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The Constitution and National Security Trump the Debt Limit

01 May 2011
Posted by Bruce Bartlett
The vast majority of those commenting on raising the federal debt limit are certain that Congress will act in time to forestall a debt default, which would occur if the Treasury lacked sufficient cash to pay interest due that day or to redeem maturing securities. The smart money says that Congress could not possibly be so stupid as to permit a default and will raise the debt limit just in time.
 
I disagree with this view. I think there are enough members of Congress who really are that stupid. Over the last several weeks, a number of Republican congressmen have said that they will not vote to raise the debt limit under any circumstances. Some Republican senators have promised a filibuster against a debt limit increase should it pass the House. And Tea Party spokesmen have promised strenuous primary opposition for any Republican voting for a debt limit increase. Personally, I would not want to be a Republican running against a Tea Party member for the party nomination when I could be accused of supporting President Obama to increase the national debt.
 
The Republican leadership is looking for a way to get just enough Republicans to join with Democrats to raise the debt limit by attaching some sort of budget cutting package or mechanism, such as a balanced budget amendment to the Constitution, that would get the necessary votes. These negotiations will be protracted and any measure that attracted Republican votes would likely lose Democratic votes. It’s not clear to me that there is any way under current political circumstances of devising a budget package that could be appended to the debt limit that would get sufficient votes for passage before a default occurs.
 
Some Wall Street types are predicting a financial apocalypse in the event of default. But there is no evidence that this has moved Republican hardliners one inch. They heard similar warnings about financial apocalypse in the fall of 2008, leading to passage of TARP, the Troubled Asset Relief Program, which rescued many banks and prevented a meltdown in the banking system. Although most economists believe that TARP was essential and that the economy would be far worse off had it not been enacted, there’s not a single Republican who will defend it. Republicans universally believe TARP was an unjustified bailout for fat-cat bankers that was a horrible mistake and set a dreadful precedent.
 
More recently, many Republicans were cajoled into voting for the fiscal 2011 appropriation because it contained $38 billion in spending cuts and because their leaders predicted political doom if the government were forced to shut down. Subsequent analysis, however, showed that only a trivial amount of spending was actually cut by the deal, leaving many Republicans to believe they were sold out by their leaders. They are determined to make sure it doesn’t happen again.
 
Given this experience, Republicans are disinclined to believe apocalyptic rhetoric about the consequences of defaulting on the debt. Indeed, some say they welcome it. Whatever pain is caused will be temporary, but the benefits of using such a crisis to slash government spending for the poor and elderly will be worth it, they say.
 
Personally, I think Republicans are playing not just with fire, but the financial equivalent of nuclear weapons. Perhaps at one time when the federal debt was owned entirely by Americans we could afford to take a chance on debt default because the consequences would only be internal. But today, more than half of the privately held public debt is owed to foreigners; the Chinese alone own more than $1.1 trillion of Treasury securities. Moreover, many countries use Treasury securities as backing for their own currencies. Thus the impact of default would be felt internationally, disrupting finances and economic policies throughout Asia, Europe and Latin America.
 
Therefore, a potential debt default is far more than a domestic consideration; it is a matter of foreign policy. This is why Secretary of State Hillary Clinton and Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, have been warning for some time that the public debt represents an important threat to national security. As attorney Thomas Geoghegan recently put it, “Where the validity of the debt is concerned, our national security is at stake.”
 
This being the case, I believe that the president would be justified in taking extreme actions to protect against a debt default. In the event that congressional irresponsibility makes default impossible to avoid, I think he should order the secretary of the Treasury to simply disregard the debt limit and sell whatever securities are necessary to raise cash to pay the nation’s debts. They are protected by the full faith and credit of the United States and preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war.
 
Furthermore, it’s worth remembering that the debt limit is statutory law, which is trumped by the Constitution and there is a little known provision that relates to this issue. Section 4 of the 14th Amendment says, “The validity of the public debt of the United States…shall not be questioned.” This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting.
 
Some will raise a concern that potential buyers of Treasury securities may be scared off by a fear that bonds sold over the debt limit may not be backed by the full faith and credit of the United States. However, given that the vast bulk of Treasury securities are 3-month bills that will turn over many, many times before this issue ever reaches the Supreme Court, it is doubtful than anyone will be concerned about that. And the Federal Reserve could assure investors that it will always be a buyer for such securities.
 
People smarter than I am tell me that the Treasury has an almost infinite ability to avoid a debt crisis. I hope they are right. But I am hypothesizing a situation in which the Treasury reaches the end of its rope and a day comes when it needs $X billion to pay interest and it has less than $X billion in cash. Under those circumstances, when default is the only possible alternative, I believe that the president and the Treasury secretary would be justified in taking extraordinary action to prevent it, even if it means violating the debt limit.
 
Constitutional history is replete with examples where presidents justified extraordinary actions by extraordinary circumstances. During the George W. Bush administration many Republicans defended the most expansive possible reading of the president’s powers, especially concerning national security. Since default on the debt would clearly have dire consequences for our relations with China, Japan and other large holders of Treasury securities, it’s hard to see how defenders of Bush’s policies would now say the president must stand by and do nothing when a debt default poses an imminent national security threat.
 
Given that the Supreme Court in recent years has been unusually deferential to executive prerogatives – in large part due to Republican appointees such as Chief Justice John Roberts and Justice Samuel Alito – I feel certain President Obama would be on firm constitutional ground should he challenge the debt limit in order to prevent a debt default. Should the Court rule in his favor, the debt limit would effectively become a dead letter. Is that really the outcome Republicans want from a debt limit showdown?
 
Addendum
 

Just as I was finishing this article, I discovered that University of Baltimore law professor Garrett Epps had pretty much the same idea. I have been unable to find any serious analysis of Section 4 of the 14th Amendment other than the discussion in Perry vs. United States (1935). If readers know of anything else, please post it in the comments.

An earlier version of this article appeared in The Fiscal Times on April 29.

Do I win something for

Do I win something for pointing out the 14th Amendment in an April 23 comment to your blog?


Reserve currency status

I don't know much about China's options, but I believe default would further jeopardize the dollar's status as reserve currency around the world. Trust in US dollar would be completely lost.


OK, I'll talk to my rep

I'm calling my rep (Michele Bachmann), who is promoting default, to tell her that the ensuing loss of confidence in the dollar would threaten reserve currency status.

Problem is, Bachmann learned how to play checkers, not chess. She can't think about
things like unintended consequences, because her brain can't grasp anything beyond the
next move.


The response

Bachmann will only vote to raise the debt ceiling if Congress repeals the Obama healthcare law.

She's on a fool's errand. Does she think Obama will agree to repeal his centerpiece program after he spent so much political capital on it? Does she think he's stupid?

*Beats head against wall*

I can't believe this is my representative. Honest, we aren't all this dumb in Minnesota . . .


I agree

I agree with you, i can't believe this.

But don't forget, many states are in the sames situation..

grossesse
lagrossesse est un des moment les plus beaux de votre vie de femme

Don't rely on the 14th -- it didn't stop the last two defaults

The 14th amendment does nothing to bar a debt default. This has already been to the Supreme Court twice.

A debt being deemed "valid and unquestioned" in no way prevents it from being restructured, see General Motors.

"Default" on a debt occurs when payment on it is delayed or restructured unilaterally by the debtor.

The US has defaulted on its debt multiple times: in 1790 when it couldn't pay; in the Civil War era and after, when debt explicity required to be repaid in "coin money" was repaid in inflated greenbacks; in 1933 when the govt refused to rpay debt explicitly required to be paid in gold, but again used fiat money instead, and arguably again when Nixon closed the gold window in 1971.

None of these defaults were deemed unconstitutional. Well, the "greenbacks" one was initially, but on the *same day* that the Supreme Court ruled so Grant appointed two new Justices who promptly voted to reconsider and reverse. See the "Legal Tender Cases".

The 1933 refusal to pay debt went to the Supreme Court too, in the "Gold Clause Cases". These present a very interesting, important, and dramatic story about how constitutional politics really works, which anyone who wants to know about such things should read.

Suffice it to say here, in neither of these "default" cases before the Supreme Court was the 14th an issue -- the constitutional issues were the takings clause, due process, and the obligation of the federal govt to follow the terms of its own contracts if Congress changes its mind about doing so.

And, of course, all the defaults were deemed constitutional. You can bet that if it happens again, it will be again.


If we do choose to default,

If we do choose to default, isn't that just going to be to stick it to China? If you owe the bank 10,000 dollars, you're in trouble; if you owe the bank 1.1 trillion dollars, the bank is in trouble?

As to Bachmann, I think she is playing the cards that her evangelical right bosses are giving her to play. It's what sells to people who go to church in strip malls or buildings that look like malls. Not a dis, just a fact.


Choosing which bills to pay

States have faced this problem -- insufficient revenue to fund all of the appropriations made by the legislature -- from time to time. The executive branch establishes priorities and pays the bills in that order. California gave state employees IOUs, but bondholders got their interest and principal payments on time. Illinois has been missing payments to its state university system, but the bondholders are getting paid.

If failure to meet interest and principal payments on US Treasuries is an international disaster, then the Administration should have plans in place to prioritize which bills get paid, and when. Defer reimbursement to state Medicaid plans. Defer payments to military suppliers. There are large expenditures other than the interest and principal payments which can be delayed while Congress gets its act together.


Cognitive dissonance

What appears very strange to me about this is that the Republicans, who claim to be about savings and wealth creation, would torch the savings of individuals, companies, and institutions in this cockamamie pursuit. The existing stock of US Federal debt on the other side of the ledger represents a large portion of the savings of almost all net savers. I really wonder whether they believe that, as "the virtuous", their own T-bills, notes and bonds would somehow be protected in a default.


"Republicans universally

"Republicans universally believe TARP was an unjustified bailout for fat-cat bankers that was a horrible mistake and set a dreadful precedent"

You mean, just because the bankers who drove their companies and the economy to the brink of disaster got to keep their jobs, their bonuses, virtual immunity from prosecution or even serious investigation of negligence, fraud, or any other wrongdoing, got sacks of nearly-free cash from the Fed, extended guarantees from the FDIC, profitable interest rate spreads at public expense, and the secure knowledge that nothing they do will ever cause them to be taken to task for it?

It's not just Republicans who believe that. Surely in between "doing nothing" and "hosing piles of money into bankers' pockets no questions asked" there had to be some better alternative.


Debt Ceiling has nothing to do with risk of default

Bruce,

Nearly 70% of government expenditures are financed by tax revenue collections. There are no legal barriers preventing Tim Geithner from paying interest and principal payments due to bondholders once the debt ceiling is reached. This myth is scaremongering of the first order, and I'm frankly surprised that you've fallen for this partisan claptrap.

Only the President himself could orchestrate a financial crisis by using his sole discretion to refuse to make payments to bondholders.

In fact, enough revenue is being collected to permit funding of debt service, Social Security, Medicare, Dept. of Defense, State, Justice, the FAA, health and safety inspection functions, etc. The core functions of the federal government are not at risk.

The risk is that offices at the Departments of Agriculture, Education, Commerce, Labor, HHS, HUD, Interior, and others will shut down for a while. That will affect government expenditures and could have deleterious short-term effects. However, that has nothing to do with default on publicly held debt.

Also, the 14th ammendment refers to outstanding debt held by the public. The debt ceiling is a restraint upon issuance of additional debt to the public. I fail to see the legal imperative in that argument. We'll see how many investors will rush to purchase T-Bills issued in contravention of the constitution.

I've written this in prior posts, Article I, section 8 gives Congress, not the Executive, the sole authority to borrow money on the credit of the United States. Your recommendation would be a blatant violation of this provision.


Just get rid of the Debt Ceiling, it has no meaning

The debt ceiling has been raised over 100 times since 1940. Just get rid of it. The whole thing is a joke. There is no ceiling as it has been ignored for over 60 years. Where are the adults in Washington? Put the debt ceiling at infinity.




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