Thursday, January 10, 2013

New Debt Financing Scheme--Script

Since Congress can't get its act together and start a plan to solve the debt crisis, there have been a number of proposals about handling the issue.  We have heard about a platinum coin worth $1 trillion being deposited in the Treasury and a plan to issue an executive order to pay the bills, both are impossible and will never happen.  The latest is  issuing scrip for debt. This will be for payments such as Social Security.

The way scrip would work is that it would be created in exchange for the amount owed. The recipient could keep the instrument until the government had the money to pay the debt. However, if there was a need to get the money earlier, banks and, we assume, Wall Street, would purchase the instrument at a discount.  How large a discount would depend upon how soon it would be assumed that the government would be able to pay its bills.
Can you imagine a pensioner who would lose 10,15, or 35% of their benefits because the government could not pay him his monthly benefit? 

We will bet you that Congressmen/women, Senators and the President will get their pay and not have to accept the scrip! Nor will  Wall Street or the banks, they all will receive "real money."  It will only be the common people that this garbage will be dropped on!

Isn't it time that Congress get to work and solve the problem. It will require pain for all American's part, however, if it is not done the damage will be many times worse. However, plans like this scrip idea are foolish and only will put lipstick on the pig!

Conservative Tom




The Debt Ceiling’s Escape Hatch


Oliver Munday


  • FACEBOOK
  • TWITTER
  • GOOGLE+
  • SAVE
  • E-MAIL
  • SHARE
  • PRINT
  • REPRINTS

LOS ANGELES
Opinion Twitter Logo.

Connect With Us on Twitter

For Op-Ed, follow@nytopinion and to hear from the editorial page editor, Andrew Rosenthal, follow@andyrNYT.
Oliver Munday
THE fiscal cliff may have been avoided, but an even higher-stakes political standoff — this time, over thefederal debt ceiling — is just around the bend.
Congressional Republicans have said they will demand immense cuts to popular government programs in exchange for agreeing to raise the nation’s authorized borrowing limit of$16.4 trillion. The Treasury Department briefly nudged against that ceiling on Dec. 31, but used “extraordinary” financial measures to buy more time. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin.
So far, President Obama isn’t giving in. As he rightly said last week, he “will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed.”
But for the president’s tough talk to be credible, Congress and the country need to know before we reach the breach point — an event that could come as early as February — that he has a plausible plan to work around the debt ceiling.
There are no great options. Most of the ideas floated so far would either severely disrupt the public markets for Treasury debt or rely on a constitutional claim of executive authority so far-reaching that we would very likely spend the next two years locked in an impeachment fight.
Some have suggested, for instance, that the president could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations. But the Constitution is clear, and Mr. Obama agrees, that Congress alone has the power to authorize new borrowing.
Other supposed solutions — like the notion that the Treasury Department could create a$1 trillion dollar platinum coin and deposit it in its own account at the Federal Reserve — are even more fantastical.
However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.
The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.
To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.
Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.
The federal Anti-Assignment Act generally prohibits the transfer of claims against the United States from one private actor to another, but the government could waive the act’s application, which is what the president would do here.
The strategy may sound far-fetched, but it has been used before: in fact, California relied on it as recently as 2009.
Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.
Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the Legislature quickly worked out a budget deal and the scrip was then redeemed for cash.
Throughout the ordeal, California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.
A federal scrip program, importantly, would not explicitly challenge any constitutional allocation of powers. Nor would there be confusion in the marketplace between valid Treasury bonds and this new paper, which would have a different name, financial terms and legal status. And because the scrip would be transferable, claimants forced to accept it would be able to turn it into immediate cash in private markets, for as long as the Treasury was unable to issue new debt.
Would a federal scrip program be a painless way of resolving a debt ceiling crisis? Hardly. But it would be the least awful way to defang the most extortionate demands of Congressional hard-liners — and one that would not permanently damage America’s fiscal standing in the world.

Edward D. Kleinbard, a former chief of staff at the Congressional Joint Committee on Taxation, is a law professor at the University of Southern California.

7 comments:

  1. Ezra Klein has an interesting argument against the $1 trillion platinum coin…

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/10/mr-president-dont-mint-that-platinum-coin/

    From a strictly political perspective, the coin would shift attention from the House Republicans to Obama, which Obama can avoid just by refusing to give them what they want. On the other hand, the risks to our economy are incalculable if this were to go on for very long and panic the bond markets. It is a stupid, high-stakes game of "chicken", either way.

    No other country in the world has this dumb debt limit raising ritual. They just pay their bills when they are due. What most people don't understand is that raising the debt limit does not create any new spending. It just allows the Treasury to pay obligations already created by Congress and thereby avoid a downgrade on our country's trustworthiness to honor our debts.

    --David

    ReplyDelete

  2. David, we CAN pay all the interest on the debt with current cash flow without the debt limit. Your congress people cannot make the decision to cut spending which is the ONLY answer!

    I hope we shut the whole gd government down and our credit drops like a balloon, maybe that will get someone's attention on the problem. Unless something dramatic happens, we will continue down this path until a solution is forced on us.

    ReplyDelete
  3. They already made the decision to cut spending. It is the Budget Control Act passed by Congres and signed by Obama. Now, they just need to let it kick in rather than kick the can down the road again. You say you want to cut spending, but you don't support the BCA because the budget cuts are not exactly where you want them. What's more important? The BCA would help, but they also need to get about $1 trillion squeezed out of tax expenditures in order to get the deficit stabilized at 73% of GDP in 10 years. I don't see how defaulting accomplishes any of this. It just makes everything far worse.

    --David

    ReplyDelete
  4. BCA was stupid. It used a hammer to kill an ant. Instead of smart, responsible cuts; it was a a meat cleaver.

    ReplyDelete
  5. Yes, it is stupid, but it is a large spending cut, and with the Congress, probably the only way you are going to get the dollar level of spending cuts you say you want. If you truly believe the "ant" is soon going to turn into a monster and reduce the value of the dollar in a short time (like the hyper inflation predictions that come out every year!), then you should be eager to kill the ant now with the only tool that seems available, even if it is a cleaver. I think the downside of the BCA is much less than the politicians (both Republicans and Democrats) claim.

    --David


    ReplyDelete
  6. The government is doing everything in its power to prevent inflation. Reason--inflation causes interest rates to rise, causing the cost of paying the interest on our debt to rise, causing a much bigger problem with the budget.

    The problem with BCA is that it does not effect the major contributor to the budget problem--the social programs that have grown like topsy. It is dumb and meant to be a nuclear bomb for the politicians, but they seem unable to address any budget problem from a rational standpoint.

    Hell, you and I who come from different spots could come up with a budget, why can't they?

    ReplyDelete
  7. You write, "The problem with BCA is that it does not effect the major contributor to the budget problem--the social programs that have grown like topsy."

    No so. Half of the $1.2 trillion in spending cuts come from non-defense parts of the budget, including Medicare. You'd rather have no spending cuts than those in BCA, because you do not like the military cuts.

    I don't think you and I could come up with $1.2 deficit reduction package.
    I would want a lot of it from reducing tax expenditures and cut military spending. You reject those options. Instead, you would want nearly all of it to come out of Medicare, Medicaid, and Social Security by cutting benefits to recipients rather than cutting payments to providers (doctors, drug companies, hospitals, as happening in Obamacare). In short, we would end up at the same impasse as Congress.

    Indeed, we can't even agree on BCA. As I fiscal conservative, I will take what is on the table as the only package passed by Congress to get us $1.2 trillion in spending up. You won't take it because it doesn't put the cuts exactly where you want.

    --David

    ReplyDelete

Thanks for commenting. Your comments are needed for helping to improve the discussion.