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Why should the GOP be nailed to the wall on the shutdown?

Its been said by many, but remains true: they are engaged in hostage taking.

Not just ordinary political hard elbows bargaining, but taking the Global Economy hostage, while starting to tell themselves its "OK":

Nearly every Republican in the House of Representatives voted for a bill in May that would direct the Treasury Department to prioritize bond payments and Social Security retiree benefits over other obligations if Congress failed to extend its borrowing authority. In the Senate, 29 of the chamber's 44 Republicans have signed on to the idea.
In order to make sure bond payments and Social Security checks went out on time, the government would have to delay other payments by days or weeks. That would send a massive economic shockwave through military contractors, hospitals, and other entities farther down the priority list.

The plan also may not be workable in a practical sense. The U.S. Treasury handles 4 million transactions a day, and separating some of them out would be practically impossible.

This is not ideological disagreement. This is believing that whatever cock and bull story you spin up is somehow turned into reality.

This is beyond a policy dispute, and enters into the territory of a dispute whether Legislators should act like they are sane, or act like they are insane.

These radical Republicans (about 180° apart from the Radical Republicans of the 1870's, who supported the right of the Freedmen to vote) need to be nailed to the wall.

And, further to the point, they can be.

As irresponsible as it would be for our elected officials to talk about who is "winning" or "losing" the shutdown, I aint no elected official, and the Republicans are losing the shutdown, badly:

And this is not uncommon, as Ezra Klein explains:

I wrote about this in 2011. Asger Lau Andersen, David Dreyer Lassen and Lasse Holbøll Westh Nielsen tallied up 167 state shutdowns since 1988. But then they went a step further and tried to isolate the fiscal mismanagement they had on the next election. They succeeded. Voters respond to budgetary chaos, and they do so angrily and predictably.

The big takeaway is that blame is not shared equally: “Governors are subjected to an electoral penalty only under unified government, while legislatures are always held accountable.”

That is to say, if the budget process falls apart amidst divided government, the executive — in this case, President Obama — not only gets a pass from the voters, but may get a bit of a boost. It’s Congress that gets blamed. And not just one party or the other. Everyone in Congress. Which is what you see in the latest Post poll.

And while people will generally blame both sides, Democratic challengers can run ads against Republican incumbents who "voted for the shutdown", while Democratic incumbents can run ads that they "voted to keep the government open" ... and quite often, that their Republican challenger "supported the shutdown", if they are facing a Tea Party challenger.

So ... why aren't the House Republicans caving yet?

Because they have one last card to play: the debt ceiling. Take the debt ceiling off the table, and they have nothing to hang onto, as their poll numbers continue to plummet.

But ... What About the Debt Ceiling

I explained this yesterday evening in Economic Populist: How Fixed Interest Payment Consol Bonds Avoid A Default.

The debt ceiling is not just asking accountants what the national debt is under Generally Accepted Accounting Practice. Its a law, and is says precisely how to count things. Two classes of bonds are counted by their face value, and the third class is counted by what members of the public pay to buy the bonds on issue.

The key is that the third class is narrowly defined: bonds sold on a discount basis, and not redeemable until maturity.

So-called "Consol bonds" are bonds that never mature, but theoretically pay their interest perpetually. When a government wishes to retire a Consol bond, they simply buy them back at the current market price.

The only purpose of the face value of a Consol Bond is to calculate the interest payment. So if instead of an interest rate, a Consol Bond is issued with a Fixed dollar amount Interest Payment, it does not require a face value. It can, for example, be sold as "$500 paid on both Oct 1 and April 1 of each year".

With no face value, there is nothing to count against the debt ceiling, and so the debt ceiling limit does not prevent their sale.

So the Treasury switches from selling 10yr Treasury Bonds to selling FIP Consol Bonds ... and there is no default.

The big bomb that the Radical Republicans are starting to talk themselves into exploding ... is turned into a dud.

Indeed, "decisive action" by the President, which prevents the reckless decision of the Congress from leading to Economic Collapse, is almost certain to strengthen the President's hand in the shutdown fight.

What About Jumbo Coins and the 14th Amendment

If it was up to me, then better safe than sorry. The House will surely challenge the sale of Consol bonds in court, and therefore it is only prudent to have backups. The first backup is the minting of jumbo Platinum coins, and the second backup is directing the Treasury to sell regular bonds in defiance of the debt ceiling, if both the Consol bonds and jumbo coins are ruled against by the radical reactionaries in our Supreme Court.

Indeed, if those are in place, it may make the Supreme Court more likely to rule with the plain reading of the law, as the back up options in place would be more controversial than reviving an old fashioned financial instrument like the Consol bond.

Originally posted to BruceMcF on Tue Oct 08, 2013 at 05:30 AM PDT.

Also republished by Money and Public Purpose and Pushing back at the Grand Bargain.

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Comment Preferences

  •  debt ceiling (10+ / 0-)

    should rise automatically as the government approves spending.

    It is time for Crashing Vor to do an ad taking on the Third Way, the enemy within

    by GideonAB on Tue Oct 08, 2013 at 05:45:21 AM PDT

    •  yes, it is such a farce. nt (2+ / 0-)
      Recommended by:
      TomP, mikejay611

      "Don't Bet Against Us" - President Barack Obama

      by MRA NY on Tue Oct 08, 2013 at 06:06:33 AM PDT

      [ Parent ]

      •  From farce to screwball comedy (3+ / 0-)
        Recommended by:
        MRA NY, Box of Rain, mikejay611

        I like the idea of combining the 3 ways of avoiding default -- platinum coins, Consul bonds and the 14th amendment.

        Maybe we could combine them in some fiendish manner that would take the courts years to determine that no one has standing to sue -- Platinum Coin issued under the authority of the 14th amendment backing a whole bunch of consul bonds that are then slowly used to retire the Platinum coin ...?

    •  Obviously it should ... (0+ / 0-)

      ... and under our system of government, a prudent House Majority ought to pass that reform, and a prudent Senate Majority pass it as well, without interference from the anti-democratic US Senate version of the filibuster, to be signed by a prudent President.

      On the other hand, given a series of such prudent House, Senate, and President combinations raising the debt ceiling as necessary, one might not notice how dangerous the formality of raising the debt ceiling when required is if sometime in the future some reckless and irresponsible major participant in the process should decide to throw bombs instead of governing.

      So after nailing the Republicans to the wall on this, it would be a good idea to reform the debt ceiling as soon as practicable, so that work-arounds like FIP Consol Bonds are not required.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Tue Oct 08, 2013 at 09:02:53 AM PDT

      [ Parent ]

    •  Yeah, it's called (1+ / 0-)
      Recommended by:

      "accounting." I know Wall Street has forgotten how to do that, but that shouldn't mean that the rest of us go follow them.

      Government and laws are the agreement we all make to secure everyone's freedom.

      by Simplify on Tue Oct 08, 2013 at 11:21:30 PM PDT

      [ Parent ]

      •  Yes, the debt ceiling ... (1+ / 0-)
        Recommended by:

        ... was never written to interfere with spending funds duly authorized and appropriated, but to facilitate it, at a time when each bond issue required a separate Congressional action.

        That's why this works: the legislation used to interfere with regular operations has a big loophole because it was never actually written to be a limit on bond sales.

        Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

        by BruceMcF on Wed Oct 09, 2013 at 01:54:49 PM PDT

        [ Parent ]

  •  Why do I have the nagging feeling that (5+ / 0-)

    should the GOP push us over the edge into potential default, Obama has a couple of contingency ideas in his back pocket?  In any case, I think he and advisers have thought through some options and have found 1-2 they are willing to do.

    I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

    by Satya1 on Tue Oct 08, 2013 at 05:52:23 AM PDT

    •  agreed. nt (2+ / 0-)
      Recommended by:
      Satya1, mikejay611

      "Don't Bet Against Us" - President Barack Obama

      by MRA NY on Tue Oct 08, 2013 at 06:06:53 AM PDT

      [ Parent ]

    •  Then the House Impeaches Obama (3+ / 0-)
      Recommended by:
      Satya1, mikejay611, spacecadet1

      Which may all be part of his plan as well

      •  And he gets aquitted in the Senate nt (1+ / 0-)
        Recommended by:

        “If you can convince the lowest white man he’s better than the best colored man, he won’t notice you’re picking his pocket. Hell, give him somebody to look down on, and he’ll empty his pockets for you.” Lyndon Baines Johnson

        by spacecadet1 on Tue Oct 08, 2013 at 01:11:23 PM PDT

        [ Parent ]

        •  And gets acquitted handily, without the ... (1+ / 0-)
          Recommended by:

          ... uncertainty of Clinton's impeachment, since a block of Republican Senators are awfully pissed off at the Tea Party Congressmen and Ted Cruz generating all of those calls from Wall Street demanding that they fix things.

          Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

          by BruceMcF on Tue Oct 08, 2013 at 09:20:06 PM PDT

          [ Parent ]

    •  If Obama does not ... (2+ / 0-)
      Recommended by:
      Satya1, mikejay611

      That would be pretty irresponsible of him ....

    •  The last time that the White House ... (1+ / 0-)
      Recommended by:

      ... reached this point, they sure acted like there was no back up plan.

      And the most visible version of tailoring securities in this was was Krugman's proposal of Moral Authority Coupons, which actually would not have worked, due to the precise language of the debt ceiling law, since they would be sold on a discount basis, and under the law would be counted at "issue price", not at face value.

      However, the proposal to use Consol Bonds with no face value, originating from the netroots as I discussed earlier, do not suffer from the same problem, since they are sold on a premium basis rather than sold on a discount basis, and the law is specific that issue price valuation is limited to bonds not redeemable before maturity and sold on a discount basis.

      It would be a shame if the flaw of Moral Authority Coupons was incorrectly thought to also apply to Fixed Interest Payment Consol Bonds. Krugma's basic idea was sound, he just did not correctly specify the financial instrument that could put his basic idea into practice.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Tue Oct 08, 2013 at 09:12:03 AM PDT

      [ Parent ]

  •  This is an excellent walk-through. Thanks! (2+ / 0-)
    Recommended by:
    annan, mikejay611

    One vote from me, for getting this one on the Rec List.  It is extremely well put together.

  •  Don't agree (3+ / 0-)
    Recommended by:
    Odysseus, annan, mikejay611

    If the president acts, then the Republicans will make this all about Obama's bad action.

    If the president stays consistent with his actions so far and insists only Congress can raise the debt limit, then the stories will be about how Boehner won't bring it to the floor (or how Republicans defeated it on the floor, either one) and how the President is left with only these loopy wacko schemes.

    If you give the Republicans even the slightest leeway to make this about the President, they will.  Then we will lose.

    We have to defuse this not only now but to prevent this weapon from being used ever again.  It may take us until 11:30pm on the 16th but I'm hopeful it will get fixed.

    Democrats *do* have a plan for Social Security - it's called Social Security. -- Ed Schultz

    by FredFred on Tue Oct 08, 2013 at 06:27:55 AM PDT

    •  I agree, to a point. (1+ / 0-)
      Recommended by:
      .... the Republicans will make this all about Obama's bad action.
      No matter what the president does, they are going to make this about Obama.

      So, I love the idea of selling Good Government Consols to the people just like war bonds were sold during WWII. Small increments, perhaps bundled, at rates above what people can get in a savings account or CD.

      "Let us not look back to the past with anger, nor towards the future with fear, but look around with awareness." James Thurber

      by annan on Tue Oct 08, 2013 at 07:23:13 AM PDT

      [ Parent ]

    •  If the President acts in the 11th hour ... (2+ / 0-)
      Recommended by:
      mikejay611, Letsgetitdone

      ... after another week of the Republicans sliding downhill, they can insist all they want ~ and surely they will, since its what they do ~ but it will be noise to the majority of Americans, who will take away that the Republicans refused to act, and the President acted decisively.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Tue Oct 08, 2013 at 09:14:50 AM PDT

      [ Parent ]

      •  I entirely agree with (0+ / 0-)

        this analysis; but I also think that the same argument applies to platinum coins used to get the Federal Reserve to use its authority to fill the Mint's PEF account with reserves, from which the seigniorage can be swept into the primary spending account of Treasury.

        In addition, if a very high face value coin, say $60 T were used, then the President would not only rid himself of the debt ceiling problem; but in very short order the issue of the debt itself. No more austerity; no more political cover for those who just want to abolish safety net and other programs that benefit the broad range of Americans.

        I don't think use of either the 14th or consols would work for this last purpose. See here, for much more analysis and detail.

        •  Except the difference is that ... (0+ / 0-)

          ... the platinum coin is a fight with the Fed, while the worst risk with a Fixed Interest Payment Consol Bond is that they will be priced at a higher than normal yield for a perpetual annuity asset.

          Since these bonds are an Open Market sale, its not up to the Federal Reserve, its up to the bond buyers in the market. There are ample 10yr Treasuries in circulation for FOMC operations.

          And with the first interest payment not due until March 1 (the Oct 1 interest payment date has passed), the market is not likely to rate the default premium very high.

          Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

          by BruceMcF on Tue Oct 08, 2013 at 09:18:33 PM PDT

          [ Parent ]

  •  Great diary. (3+ / 0-)
    Recommended by:
    ZedMont, BruceMcF, mikejay611

    Tipped, rec'd and hotlisted. Excellent, informative and understandable.

    Thank you.

    "Let us not look back to the past with anger, nor towards the future with fear, but look around with awareness." James Thurber

    by annan on Tue Oct 08, 2013 at 07:23:56 AM PDT

  •  If we come to the brink of not raising the debt (2+ / 0-)
    Recommended by:
    BruceMcF, mikejay611

    limit, I suspect that the majority of Americans will have been well informed of the consequences (the financial markets will see to that).  So, I wonder, if at the eleventh hour President Obama takes one of his several options to ignore the debt limit statute, what would happen then?

    Would the Republicans impeach him?  If they do, they are publicly admitting that they are willing and ready to collapse the economy, and it will be readily apparent that the president has put his own personal well-being on the line to stop them.

    What would be the political consequence of that?

    I'm not expecting it to happen, because Barack Obama is not Mahatma Gandhi, but can't help thinking about the fallout.

    Also, someone help me with this.  What would happen if President Obama simply refused to recognize a debt limit, citing the 14th amendment to maintain that the debt limit statute is unconstitutional, and that his statutory responsibility to uphold the constitution requires that he comply with the 14th amendment over this statute, which, if it caused the country to default, would violate the 14th amendment?

    Would he be immediately impeached, or would the GOP first file suit in court against his action?  Would the president be correct - legally - and how - given its present makeup - do you think the Supreme Court would rule?

    My personal layman's opinion is that the debt limit law is in fact unconstitutional, and has gone unchallenged for two reasons: 1) because of the political consequences of appearing to be in favor of unlimited spending, which of course is ludicrous, but then the electorate often votes for ludicrous, and 2) the statute has never actually caused a default.

    The questions are made all the more intriguing by the fact that the president is a constitutional expert.

    Fighting for peace is like screwing for virginity -- George Carlin

    by ZedMont on Tue Oct 08, 2013 at 07:50:10 AM PDT

    •  They'll either impeach him or bring him to ... (2+ / 0-)
      Recommended by:
      mikejay611, ZedMont

      ... the Supreme Court, which suggests that it is prudent to take the option which is the smallest break with existing conventions and which explicitly honors the letter (though surely not the spirit) of the law.

      That's why, if it was me, I would consider ordering the Treasury to prepare to sell a FIP Consol Bond series, mint a series of $100b platinum coins, and as a final resort, if both of those actions are ruled unconstitutional, to proceed to sell 10yr bonds in contravention to the debt ceiling legislation on grounds that in refusing to raise the debt, if there is no recourse to one of those other two solutions, the House is violating the 14th Amendment.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Tue Oct 08, 2013 at 09:20:00 AM PDT

      [ Parent ]

      •  Watching Obama's press conference. He seems to (0+ / 0-)

        reject the remedies we are talking about, but so far is not explicitly doing so.  That is not surprising at this point, but if it proceeds to the point when we're down to nothing, then I would think all bets are off, and what might have seemed unacceptable a week before, may suddenly have great appeal.

        Fighting for peace is like screwing for virginity -- George Carlin

        by ZedMont on Tue Oct 08, 2013 at 11:50:02 AM PDT

        [ Parent ]

        •  He explicitly rejected the jumbo coin ... (0+ / 0-)

          ... based on the argument that its too late to verify its Constitutionality at this late date, which is rather an argument that he should have ordered them minted earlier and had their legal standing tested in court ~ surely the House would have obliged by bringing a case.

          He explicitly rejected the "14th Amendment option".

          He did not, in fact, address changing the structure of the bond series that avoids adding to the debt ceiling as specified in legislation.

          Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

          by BruceMcF on Tue Oct 08, 2013 at 12:02:29 PM PDT

          [ Parent ]

  •  This (3+ / 0-)
    Recommended by:
    BruceMcF, ZedMont, priceman

    is a real education in the 14th amendment for me... I thank the author for the plain spoken post...

    No star is lost once we have seen, We always may be what we might have been. Adelaide Proctor -7.25/-5.64

    by mikejay611 on Tue Oct 08, 2013 at 09:28:27 AM PDT

    •  ditto (2+ / 0-)
      Recommended by:
      mikejay611, BruceMcF

      Fighting for peace is like screwing for virginity -- George Carlin

      by ZedMont on Tue Oct 08, 2013 at 11:41:43 AM PDT

      [ Parent ]

    •  Note that this post was the debt ceiling law ... (2+ / 0-)
      Recommended by:
      priceman, mikejay611

      ... though it is indeed aimed at avoiding the President being caught in a squeeze between upholding the 14th Amendment and upholding Section 1, which lists the powers of Congress.

      Because Congress wrote the debt ceiling law in a way that would allow "Fixed Interest Payment" Consol Bonds to be sold without violating the debt ceiling, it allows both Constitutional duties to be honored at the same time.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Tue Oct 08, 2013 at 12:17:37 PM PDT

      [ Parent ]

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