Photo: Images_of_money on Flickr
Edward Kleinbard, the former chief of staff at the Congressional Joint Committee on Taxation, is out this morning with a new way President Barack Obama could work around the debt ceiling if Congress does not raise it in the coming weeks.The idea, which Kleinbard describes in The New York Times, is simple enough: Obama would, in effect, give out “IOUs” to existing claims holders like federal employees, defence contractors, Medicare service providers, and Social Security recipients.
He should threaten to issue scrip — “registered warrants” — to existing claims holders. […]
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.
Kleinbard says that the unusual strategy has precedent — at least on a state level. In the midst of its 2009 budget crisis, California issued 450,000 IOUs worth $2.6 billion. The IOUs gave the negotiating parties wiggle room but forced a somewhat quick deal, and they prevented California from taking a hit on its credit.
Of course, there’s been no precedent on a federal level, and there’s no telling how it would go over with markets.
To make it work, Obama would have to waive the federal Anti-Assignment Act, which bans the transfer of claims against the United States from one private actor to another.
The idea has also been advanced by Paul Krugman, who termed the IOUs “Moral Obligation Coupons” instead. Krugman wrote Monday that the Treasury could sell the coupons redeemable at face value in one year.
As for the trillion-dollar coin? Kleinbard calls it a “fantastical idea.”
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