Attack of the Giant Killer Debt Limit Tomatoes IV

Can the US Treasury really not prioritize payments in the event of a refusal to raise the debt ceiling?

(For previous episodes, see here, II – here , III – here , and lots more and better by fellow RBC bloggers)

Jack Balkin concludes a good post on the distinction-without-a difference between a government shutdown without a budget resolution and a debt ceiling crisis with one:

Let’s assume that’s what people are fearing– that the debt ceiling crisis will not turn out to be the same thing as a shutdown, and therefore will have far worse consequences.

If that is so, the President’s correct strategy is fourfold.

(1) announce that you will not bargain over the debt ceiling under any circumstances.
(2) make preparations if you can’t pay all your bills but don’t tell anyone about your contingency plans;
(3) emphasize the difference between a debt ceiling crisis and an “orderly government shutdown;” and
(4) emphasize how terrible a debt ceiling crisis will be and how unprepared the country is for it. That is especially so even if you have made preparations.

Which, it seems, is exactly what the Obama Administration is doing.

Against the million of bits spent on Beltway augury reading the entrails of chickenhawks, there is very little discussion of the mechanics of default since the platinum coin was taken off the table by the White House and the Fed. Matt Yglesias links to a report (leak?) that the Treasury actually has no way of prioritising its payments: it´s the computer, Guvnor. Quote from analysts at RBC Capital Markets:

The Treasury’s systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments.

But that can´t be quite right. The Treasury does have a way of shutting down half the government, the discretionary programmes; it already did so in 1995. There´s an interesting situation (in the sense of three of the four bomb interlocks going) question if mandatory programmes (≈60% of the budget) plus debt servicing (≈6%) are greater than the incoming tax receipts (≈68%), but it´s clearly close and maybe just manageable. Don´t tell me it´s impossible technically to wall off and meet the debt payments – you could do it at a pinch with handwritten cheques.

None of this makes a difference to the shock quite probably coming very soon to US citizens and world capital markets on default day. Jack Lew may have to announce that from the following morning the government of the most powerful nation and mightiest economy on Earth won´t be meeting a third of its legal payment obligations, until a bunch of loons elected by mistake to the US Congress in the name of a ¨Republican Party¨ decide to stop wrecking the Republic.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

22 thoughts on “Attack of the Giant Killer Debt Limit Tomatoes IV”

    1. The linked article reinforces the view that the government can prioritize if it really wants to.
      Jack Lew is much more of a top professional bureaucrat – in France, they´s say un grand commis de l´État – than was Tim Geithner, basically a banker in politics. I find it hard to believe he has not gamed this every which way and has a raft of contingency plans. Throwing the steering wheel out of the window is a good claim but the wrong actual policy.

      1. Where do you come up with the description of Tim Geithner as a banker in politics? You don’t seem at all familiar with his career, which includes exactly zero positions as a banker until 2003 when he became president of the New York Fed, which is as much a political position as it is a banking position.

        http://en.wikipedia.org/wiki/Timothy_Geithner

          1. No, you disagreed with him about policy decisions. That in no way makes him less of top professional bureaucrat in either actuality or mindset.

      2. PS: I recommend Bruce Bartlett´s piece to RBC readers. It adds a lot of technical wrinkles to Balkin and is a sterling exception to the herd journalism of obsessing with the political theatre.

  1. “…a bunch of loons elected by mistake to the US Congress…”

    Their election was all too deliberate. Look who’s bankrolling the lunatic fringe.

    This is looking like an engineered collapse like any other building implosion, designed to finally unshackle the corporate elite from the feeble chains of democracy. People like the Kochs and all their allies are busily preparing to impose their neo-feudal will on the unruly masses, and take up their rightful roles as the masters of the world. If you want to see the future, look at China, look at Russia. The wealthy oligarchs rule. That’s the ‘libertarian paradise’ the far right wing wants to bring to pass.

    Always, always, ALWAYS follow the money.

    1. How is the Galtian putsch supposed to work? A shutdown (either variant) will certainly be very unpopular, and will very probably be blamed on the GOP. It could transform the normal good expected Republican result in the midterms into a rout, with a guaranteed HRC presidency from 2016. The Kochs and Dimons know this from last time.

      The alternative and more plausible theory is the sorcerer´s apprentice. The plutocrats have conjured up a movement to serve their interests by electing diehard anti-tax fanatics to Congress. But it´s out of control. The fanatics hate other things as well, especially Obamacare, which has nothing to do with keeping tax low for the rich, and everything to do with giving blacks and Latinos and women and the young better public services. The fanatics are prepared to shut down the government and wreck the government´s credit to stop it succeeding. Neither are in the plutocrats´ interests. Even the WSJ is against the shutdown.

      1. James, I think the crux of the present situation is in your last sentence.

        The “rational plutocrats” like Mitt Romney have lost control of the party. Interview a thousand board members of the Fortune 500 corporations, and you’d be hard pressed to find more than a handful of Tea Party extremists. But the day seems to be long gone when a few Wall Street “big boys” could get together on a conference call to the Speaker of the House and tell him “You’ve got to get those looneys under control. They don’t understand how they’re wrecking the business we’ve worked so hard to build up.”

      2. The plutocrats and the fanatics are quite often the same people. The WSJ-types have created a monster, sure, but even they are still quite sympathetic to the monster. You won’t see the Journal calling for Ted Cruz to be defeated in an election, because Cruz isn’t proposing anything that the WJS isn’t at least a bit sympathetic do.

        You could write a book on this, and call it What’s the Matter with Kochs.

        But as with Thomas Frank’s book, any such book would give short shrift to peoples’ self-interest as they perceive it themselves. When the Kochs look in the mirror, they see patriots who are willing to take a financial hit if it might keep poor people from wrecking the country by receiving undeserved healthcare. The Kochs are willing to pay the price in the interest of economic justice.

  2. I’m very far from convinced that walling off debt payments (and SS) solves much.

    The problem is not the legal issue of default, but the market’s reaction to whatever happens. It seems to me that even putting the possibility of default in play is dangerous. Further, paying bondholders, but not meeting other obligations is pretty weak. The markets will wonder, rightly, whether next time around bondholders will get stiffed in favor of some other group.

    The whole notion that the willingness of the United States to meet its financial obligations, of whatever sort, can be sacrificed in a political dispute is very bad.

    1. I agree. But paying the interest looks as if it´s a legal priority under the 14th Amendment. I predict that if there´s a shutdown/default, Lew will say so. This could at least stop a panic and turn the financial side of the crisis into a slow-motion one. But watch for a big and fast drop in the Dow.

      FWIW, there are hints of a GOP cave-in. The price would be the opportunistic and cynical repeal of the medical device tax. Big Pharma and the hospitals must be seething at being left out of the pork.

  3. I think it has to be understood that the federal government routinely generates contingency plans for all sorts of low probability events, so as to be prepared when one of them happens. What I’m saying, and Jack agreed with me, is that not having a contingency plan for the debt ceiling not being raised was a choice. Kind of like conspicuously strapping explosives to the front bumper of your car going into a game of chicken, it’s a decision intended to raise the stakes.

    1. ¨Jack agreed with me.¨ Do you believe him? Are the explosives really wired to a detonator? Finance Ministers routinely lie about their intentions on market-sensitive matters. All devaluations are unthinkable until they are announced.

      1. James, do you really think that Obama could have a plan for dealing with reaching the debt ceiling, a plan, mind you, actually capable of implementation, and keep it a secret? If the plan were any more complex than, “Maximize the pain, and blame it all on the Republicans.” you’d have to have involved too many people, (Programming Treasury computers, for instance.)for that to be plausible. You’d know we had a plan, just like you know we have a plan for a shutdown.

        No, we don’t have a plan, and we don’t have a plan deliberately. It’s Obama’s debt crisis version of throwing the steering wheel out the window.

        1. I thought Mr. Bellmore was the world’s leading advocate of the theory that we should believe that people actually mean what they say? Perhaps President Obama really thinks that the debt ceiling is a meaningless arithmetical marker and really believes it is the responsibility of the House of Representatives to pass a continuing resolution funding the programs that have been signed into law over the last 30 years?

          Strangely, in this particular case, Mr. Bellmore believes it is not a matter of a person saying what he believes but of explosives strapped to bumpers, steering wheels thrown out windows, etc. I wonder what could be different in this situation, eh?

          Cranky

          1. I think the Republicans are right and Brett errs here. There is almost certainly room for negotiation.

            But I wish Brett were right. It will be insane to give in to this kind of blackmail, and the issue should, in fact, be non-negotiable. And if it’s non-negotiable, Obama should be communicating that fact as clearly as possible. The steering wheel should have been out the window a long time ago.

          2. Oh, it was, Cranky. I just think it’s hilarious to watch somebody throw the steering wheel out the window, and then pompously denounce the opposing driver for playing chicken.

            Perhaps if the Senate were actually bothering to generate budgets, we could have a debate over these things without having to go to the brink. But perhaps not, Reid seems determined to prevent any debate even if we ARE at the brink.

  4. Reid seems determined to prevent any debate even if we ARE at the brink.

    One is always tempted to respond by saying “even for Brett, this is ridiculous.”

    But okay, this probably isn’t any more ridiculous than any number of other things Brett says.

    For the record: The Senate hasn’t had any trouble debating and even voting. The hold-up is in the House, where Boehner is blocking a debate because he knows if it came to a vote, the nuts would lose.

    I just think it’s hilarious to watch somebody throw the steering wheel out the window, and then pompously denounce the opposing driver for playing chicken.

    Also very Brett-like in that it gets everything pretty much exactly wrong. Sane people wish we weren’t in this game of chicken, which was initiated by House Republicans. ‘Not playing’ simply isn’t an option. Given that fact, Obama should play to win. The steering wheel gambit (which, sadly, Obama has refused to employ) is the exact right move here.

  5. James: “But that can´t be quite right. The Treasury does have a way of shutting down half the government, the discretionary programmes; it already did so in 1995. There´s an interesting situation (in the sense of three of the four bomb interlocks going) question if mandatory programmes (≈60% of the budget) plus debt servicing (≈6%) are greater than the incoming tax receipts (≈68%), but it´s clearly close and maybe just manageable. Don´t tell me it´s impossible technically to wall off and meet the debt payments – you could do it at a pinch with handwritten cheques.”

    James, how many payments per day would there be? Are high volume, high liquidity markets capable of using handwritten checks?

    1. The debt is managed by the Bureau of the Public Debt, which has 1,987 employees. That´s a lot of cheque-writing capacity.
      In 1945 Britain and the US managed proportionately much larger debt with pens, typewriters and possibly hand calculators. In 1815, Britain managed the world´s all-time record debt burden (>250% of GDP) without the typewriters.

      The point´s moot anyway. Bruce Bartlett provides the nugget that the Bureau is a distinct agency with its own payment systems. There should be no technical difficulty in prioritising its calls on the central Treasury account. The problem, if you´ve paid attention, is that the calls are identified to Treasury by agency, not by purpose. Defence isn´t mandatory, but Health is mixed. But you could fix that (in the narrow sense of rearranging the deckchairs on the Titanic) with a daily conference call.

      1. Why go to the bother? Order the Treasury to issue bonds as necessary to fund lawfully passed obligations. Let the House try to impeach him.

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