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If Biden goes nuclear on the debt ceiling, there’s no going back

Apr 26, 2023

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With the summer deadline looming large to avoid a catastrophic default on U.S. debt, the White House and House Republicans are no closer to striking a deal. This week, the White House warned that President Joe Biden would veto a Republican proposal that would lift the debt ceiling into 2024 in exchange for cutting federal spending.

The Congressional Budget Office said Tuesday, April 25 that the Republican proposal would reduce budget deficits by about $4.8 trillion over the next 10 years if implemented. But Democrats have argued for a clean debt ceiling hike to avoid default, reminding Republicans they did so when former President Donald Trump was in office.

The Treasury Department is already taking extraordinary measures to stretch U.S. funds to the summer, now saying a debt default will occur sometime between July and September. Absent congressional bipartisanship to raise the $31.4 trillion debt ceiling before that time, the Treasury is in a tricky spot. But there may be legal options the executive branch can take that bypass Congress and the debt ceiling.

Conflicting constitutional obligations

The Treasury is legally obligated to make payments owed, from Social Security to military pay to debt interest payments. At the same time, Congress holds the power of the purse and orders that Treasury cannot borrow more than the body says to make the necessary payments. Without a debt ceiling hike, Treasury will have to break one of these two conflicting obligations.

“So from a kind of traditional perspective, they have to choose, quote-unquote, the least unconstitutional option,” said Nathan Tankus, research director for the Modern Money Network.

Tankus laid out three ways that Biden could “steamroll” Republicans on the debt ceiling. 

  • Treasury can break the debt ceiling, determining it is less unconstitutional than defaulting on debt.
  • Mint a platinum trillion-dollar coin, whereas Treasury has the authority to mint platinum coins in any denomination. 
  • Issue low-face-value, high-coupon bonds, a creative accounting proposal that could shuffle around finances.

Would the Fed play ball?

The Federal Reserve acts as the Treasury’s fiscal agent. Many have questioned whether the Fed, which attempts to maintain political independence from administrations, would even participate in some of these proposals. 

According to Tankus’ research, which takes him back to an October 2013 conference call with Fed officials, now-Fed Chair Jerome Powell’s comments when he was just a member of the board of governors indicate he would take extraordinary measures, albeit begrudgingly. 

Speaking on an idea of buying defaulted Treasury securities, Powell called the concept “loathsome.”

“But I don’t want to say today what I would and wouldn’t do, if we have to actually deal with a catastrophe on this,” he said.

Pressed by then-Fed Chair Ben Bernanke whether he’s willing to accept “loathsome” under certain circumstances, Powell said yes, though he noted the Fed should not publicly disclose what they’d be willing to do until the last minute because he feared it would take pressure off Congress to negotiate a debt ceiling rise. 

“They’re being coy because they see their role as essentially compelling Congress and the White House to negotiate with each other,” Tankus said. “They are worried that…they’re going to take steam out of this game of chicken between Republicans and Democrats, and that’s political. They want to stay out of it as much as possible, because they see their independence, their power, as determined by…having both parties think that they are not on, quote-unquote, one side or another.”

What happens if Biden goes nuclear?

A default at any level would be catastrophic for the U.S., certainly resulting in credit downgrades and likely soaring unemployment. Since 1960, elected representatives have acted on the debt ceiling 78 times to avoid default.

Should Biden take a nuclear option, it puts the idea of a debt limit into serious question.

“Anytime they use one of the nuclear options, unless those nuclear options are statutorily closed…it’s fundamentally an end to the debt ceiling crisis,” Tankus said. “And I think that’s a good thing. There’s no actual fiscal benefit that we’re getting through having these recurring debt ceiling crises. And when we want to argue about budget stuff, we should just argue about budget stuff and not have this other dishonest conversation, which involves hostage taking.”

House Republicans are still pursuing their legislation in hopes it’ll frame discussions with Democrats, even if it’s dead on arrival. House Speaker Kevin McCarthy (R-CA) said it was their responsibility to pass the bill and send it to the Senate. 

“Without exaggeration, American debt is a ticking time bomb that will detonate unless we take serious, responsible action,” McCarthy said at the New York Stock Exchange last week.

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Simone Del Rosario: The best course of action is for Congress to raise or suspend the debt ceiling, preferably well before the deadline, because the money’s already been spent, we have to pay the bills. But obviously, the two parties aren’t seeing eye to eye on a deal. And the closer we get to the deadline, the more we put the Treasury in a pretty troubling spot. The Treasury is legally obligated to make these payments. And at the same time, it’s being told it can’t borrow more than Congress says, to make the payments. So without a debt ceiling hike, in the simplest terms, Treasury is gonna break one of two rules. I want to bring in Nathan Tankus. He’s the research director for the Modern Money Network. And he recently wrote this op ed called Biden can steamroll Republicans on the debt ceiling. Nathan, what are some of the trick plays that the executive branch might have in its playbook if Democrats or Republicans don’t come to some type of agreement, and the country is at risk of default?

Nathan Tankus: Yeah. First of all, thanks for having me. The key ideas, I think, are these three essential ideas. One is the big picture idea, which I think I’ll start with, which plays off of what you were just saying that Congress has given from a certain point of view, the Treasury, the executive, these inconsistent orders, these inconsistent directives, and where they have to spend a certain amount, they’re only legally allowed to borrow a certain amount. So from a kind of traditional perspective, they have to choose quote, unquote, the least unconstitutional option. Simply just break the debt ceiling, it’s kind of simple to direct break the debt ceiling, debt ceiling is causing an unconstitutional crisis. So least unconstitutional, breaking it, you know, minting a trillion dollar coin, you can just create money. So that’s actually affirmatively constitutional. And so the debt ceiling is binding, you’re basically compelled to just create money, or, you know, let’s, you know, shuffle things around and lower the face value of the debt by issuing these tiny face value, high coupon bonds. And those are the kinds of the three essential proposals that are around

Simone Del Rosario: Creative accounting at its finest. You went back in the archives 2013, when Fed Chair Jerome Powell was just on the Board of Governors at the time, what did you learn from those old transcripts about the appetite that Powell might have today to do whatever it takes to avoid default?

Nathan Tankus: What I found in the archives, in this conference call in October 16 2013. Is Powell, very, very revealing comments from Powell and from other other people at the Fed on an issue that wasn’t exactly this issue, but I think is the closest standard we have to what Powell thinks and this is the issue of in the in the situation where the where the Treasury actually does default, with the Federal Reserve, by default to treasuries, for financial stability reasons this is a proposal in a memo that was written to the FOMC. The board that makes monetary policy decisions. And what’s so interesting is that the vast majority of people on the FOMC at the time including Powell, go along with it. Powell says he finds the idea loathsome. But Bernanke, then Chairman Bernanke, Beatles him and says, but you do loathsome sing sometimes. And he says, yes, the right circumstances. And to me, this changes the entire conversation that we’ve been having. Because it goes from a very, you know, kind of more speculative conversation about like, does the Fed understands, you know, its legal authority the way I do, which, you know, who knows, you know, at some level, you know, who cares what I think what this was, was the words of Fed officials, and Powell himself saying, not only that he would buy the defaulted Treasury securities, but that they shouldn’t announce that they’re willing to do that until the last moment. 

Simone Del Rosario: Let’s talk about that a little bit. Nathan, he, he mentions in the transcript that he even I think felt uncomfortable talking about it that much time in advance. And this is a conference call that wasn’t going to be released, it wasn’t like it was happening out in the public. But why do you think that Powell, the Fed and others are being so coy about these potential nuclear options that you’re talking about?

Nathan Tankus: They’re being coy, because they see their role as essentially compelling Congress in the White House to negotiate with each other. And from their point of view, compelling, this negotiation is being quote unquote, above politics, what they’re worried about, is, if they come out on one side or another, that that is politics, that is partisanship, but in their kind of internal institutional idea, they are worried that, oh, if we save, we’re gonna follow our legal obligation as a fiscal agent, for example, that they’re going to take the steam out of this game of chicken between Republicans and Democrats. And that’s political. They want to stay out of it as much as possible, because they see their independence, their power, as determined by as much as they possibly can do, having both parties think that they are not on quote, unquote, one side or another. 

Simone Del Rosario: What should Republicans take away from this?

Nathan Tankus: Um, well, that’s a very interesting question, because I’m actually not sure what Republicans should take away from it. Um, in my optimistic guys, I would say, Republicans should take the idea away from this, that they should get behind a clean debt ceiling, because the Biden administration is going to trump card them with these workarounds. And they should make it look like they negotiated a deal, rather than they, you know, huffed and puffed and got nowhere. But that’s just my optimistic moments in my more pessimistic moments, I think, well, the Biden administration is so concerned about the politics of this, they’re so concerned about see being seen unserious, or doing something dramatic, whether it’s the debt ceiling, whether it’s the coin, or even, you know, this kind of boring, obscure, low face value, high coupon bonds, but they’re worried that all these things are going to seem Quixotic and that it’s a political loser. And am I more pessimistic moments. And frankly, this is also from backchannels. I’ve heard from a number of kind of number of former Treasury officials about, you know, the state of the Biden administration’s thinking is that they see a game of chicken with Republicans as a political winner. And they see cutting off the game of chicken as only having political risks for them. I think their calculus in the politics is wrong. And more fundamentally, I think that in a kind of ironic sense, is putting partisanship over the the most fundamental issue, which is avoiding an unconstitutional default, avoiding Social Security checks, being a bridge in some way, and avoiding any sort of, you know, quote, unquote, payment prioritization, which is just a default by another name.

Simone Del Rosario: A default at any level would be catastrophic for the country, so let me ask you this, though, because this hasn’t been done before, if a nuclear option is taken this round, is at the end of the debt limit. I mean, how do you go back after that, and pretend that Congress raising the debt ceiling matters when you’ve utilized something in your back pocket like that?

Nathan Tankus: Yeah, I think that’s absolutely the case. I think anytime they use when even nuclear options, unless those nuclear options are statutorily closed, all of them, which still leaves the 14th amendment or the, you know, just breaking through the debt ceiling, because it’s the least unconstitutional option. I think, yeah, it’s fundamentally an end to the debt ceiling crisis. And I think that’s a good thing. I think that there’s no actual like, you know, fiscal benefit that we’re getting through having these recurring debt ceiling crises. And when we want to argue about budget stuff, we should just argue about budget stuff and not have this other dishonest conversation, which involves hostage taking.

Simone Del Rosario: Yeah, I think an important point for our listeners as always, that this is money that has already been allocated and spent. The Treasury is trying to pay the bills at this point. Congress has multiple opportunities to decide how much money they’re spending every single year, so we’ll leave it there. Nathan Tankus Research Director for the modern money network. He’s also got a newsletter that you can check out if you want more on his thoughts, notes on the crises. Nathan, thank you so much.

Nathan Tankus: Thank you for having me.

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