Bob Woodward's releasing a new book, so we are now seeing articles based on it. A few days back, The Washington Post published the ”Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis.” This account is a pretty downbeat one of how our political leaders and President Obama handled the debt ceiling crisis of the summer of 2011. I want to comment on what for me was the most salient point: that during the crisis, the President had no “Plan B” to get around the debt ceiling beyond negotiating a deal with Congress.
According to Woodward, the President asked his Senior staff to come up with a Plan B, because the compromise Congressional leaders first proposed to him would have required a two-step increase in the debt limit, with the second step coming near the time of the 2012 election, opening the possibility that the House Republicans would be able to hold the country and the financial world hostage in the run-up to the election. The President rejected the deal, and sent Harry Reid and his Chief of Staff David Krone back to get another that would not require the hostage taking two-step. Meanwhile, Obama's staff tried to put together a Plan B.
But when Harry Reid couldn't get a deal from John Boehner, and the House Republicans passed a two-step plan on July 29th, the President again called for more options. Woodward reports none except for accepting the Republican deal, which Geithner favored, and vetoing the House Bill if Harry Reid “folded” and the Senate passed it, which the President favored. The President, concerned about the likely continuance of Republican blackmail and hostage taking, and believing that he was out of options, indicated that he would veto a two-step deal even if the Democrats folded. However:
”Obama never had to confront the veto question. A few days later, House Republicans dropped their insistence on the two-step plan. The final plan accepted a debt limit increase that would take the country through the 2012 presidential contest. It also postponed $2.4 trillion in spending cuts until early 2013.”So, the President, and according Geithner, the world financial markets, survived that confrontation because the Republicans folded. But, if Woodward is right, if the Republicans had stood firm, Obama would have vetoed the bill, because no other options had been developed by the White House staff.
Yet there were at least four other options that were offered in the blogosphere and the news media at the time, three of them at CNN, that a well-informed White House might have been expected to know about. So, the obvious question is why is there no indication in Woodward's account that the White House was aware of other options except a veto or surrender to the House Republicans to handle the crisis? The four options were:
1. a selective default strategy by the Executive, prioritizing not paying for things that Congress needed, and perhaps not paying debt to the Fed when it falls due and working with the Fed to get the $1.6 Trillion in bonds that it was holding canceled;
2. an exploding option involving selling a 90-day option to the Fed for purchasing some Federal property for $ 2 Trillion. Then when Congress lifts the debt ceiling, the Treasury could buy back the option for one dollar, or the Fed could simply let the option expire;
3. using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt; and
4. using the authority of the 14th Amendment to keep issuing debt in defiance of the debt ceiling, while declaring that the debt ceiling legislation was unconstitutional because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending.
Since, the summer of 2011, beowulf has offered a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit.
The links above provide explanations of the various options, so I won't describe them in more detail than I've already done here. But I do want to note a couple of points.
First, if Woodward is right that none of these options was part of the internal deliberations of the Administration about a Plan B that the President might have fallen back on, if he had to veto a Congressional Bill that would have required a two-step debt ceiling process, then what's wrong with a White House staff and a Treasury Secretary that evidently weren't watching the web blogosphere and cable media closely enough to know that these “Plan B” options existed? It seems to me that between the staff and the Treasury, they should have known about all of these Plan B options and presented them to the President for consideration. So, if Woodward is right, then this White House staff and his Treasury Secretary both need to upgrade their advisory capabilities significantly before the next crisis hits, so that the President has a Plan B, C,and even D, that might succeed in defusing a renewed Republican attempt to blackmail the Administration into making deals it really would rather not make.
On the other hand, perhaps the President did know about all of these options, or at least all of them except consols, but Bob Woodward just missed their presence in Administration deliberations, and the Administration itself just decided not to use any of them in a viable Plan B for reasons unknown to him. If this last alternative is true, then Woodward missed an important part of the story of the debt ceiling crisis, and perhaps should go back and see if he can find out whether there were, in fact, other options that entered the deliberation and decision processes of the White House.
Yves Smith, in an interview with Paul Jay, after describing three of the options, opines that the Administration may have been actually seeking a Government shutdown with Congress in the summer of 2011, because it would have created the atmosphere of crisis that the President wanted to negotiate his grand bargain with Congress, then. Unfortunately, for him, if this view is true, the Republicans and Democrats in Congress failed to oblige him by “forcing” a veto of their two-step debt ceiling bill on him. And so they avoided the crisis, temporarily, but now we will have the sequestration crisis upon us at the end of the year, or perhaps an effort to defuse it in the lame duck.
If that happens, will the President still be talking about austerity and deficit reduction? Will he still be willing to place entitlement cuts on the table? We'll have to wait until the election is over and perhaps later to find out for sure?
(Cross-posted from New Economic Perspectives.)