In yesterday’s Economix blog, former Reagan and GHW Bush administrator Bruce Bartlett addressed the possible options. Below is a crisp summary of the details. Read his full post for more.
1. The debt limit is public law.
2. Appropriations (passed by the Congress) are also public law.
3. Entitlement programs (such as Social Security and Medicare) are public law.
4. The Prompt Payment Act, which requires that obligations be paid when they come due, is public law.
Result: something has to give.
5. Treasury can’t easily determine which bills to pay or not pay. It does not have sufficient information to determine priorities. Various departments and agencies would need to set such priorities. This, however, would be difficult since it would take time to do so and many staff members required to provide input have been furloughed.
6. To enable prompt payment, Treasury has established processes “to make payments when they are due, whether the cash is there or not.”
7. As a result of point 6, obligations are likely to be paid in order of due date as cash becomes available.
8. If 7 holds, some bondholders will experience a delay in receipt of payment, but this means the security would be classified as “non-performing.” As Bartlett puts it.
Treasury would now be in default, and defaulted securities cannot be traded, accepted by the Federal Reserve as collateral, or held by money market funds. In a note published on Oct. 5, Goldman Sachs said money managers are forced to dump Treasury securities before October 17 to avoid being stuck with securities that could not be traded.
9. Section 4 of the 14th Amendment to the Constitution provides a rationale for the president to override debt limit legislation.
10. President Obama has said, on numerous occasions that he will not use the authority granted by the Constitution to get around the debt limit set by Congress.
Result: At best, uncertainty predominates. At worst, Treasuries are not accepted as collateral by many financial managers and organizations. I’m not sure which game theory structure applies – Help, Professor Galambos. Some have characterized the situation as a game of chicken – who will give in first. My conclusion is that it is a negative sum game in which the magnitude of the losses in the resultant payoff matrix swamps the few available positive results.
Conclusion: This is a game that should be avoided. Will it be avoided? I hope so.