SIFMA)
How the GOP Could Sell the Debt Limit Vote (Politico)