[HN Gopher] I Got the Fed to Release Its 2011 "Treasury Default"...
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I Got the Fed to Release Its 2011 "Treasury Default" Playbook
Author : e63f67dd-065b
Score : 100 points
Date : 2023-11-07 19:04 UTC (3 hours ago)
(HTM) web link (www.crisesnotes.com)
(TXT) w3m dump (www.crisesnotes.com)
| e63f67dd-065b wrote:
| The memo itself can be found here:
| https://www.federalreserve.gov/monetarypolicy/files/FOMC2011...
| function_seven wrote:
| For those more knowledgeable than me:
|
| How would it play out if the Treasury decided to ignore the debt-
| ceiling outright, and continue to service the national debt?
| Imagine a policy that says, "In accordance with the Fourteenth
| Amendment, we will continue to pay bondholders their due monies"
| or something like that.
|
| I don't think the 14th amendment gives the Treasury that power,
| but that's not what I'm asking. Imagine they decide to interpret
| it that way. The Supreme Court rules against them. They ignore
| the Court and continue to pay.
|
| What happens then?
|
| I guess what I'm getting at is: what is worse, a Constitutional
| Crisis? Or a default on our debt? To me it seems like the better
| outcome would be to ignore the Court altogether on this issue.
|
| (I'm sure I'm making naive assumptions in this questions. Let me
| know!)
| User23 wrote:
| The answer is already in the submission. They
| would gladly facilitate an option the Treasury pursues in its
| role as fiscal agent, since they can always claim that it was
| the Treasury's decision and they had no other option as fiscal
| agent (which happens to be true).
|
| The end result is the Federal Reserve would be forced to follow
| its unwritten 0th commandment: maintain the integrity of the
| payments system. As a consequence of that imperative it would
| be operationally forced to continue to ensure Treasury auctions
| and payments continued to go through. Presumably accounting
| gimmicks would be employed to avoid "technically" exceeding the
| debt ceiling, like simply allowing Treasury to overdraw. But at
| the end of the day there would be no constitutional crisis. At
| least not a forced one. Of course we shouldn't underestimate
| the power of stupidity so it can't be ruled out entirely.
| JumpCrisscross wrote:
| > _it would be operationally forced to continue to ensure
| Treasury auctions and payments continued to go through_
|
| The Fed can't buy debt directly from the Treasury [1].
|
| [1] https://www.federalreserve.gov/faqs/money_12851.htm
| candiddevmike wrote:
| Capital will never let either scenario occur. It's all just
| theatre. The US will never default on debt, it's a convenient
| negotiation tactic to waterdown more progressive legislation.
| Just like how there's always 1-2 democrats that just can't get
| behind progressive legislation.
| function_seven wrote:
| Yeah, I'm asking a hypothetical to see where it goes. Lots of
| things that would "never happen" seem to be happening, so I
| wouldn't be too sure of it.
|
| So, Treasury decides to punch through the debt ceiling. What
| happens next?
| joelthelion wrote:
| > Capital will never let either scenario occur. It's all just
| theatre. The US will never default on debt, it's a convenient
| negotiation tactic
|
| That's true until it isn't. I hope you're right, but I worry
| that you're probably overestimating our politicians. They're
| not all playing 5D poker. Some are just plain stupid.
| Eji1700 wrote:
| Yep. Maybe when this started it was theater, but more and
| more i'm wondering if we've got enough idiots who think
| they stand to gain from something like this. It won't be
| some shadowy cabal of actors trying to overthrow things,
| it'll just be a bunch of headline hunting lunatics who
| can't think past the next hour.
| ryandrake wrote:
| Yea it would be great if it was just stupidity, but we
| have elected officials actively working to sabotage and
| undermine the government and economy.
|
| Our system of checks and balances didn't really account
| for what happens when a sizable minority in government
| are bent in destroying it.
| friend_and_foe wrote:
| The US will absolutely default on it's debt eventually.
|
| The debt ceiling debates every year are certainly theater
| though.
| topspin wrote:
| The US can supply whatever amount of money is necessary to
| service any conceivable amount of debt. The US absolutely
| will debase its currency into toilet paper, but default is
| not a certitude.
|
| And it's not theater. When these debates occur the
| legislature is forcing the executive to face taking
| extraordinary steps. That's leverage used to negotiate
| budget deals.
| immibis wrote:
| The Federal Reserve can choose to print the money the
| Government spent. They're not the same entity and they
| don't have the same goals. If the Government spent the
| money and the Federal Reserve doesn't want to print it,
| that's uncharted territory.
| topspin wrote:
| > that's uncharted territory
|
| Thus, the "extraordinary steps" I mentioned. Some have
| argued the executive has the authority to do any
| conceivable thing necessary to ensure that the "validity
| of the public debt ... shall not be questioned," to
| include ordering the Fed to honor Treasury overdrafts.
|
| Another extraordinary step by the Treasury would be
| minting legal tender and depositing it with the Fed. The
| so called "trillion dollar coin" scheme.
|
| At the end of the day they'll do what they have to do.
| This story makes it very clear that the Fed is not
| interested in becoming the political target over US
| default, so don't imagine they're going to take some
| heroic stand.
| JumpCrisscross wrote:
| > _include ordering the Fed to honor Treasury overdrafts_
|
| The Treasury hasn't come close to proposing over
| drafting. It would sell Treasuries and then have cash. If
| that became problematic, it would mint. The Fed cannot,
| by law, lend money to the Treasury. It can't even
| purchase Treasuries from them directly.
| function_seven wrote:
| Then mint it instead?
|
| https://en.wikipedia.org/wiki/Trillion-dollar_coin
| JumpCrisscross wrote:
| > _If the Government spent the money and the Federal
| Reserve doesn 't want to print it_
|
| What does this mean? Even if a Treasury auction fails,
| the Treasury has the power to mint currency. It could
| literally just deposit paper representing the $200bn of
| gold at Fort Knox and have money in its Fed account.
| immibis wrote:
| Also uncharted territory. So far, that's never been
| tried.
| JumpCrisscross wrote:
| > _Also uncharted territory. So far, that 's never been
| tried._
|
| Minting is more precedented than the Fed. Functionally
| doing this is trivial. It's legally asserting the
| supremacy of the 14th Amendment over the Public Debt
| Acts.
| rufus_foreman wrote:
| >> The US will never default on debt
|
| The US has defaulted on its debt several times.
|
| For example FDR defaulted on the debt when he refused to pay
| back bonds denominated in gold with their face value and
| instead paid them back in devalued currency. The Supreme
| Court ruled that he had acted unconstitutionally, but also
| did not force the government to pay back the full value as
| FDR had said he would ignore such a ruling.
| sanderjd wrote:
| This is why the Supreme Court wouldn't rule against this. It's
| a game of chicken, but it's very important to the Court to
| never make a decision that simply can't be executed by the
| elected branches. And the individual human beings on the Court
| know this and enough of them would find some rationalization
| they could live with to avoid such a ruling.
| function_seven wrote:
| I think you're right. If I'm sitting on the court, I might
| accept whatever flimsy loophole the Executive Branch
| provides, and say, "Congress is free to clarify their
| intentions at any time to resolve this impasse".
|
| Now the ball is in the House's court. Are they going to vote
| to _positively_ default? (Rather than passively not act
| before some deadline, like how they do it now?) I bet not.
| fnordpiglet wrote:
| Given the 14th amendment exists and its purpose was in fact
| to assure the treasury would always pay its debts and the
| constitution overrides any law, it wouldn't be a very
| flimsy loophole to say congress would need to clarify
| possible up to and including an amendment. The debt ceiling
| isn't specifically about paying debts but about authorizing
| new borrowing. So while the treasury may not be able to
| legally issue debt to pay existing debt, it would be
| required to pay debt. This is of course the starve the
| beast goal of the debt ceiling to force spending cuts to
| pay the debt by making the debt payment so vast that the
| federal government would become a shadow of itself in that
| eventuality. However since the law has never been contested
| it's not clear it would work.
|
| But the treasury of course has many other ways of paying
| debts, including simply issuing currency. Even if the 14th
| amendment doesn't invalidate the debt ceiling, the treasury
| still must pay the debts, and doesn't have to do so by
| cutting spending. It would however be more orderly and
| strictly better for everyone if the 14th amendment did
| invalidate the debt ceiling in a situation that questioned
| the treasuries ability to make whole debts without
| resorting to disruptive measures.
| immibis wrote:
| The 14th amendment doesn't say the Treasury must always
| pay its debts. It says everyone has to act as if the
| Treasury will always pay its debts. It could default
| tomorrow, and you'd be constitutionally required to
| accept T-bills at face value anyway.
| jjeaff wrote:
| "The validity of the public debt of the United States,
| authorized by law, including debts incurred for payment
| of pensions and bounties for services in suppressing
| insurrection or rebellion, shall not be questioned."
|
| It is strangely worded, but I think it could be
| interpreted to also mean that the government shall not do
| anything that would call the validity of the debt into
| question.
|
| It doesn't really make sense to pass an amendment that
| tries to mandate the perception of the validity of the
| debt. if the government stops honoring it, then the
| invisible hand of the market will consider it invalid.
| immibis wrote:
| That would be a reach. The non-reaching interpretation is
| the face value one: the validity of the public debt ...
| shall not be questioned. It's hardly the most anti-market
| law around - the US has farm subsidies, and some
| countries even have price controls.
| eli wrote:
| I don't think that's a reach. There's a credible argument
| that it _compels_ the President to continue to service
| debts
| SilasX wrote:
| On my latest re-reading of it in your comment, it sounds
| more like it's saying, "shut up, you lost, the measures
| taken to suppress your rebellion are valid, move the frak
| on".
| dragonwriter wrote:
| > I think you're right. If I'm sitting on the court, I
| might accept whatever flimsy loophole the Executive Branch
| provides, and say, "Congress is free to clarify their
| intentions at any time to resolve this impasse".
|
| See, that's why you aren't on the Court.
|
| What the kind of people that actually get put on the Court
| would mostly due to allow the action without endorsing its
| legality would be:
|
| (1) Be sticklers about standing and other threshold issues
| (ripeness, mootness, etc, but standing is the big and most
| useful one here); almost no litigant other than Congress
| acting as a whole will have the kind of particularized
| injury to allege that would give them standing to challenge
| _paying_ the debt (an actual creditor might have standing
| the other way, but that 's not the scenario we're concerned
| with.)
|
| (2) If you _really_ can't kick the case for standing or
| other threshold issues (well, first, _amateur_ , but...)
| then invoke the "political question doctrine" to avoid it
| anyway.
| xwdv wrote:
| If there's anything I've learned in the past decade is that
| way, way too much of our government relies on people in power
| being rational actors with good intentions.
|
| If they wanted to raise hell they could simply make the worst
| decision and there's nothing that can be done about it.
| sanderjd wrote:
| Governments, like societies in general, are just
| aggregations of human beings. No facade of legalisms can
| ever fully overcome that fundamental truism.
| omginternets wrote:
| I've always thought of it as an attempt to engineer peer-
| pressure. Build institutions that recruit like-minded
| people in the hopes that when faced with tremendous
| pressure, the group can force individuals to fall in line
| around a predetermined principle.
| HDThoreaun wrote:
| The justices put a ton of effort into maintaining the courts
| legitimacy. A large part of that is not making decisions that
| the vast majority of the country disagrees with, even if
| there's no real legal reason to do so. I think this would be
| one of those situations.
| eli wrote:
| Some of the justices seem to care somewhat about what people
| think of them. Some don't seem to care much at all. In
| general I don't agree that the court puts that much effort
| into appearing legitimate.
| callalex wrote:
| If the Supreme Court cared at all about appearing legitimate,
| they would have made the effort to remove Justice Thomas, who
| keeps taking outright bribes in order to influence his
| decisions, and the public is completely aware of it with
| documented proof.
| Eji1700 wrote:
| You have very different definitions of "the public" and I
| promise you that yours is a hell of a lot smaller.
|
| People who are aware of who Justice Thomas even IS would
| still be a vastly smaller circle than the number of people
| who would be affected and have very strong opinions on a US
| default (although not until it happens).
| niceice wrote:
| Missing context:
|
| Supreme Court Justice Clarence Thomas has been friends with
| Dallas billionaire Harlan Crow for 27 years. Crow said that
| he and his wife have been friends with Thomas and his wife
| Ginni since 1996.
|
| Is there proof they were bribes as opposed to the innocent
| explanation that they are just family friends, and it's not
| unusual for billionaires to offer a free ride to their non-
| billionaire friends on vacation?
| HDThoreaun wrote:
| Thomas joined the court in 1991, so I'm not sure that the
| 1996 friendship date helps him much.
| kurthr wrote:
| Giving and forgiving a $200k loan, buying his mom's house
| (while still allowing her to live there free for over a
| decade), and paying for his kids private schooling while
| you have cases in front of a justice has the appearance
| of impropriety.
| bugglebeetle wrote:
| This seems so far from the present-day reality that I don't
| know where to begin. Thomas is demonstrably taking bribes.
| Kavanaugh had a large amount of debt he claimed was from
| "baseball tickets" that just magically disappeared. Cony-
| Barrett is part of a cult. Meanwhile, the court is making
| wildly unpopular decisions left and right and openly states
| no one can hold them to account for anything they do or say,
| on or off the bench. They have zero legitimacy.
| HDThoreaun wrote:
| The public plainly does not care about the bribes. Their
| decisions have been unpopular, but not wildly so. The
| courts approval rating is sitting at 40% which is probably
| fine. The issue is when it starts approaching single
| digits.
| PeterisP wrote:
| For starters, the supreme court would not do anything until
| (unless!) someone challenges the treasury ruling, and there
| would inevitably be some nontrivial time gap between the two
| sentences in your scenario of "Imagine they decide to interpret
| it that way. The Supreme Court rules against them." during
| which they would pay out the funds.
|
| But after a binding ruling is issued, I'd assume there would be
| personal sanctions, liability and likely criminal charges
| against any individuals involved in defying that decision.
| eli wrote:
| That seems like a dodge. There is always someone willing to
| challenge anything the federal government does. It would be
| entirely up to the Court how quickly they'd want to hear the
| case. It could be immediate if they want.
| ndriscoll wrote:
| > I'd assume there would be personal sanctions, liability and
| likely criminal charges against any individuals involved in
| defying that decision.
|
| The president would almost certainly not want to take
| responsibility for the resulting economic implosion, and
| would order the executive to ignore the court ruling. Then it
| comes down to a mix of loyalties and individuals' beliefs
| around what would cause the least damage.
|
| It's far more likely that a ruling like that would be the end
| of the court's power.
| ProjectArcturis wrote:
| Yes, in practice a ruling like this might remind everyone
| that there is no clause in the Constitution giving the
| Supreme Court the power to review the other branches'
| actions. They grabbed that power themselves in Marbury v
| Madison.
| wolverine876 wrote:
| > But after a binding ruling is issued, I'd assume there
| would be personal sanctions, liability and likely criminal
| charges against any individuals involved in defying that
| decision.
|
| That's not accurate:
|
| Power in the US government is of course separated between the
| legislative, executive, and judicial branches, and each has
| checks and balances on the other two.
|
| One check the executive has on the judicial is to ignore its
| rulings. The executive can't do it all the time, obviously,
| and afaik the US also generally embraces 'judicial
| supremacy', the idea that the judicial branch generally gets
| the last word. Also, I don't recall the judiciary sanctioning
| indiviuals in the executive branch, but I could be wrong
| [Edit: of course I'm wrong, see below]. I would guess they've
| never sanctioned a president.
|
| Perhaps the most famous use of this power was in Worcester v.
| Georgia; when his favored side lost the case, President
| Andrew Jackson reputedly said, "[Chief Justice] John Marshall
| has made his decision; now let him enforce it." (Inspiring
| rhetoric, but it led eventually to Native Americans having
| their land stolen and many being marched to their deaths.)
| JumpCrisscross wrote:
| > _I don 't recall the judiciary sanctioning indiviuals in
| the executive branch_
|
| Every time someone in the executive has been held in
| contempt of court in relation to (but usually exceeding)
| their official duties, the judiciary sanctioned individuals
| in the executive branch.
|
| That said, the President could pardon everyone involved.
| wolverine876 wrote:
| That's right. Somehow I wasn't thinking of it.
| tonyarkles wrote:
| Presumably "contempt of court" would apply here, which could
| definitely be applied to the individuals running the bank.
| eli wrote:
| So would the President's pardon power
| bbsm_777 wrote:
| I think the Supreme Court might rule that the new debt issued
| when the debt ceiling was exceeded was not valid. The most
| likely way this could happen is if a new administration refused
| to pay the obligations due on bonds issued in excess to
| government appropriations. Typically the 14th amendment would
| actually be seen as requiring the payment of this debt, but if
| someone challenged the non-payment the Supreme Court could rule
| the debt was not issued in compliance with law.
| jfengel wrote:
| There is an additional player, the Federal Reserve. The
| Treasury can write a check, but that check is to be drawn
| against an account in an actual bank -- ordinary commercial
| banks. Those banks have to follow the rules of banking and
| can't just honor checks because they're the government.
|
| So in the scenario you describe, the Treasury writes checks,
| and they bounce. That would be... bad.
|
| The Treasury would have to collude with the Fed. Something
| like, the Treasury sells some bonds to the Fed, and the Fed
| buys them, putting the money into the Fed account. That's
| illegal, because Congress didn't authorize it, and they try to
| put the Treasury secretary in jail.
|
| The Supreme Court says "We have no idea what's going on, this
| is up to you jackasses. Go legislate something." A whole bunch
| of stuff happens, but it all comes down to DC in flames and the
| country gives up.
| JumpCrisscross wrote:
| > _Treasury can write a check, but that check is to be drawn
| against an account in an actual bank -- ordinary commercial
| banks_
|
| The Treasury banks with commercial banks, but it also has an
| account at Fed. That said, banks aren't legally obligated to
| accept its cheques.
|
| > _an additional player, the Federal Reserve_
|
| That's what this memo describes [1]. In essence, the Fed says
| it will defer to the Treasury on whether debt is legally
| issued.
|
| > _Treasury sells some bonds to the Fed_
|
| The Fed can't do that [2]. What they can do is announce to
| the market that they won't treat post-ceiling debt
| differently from pre-ceiling debt. That's what this memo
| says.
|
| It may not be able to continue doing that if _e.g._ SCOTUS
| rules Treasury exceeded its authority. But at that point, the
| Treasury could start testing its minting power.
|
| In summary, the Fed isn't a player in the legal part of this
| game.
|
| [1] https://www.federalreserve.gov/monetarypolicy/files/FOMC2
| 011...
|
| [2] https://www.federalreserve.gov/faqs/money_12851.htm
| function_seven wrote:
| This is a piece I was missing in my hypothesizing. It didn't
| even occur to me that Treasury needs the Fed in order to
| transact in this way.
|
| I kept thinking about the Fed doing maneuvers as "one
| possible path", and the Treasury doing maneuvers as "another
| path", but they're kinda the same.
|
| Thanks.
| dragonwriter wrote:
| > The Treasury can write a check,
|
| Why write a check?
|
| https://en.m.wikipedia.org/wiki/Trillion-dollar_coin
| pdonis wrote:
| _> How would it play out if the Treasury decided to ignore the
| debt-ceiling outright, and continue to service the national
| debt?_
|
| As the article notes, the Treasury already does things to
| circumvent the debt ceiling, and nobody cares. The article is
| just discussing further things that the Fed could do to help
| the Treasury circumvent the debt ceiling if necessary.
|
| In other words, I don't think the debt ceiling issue will ever
| trigger a Constitutional crisis. (Unless, of course, you think,
| not unreasonably, that all this circumventing of laws passed by
| Congress already _is_ such a crisis, but that 's a whole other
| discussion.)
| JumpCrisscross wrote:
| > _article is just discussing further things that the Fed
| could do to help the Treasury circumvent the debt ceiling if
| necessary_
|
| Not even that. The Fed is saying they'll defer to the
| Treasury on whether debt is legally issued. (Presumably,
| until SCOTUS rules on it.)
| pdonis wrote:
| _> The Fed is saying they 'll defer to the Treasury on
| whether debt is legally issued._
|
| Yes, while the Fed continues to do various things behind
| the scenes to make sure that the Treasury can plausibly
| claim that the debt _is_ legally issued.
| JumpCrisscross wrote:
| > _while the Fed continues to do various things behind
| the scenes to make sure that the Treasury can plausibly
| claim that the debt is legally issued_
|
| What are you hinting at? The Fed doesn't decide on
| whether debt is legally issued. It also cannot overrule
| Treasury absent a court order. It's saying that, absent
| court advice, if the Treasury issues debt it will treat
| it like any other. There is nothing behind the scenes
| they need to do beyond announcing they'll treat them
| equivalently.
| kaonashi wrote:
| sounds like an eminently responsible response to potential
| political sabotage of the economy
| PKop wrote:
| But it certainly doesn't sound like democracy
| JumpCrisscross wrote:
| > _it certainly doesn 't sound like democracy_
|
| The Constitution is a democratically-formed device, and the
| Constitution contains the 14th Amendment.
| PKop wrote:
| What does this have to do with the Federal Reserve
| subverting the will of elected representatives? If we're
| talking about the 14th amendment, we're not talking about
| the Fed sua sponte-ing some action.
| pdonis wrote:
| _> the Federal Reserve subverting the will of elected
| representatives?_
|
| It isn't. The Federal Reserve Act, passed by Congress and
| signed by the President in 1913, allows the Fed to do all
| the things it does.
| eli wrote:
| Neither does the debt ceiling, especially when it can be
| obstructed by a small minority.
| hospitalJail wrote:
| Literally someone is going to be 'too big to fail' and cause this
| to happen.
|
| We all know how to catch this falling knife, the problem is that
| you basically uproot the Rule of Law to do it. After that you are
| going to have a disgruntled population angry that someone didn't
| have to play by the rules and we picked up the pieces.
|
| We get some Band-Aid legislation that says 'this will never
| happen again'. Sometimes it does happen again.
| immibis wrote:
| It's going to happen again. The government already made a lot
| of entities that are too big to fail.
| dools wrote:
| As Mosler has maintained for many years "Government Checks Don't
| Bounce"
|
| https://moslereconomics.com/mandatory-readings/innocent-frau...
| socketcluster wrote:
| So basically they've been printing money and giving it to
| institutions who serviced reckless people who took on debts that
| they could not afford and did not repay. Guess who ended up
| paying for that? Every decent person who did the right thing; tax
| payers, salary earners (through devaluation of their salary
| contracts via inflation), those who did pay back their debts.
|
| Then you wonder how all these reckless people ended up in
| positions of power.
| MuffinFlavored wrote:
| What purpose does calling this out gain? What changes after
| you've made this statement?
| NoraCodes wrote:
| This isn't the standard to which comments on this website are
| held, generally; why does this one bother you?
| JumpCrisscross wrote:
| > _they 've been printing money and giving it to institutions_
|
| Who is "they"? The Treasury?
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(page generated 2023-11-07 23:00 UTC)