Tuesday, October 15, 2013

Please, Mr. President, Just Bite The Bullet And Declare The Debt Ceiling Unconstitutional!

Which it is, btw, the 14th Amendment and all that, although some fools think that Treasury can prioritize and just pay interest on the debt while not paying all sorts of other legally mandated bills.  As it is, it is against the law not to pay legally mandated bills, although those who want to blow past the debt ceiling say that all that would be involved would be delaying paying the bills.  But the effect would be very bad for the US and world economy, as leaders from all over the world are telling us about as loudly as they can, not that those who are pushing for a default are paying the slightest shred of attention to them.

Quite aside from the fact that the debt ceiling is unconstitutional, even if, Mr. President, you are reported to accept the argument of Laurence Tribe that it is constitutional, you yourself have analyzed how given the current polarization, it just sets you and your successors up for repeated blackmail.  You already caved in 2011 and are now trying to put the genie back into the bottle.  It looks like it is not going, with Vix soaring and Congress just apparently unable to cut any sort of deal.  Maybe, just maybe, Boehner will simply pass some six weeks extension at the last minute, but that simply puts the day of reckoning off six weeks.  It is time to end this once and for all, even though you will probably be impeached by the loonies in the House. Rest assured that you will not be convicted by the Senate, and the world and history will be grateful, even if SCOTUS later stupidly disagrees with the judgment and reinstates the damned thing.  Hopefully they will not, and the US and world economies and future presidents will be freed from this noxious law that never should have been passed and is the only one of its kind ever passed in any nation on the planet.

Let us recognize that in fact we really do not know what will happen if there is a default.  It may well be the case that those saying consequences will not be all that bad may prove to be right.  Interest rates will go up in the US with a slowdown in US growth, but adjustments will be made and the world will not come to an end.  OTOH, there is a really serious downside tail risk here, one that those who are more closely connected with the financial markets seem to take very seriously. One of the worst possible scenarios would be a complete freezeup of the repo bond market.  The reason would be that what gets traded there are essentially short term Treasury securities, whose interest rates are currently soaring.  This is the main market the Fed uses for its open market operations, and it is arguably at the very foundation of the entire global financial system.  Causing it to freeze up completely by defaulting on the main security being traded in it might well lead to the Fed to being totally crippled in dealing with this crisis and essentially freezing up nearly every financial market in the world in a scenario that not only would make 2008 look like a picnic on Sesame Street, but could rival even 1931 as well.  Yes, this is a less than 50% probability outcome, but, Mr. President, do you really want to risk this?  Please act to forestall such an utterly disastrous possibility.

Barkley Rosser


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