Thursday, October 03, 2013

GOP actually tried to shield bondholders from debt default; quietly, experts look at possible presidential XO to get past any defaul

The newspapers are discussing US default a lot this morning, and most of all, the Wall Street Journal leads off its editorial page with “Dancing With Default”, link 

 I had forgotten that Tom McClintock and  Pat Toomey had sponsored a Full Faith and Credit Act in 2011, during the debt ceiling fight in 2011.

What that bill would have done is guarantee that the Treasury can always the money to pay bondholders first.  It’s possible for the Treasury to fail to pay contractors or employees or other beneficiaries, but at least the world financial markets will not be damaged.  The harm to individuals and particular businesses then become the moral responsibility of politicians. Imagine the lectures on “social capital”, the “natural family” and interdependence that would follow.

That is, of course, the rub.  Obviously Social Security comes to mind.  But the Social Security Trust Fund is technically a bond holder.  Even without specific authorization in the law, the Fund could probably litigate to get paid.  But indirectly, at least, this brings up the issue of means testing, and there are ways that benefits for some better-off recipients could end forever.  But it is the status of entitlements under this law (like Medicare doctors getting paid, and the like) that led the Democrats to balk. 

However, the New York Times ran a primer in the Business Day page today (Thursday, October 3, 2013), “Wall Street Fears Go Beyond Shutdown”, by Nelson D. Schwartz and Charlie Savage, link here. The legality of a presidential fiat to borrow under the 14th Amendment or mint a platinum coin is conceivable but dubious.  The article compared Obama’s refusal to discuss it (but holding it in quite reserve) to a gambit opening in chess, maybe like the Benko Gambit where the player of “Black” has permanent pressure for a sacrificed pawn.  Or maybe it’s more like a baseball manager’s possibility of calling a suicide squeeze play in the bottom of the ninth inning to tie a game.  The Post has some analysis based on a letter by Treasury Secretary Lew here.  


There’s another practical consideration, that even if the president avoids default with some sort of emergency executive order, the rest of the world could refuse to continue accepting the dollar, according to some like Porter Stansberry.
  
In any case President Obama gave another speech at a Maryland construction site this morning and discussed his hard line on the debt ceiling and on “ransom”, link   Obama, without mentioning the Hastert Rule, urged Boehner to call and up-down vote right now on re-opening the government and upping the debt ceiling.  

Ezra Klein of the Washington Post wrote t   oday that the 2013 crisis is more dangerous than 2011 because there is no way for a game to be drawn (Wonkblog link is here ).  Either the Democrats or the Republicans flat out lose.  It’s rather like sudden death in pro football, where a field goal wins in overtime (unless it is on the first possession after kickoff).
  
In the diagram below, White loses if it is his move (that’s like the 2013 crisis), because Black has the opposition in this King-and Pawn ending.  If it is Black’s move, it’s a draw (like 2011).  It seems as though the Dems have the opposition, and the GOP is in zugzwang.  But it won't resign the game without financial violence.  "We won, they lost."    
    
Another complication is what happens to the Speaker Boehner once he disregards the Hastert Rule. Maybe he is forced to resign.  The math does not support a Tea Party hardliner getting elected speaker.  There are about 80 of them out of 232 Republicans.  .  

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