Some Comments on the Debt Limit Impasse

This past weekend the Treasury, with assistance from the Federal Reserve, effectively ended discussion of the platinum coin proposal.  The idea was that Treasury could mint and deposit a large-denomination platinum coin (or coins) at the Fed in order to pay its bills if there were otherwise insufficient cash in the Treasury account at the Fed because of a debt limit impasse. The Treasury statement – “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit” – was awkwardly written as sometimes results when statements are negotiated. It was clear enough, though, and accomplished the desired purpose. 

The Treasury had to stop the speculation that it would mint a platinum coin. Resorting to such a coin could prolong the debt limit saga indefinitely, create calls for the President’s impeachment, make the U.S. look ridiculous and ungovernable, and, consequently, cause negative market reaction and adversely affect the economy.  

 

Also, while Treasury does have the power to create money by minting coins, this would be at a much higher order of magnitude than anything done since the creation of the Federal Reserve System in the early twentieth century. The Fed could offset the money injected into the banking system as Treasury spent the funds it acquired from minting a platinum coin by selling Treasury securities from its portfolio. In essence, the Fed would be selling Treasury securities to the public rather than the Treasury. The platinum coin scheme, though, would muddy the line, already considerably blurred, between monetary and fiscal policy. It is no surprise that the Fed would be opposed to the minting of platinum coin as a way to keep the government funded. 

The Treasury’s platinum coin statement and Administration statements indicating that there is no other option than for Congress to raise the debt limit signaled that the White House was going to play hardball with Congressional Republicans on this issue. Administration officials even went so far as to call Paul Krugman, who has been a proponent of the platinum coin option and has worried that the Administration would not be tough enough with the Congress, to reassure him that they were not going to negotiate on debt limit legislation. Krugman wrote on his blog:  “Meanwhile, I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.” 

The debt limit can be likened to a game of chicken.  Harvard Business School Professor Deepak Malhotra has a good explanation: 

“In the classic game of Chicken, two drivers on a crash course speed toward each other. The rules are simple: Whoever swerves first and avoids collision loses, and whoever is brave enough to stay the course wins. Of course, when both drivers stay the course, they collide and die. 

“Clearly, this is not a game for the faint-hearted. But bravado alone doesn't guarantee a win. Your opponent has to believe that you're gutsy enough to stay the course, or he may do the same until the very end. 

“How do you win at Chicken? One approach would be to talk tough beforehand. You might behave irrationally to suggest that you wouldn't swerve even to save your life. Once the game begins, however, your threat simply may not be credible. 

“Now consider this strategy: Once the cars are headed directly toward each other, you unscrew your steering wheel and throw it out the window, making sure that your opponent sees you do it. Foolish? So it would seem, but your threat is now entirely credible. You can't change course even if you wanted to. It's up to your opponent to decide whether to lose the game or die. The odds are in your favor.” 

Fortunately, there now seem to be some signs that the debt limit will be resolved without too much brinkmanship. Senior Republicans in the Congress know that, if the date when Treasury says it will run out of cash gets too close and no debt limit increase is in sight, Wall Street would be taking the shuttle down to Washington, DC and storming the Capitol. Republicans would be getting a lot of phone calls and visits from people they can't brush off saying that the world's financial markets and economy were being put at risk.  

Senior Republicans also know that they have more usable tools to pressure the Administration and Congressional Democrats on spending–the upcoming sequester and the need for some kind of continuing resolution to avoid a government shutdown. Prolonging a confrontation over the debt limit does not accomplish anything and hurts them politically.  

The wild card is some House Republicans. Boehner may have to violate the Hastert rule again. This unwritten, informal rule, named after former Speaker of the House Dennis Hastert, says that, when the Republicans are in the majority, their leadership should not bring to the floor for a vote a bill that does not have the support of the majority of the majority.  Boehner may have to let whatever debt limit increase mechanism Senator McConnell, the Administration, and Senate Democrats come up with to pass with a minority of the majority and Democratic votes. Boehner has already recently created two precedents for violating the Hastert rule.  He permitted the House to vote and pass the fiscal cliff deal and the Hurricane Sandy relief bill, though both passed with only a minority of the Republican conference voting in the affirmative. 

While the process may be messy and potentially nerve-wracking, the debt limit is most likely to be increased in time. There are, though, more problems that the Administration and Congress have to resolve in the coming months. The sequester is set to begin on March 1, and the current Continuing Resolution, which has substituted for year-long appropriation legislation, expires on March 27.  Negotiations in light of these looming deadlines will be difficult. A  government shutdown and severe, if ultimately temporary, cuts to some programs, including defense expenditures, are certainly possible.  None of this is a good harbinger of Washington’s ability to deal with important issues over the next two years. The disagreements are too strong, and the political climate, too virulent.