Mike Konczal

Roosevelt Institute Fellow
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Recent Posts by Mike Konczal

  • Rortybomb

    The Game Theory of the Post-Platinum Coin Debt Ceiling

    Jan 14, 2013Mike Konczal

    In a statement given to wonkblog over the weekend, the Treasury department announced that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” Jay Carney followed up with the statement that there "are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default."

    The administration decided against negotiating with the GOP over potential terms for raising the debt ceiling, even though they could have tried for the Grand Bargain they’ve been trying to get for the past several years. They’ve asked for a clean increase of the debt limit instead, threatening default. They’ve also now decided to commit to not sidestepping around the debt ceiling using legal measures, either by minting the platinum coin or declaring the debt ceiling unconstitutional via the 14th amendment.

    The administration thinks that this move will strengthen their position. In general, having more choices makes you better off. But in strategic situations, removing some of your options can strengthen other options, by committing to following them through. Every game theory class has a reference to an army burning bridges and ships and otherwise removing their own escape routes, to tell their soldiers--and their opponents--that they’ll fight to the bitter end.

    Since the platinum coin decision and subsequent statements seem compatible with game theory dynamics, it might be useful to diagram out the debt ceiling debate via an extensive-form game:

    Removing the “avoid debt ceiling” option, in red above, is the administration’s way of saying that they want a “clean increase,” in green above, over anything else.

    What are some ideas that can be drawn from viewing the debate as a game?

    What Does a Clean Increase Give the Administration? For the White House, both the strategy of sidestepping the debt ceiling or the strategy of not negotiating and then having the GOP give up a clean increase would end the game. However, going for the clean increase has greater risks, as there’s a possibility of default.

    So why try and force the game down this path? One reason could be that the administration is more worried about the costs of a defusing strategy than the pundits are. Maybe the Obama administration believes that the public will see this as a gross overreach of executive power.

    A more likely explanation is that the administration thinks it is important to its own longer-term strategies for the GOP to play the ending move. Say Treasury had used the coin in the first round. This might have emboldened the more reactionary elements of the GOP. Taking the coin off the table forces the more sensible members of the GOP to take power back from those willing to default and move for a clean increase. This was basically Ezra Klein’s argument for not using the platinum coin.

    Most liberal commentary is split over the second level of the diagram, the branches leading from the “don’t negotiate” option. There are those that think that this will force the more extreme conservatives to fold, further weakening them in the aftermath of the 2012 election and fiscal cliff. And there are those that think that breaching the debt ceiling has such a potential high cost for our economy, and don't see any reason to think the GOP will moderate to the center by February 15th, that it is not worth the risks.

    The Administration Should Emphasize Default Pains... The stated strategy behind abandoning the platinum coin option is to use the threat of the “full default” to force a clean increase. One of the interesting things about the platinum coin and the 14th amendment in this game is that they have a dual strategic value. They could be used to shut down the debt ceiling in advance of having to stare down the House GOP, and they could also be kept as a last-minute option to prevent a default if the GOP doesn’t go for an increase. If the administration wants to commit to a “clean increase” strategy, then they have to remove it in both cases.

    The leverage here for the administration is to emphasize the pain of default and the lack of other ways of mitigating them. The State of the Union speech is February 12th, or three days before the first day we could possibly breach the debt ceiling. There is significant opportunity there to emphasize to the public how bad the outcomes would be if there isn’t an increase, as well as to explain how impossible prioritization and workarounds are.

    In the meantime, expect to see conservatives argue that the various workarounds available for the administration are sufficient and going through the debt ceiling wouldn't be that bad, contrary to the available evidence, to push back against the administration's strategy (and force them into "negotiate").

    ...While Downplaying IOUs and Other Shadow Currency. Several people are putting out the idea that instead of minting a platinum coin, the administration should begin to prepare IOUs, scrips, or other forms of shadow currency promising future payments once the debt ceiling is raised.

    As NYC Southpaw notes, this is the equivalent of saying we will “postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order” that are almost certainly “a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.”

    This is a weaker option than the platinum coin on every angle, inviting more legal challenges, uncertainty and constitutional issues while also inviting blowback for the administration in the form of how they are prioritized and the likely bank profits. (To use game theory terms, the platinum coin strictly dominated the IOU shadow currency strategy.)

    Since it is weaker across the board, and the administration is trying to downplay both points at which this strategy could be deployed (under “avoid” as well as “workarounds”) expect little play on this topic in the weeks ahead.

    Sequestration Complicates This. As many have noted, the debt ceiling will occur at the same time as the large spending cuts in the sequestration come into play. One doesn’t have to be cynical to think that the debt ceiling will be in the background of any sequestration negotiations. Removing the platinum coin tells us little about this will play out, though throwing in the debt ceiling might make a bad deal look better for the administration and Democrats.

    Finally if the administration gets the better of the GOP on sequestration, it could make the GOP more likely to threaten default to compensate for what see as a loss of power. In theory, the payouts of one game shouldn’t affect a completely different game, but life is often more complicated than what game theory can tell us.

     

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    In a statement given to wonkblog over the weekend, the Treasury department announced that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” Jay Carney followed up with the statement that there "are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default."

    The administration decided against negotiating with the GOP over potential terms for raising the debt ceiling, even though they could have tried for the Grand Bargain they’ve been trying to get for the past several years. They’ve asked for a clean increase of the debt limit instead, threatening default. They’ve also now decided to commit to not sidestepping around the debt ceiling using legal measures, either by minting the platinum coin or declaring the debt ceiling unconstitutional via the 14th amendment.

    The administration thinks that this move will strengthen their position. In general, having more choices makes you better off. But in strategic situations, removing some of your options can strengthen other options, by committing to following them through. Every game theory class has a reference to an army burning bridges and ships and otherwise removing their own escape routes, to tell their soldiers--and their opponents--that they’ll fight to the bitter end.

    Since the platinum coin decision and subsequent statements seem compatible with game theory dynamics, it might be useful to diagram out the debt ceiling debate via an extensive-form game:

    Removing the “avoid debt ceiling” option, in red above, is the administration’s way of saying that they want a “clean increase,” in green above, over anything else.

    What are some ideas that can be drawn from viewing the debate as a game?

    What Does a Clean Increase Give the Administration? For the White House, both the strategy of sidestepping the debt ceiling or the strategy of not negotiating and then having the GOP give up a clean increase would end the game. However, going for the clean increase has greater risks, as there’s a possibility of default.

    So why try and force the game down this path? One reason could be that the administration is more worried about the costs of a defusing strategy than the pundits are. Maybe the Obama administration believes that the public will see this as a gross overreach of executive power.

    A more likely explanation is that the administration thinks it is important to its own longer-term strategies for the GOP to play the ending move. Say Treasury had used the coin in the first round. This might have emboldened the more reactionary elements of the GOP. Taking the coin off the table forces the more sensible members of the GOP to take power back from those willing to default and move for a clean increase. This was basically Ezra Klein’s argument for not using the platinum coin.

    Most liberal commentary is split over the second level of the diagram, the branches leading from the “don’t negotiate” option. There are those that think that this will force the more extreme conservatives to fold, further weakening them in the aftermath of the 2012 election and fiscal cliff. And there are those that think that breaching the debt ceiling has such a potential high cost for our economy, and don't see any reason to think the GOP will moderate to the center by February 15th, that it is not worth the risks.

    The Administration Should Emphasize Default Pains... The stated strategy behind abandoning the platinum coin option is to use the threat of the “full default” to force a clean increase. One of the interesting things about the platinum coin and the 14th amendment in this game is that they have a dual strategic value. They could be used to shut down the debt ceiling in advance of having to stare down the House GOP, and they could also be kept as a last-minute option to prevent a default if the GOP doesn’t go for an increase. If the administration wants to commit to a “clean increase” strategy, then they have to remove it in both cases.

    The leverage here for the administration is to emphasize the pain of default and the lack of other ways of mitigating them. The State of the Union speech is February 12th, or three days before the first day we could possibly breach the debt ceiling. There is significant opportunity there to emphasize to the public how bad the outcomes would be if there isn’t an increase, as well as to explain how impossible prioritization and workarounds are.

    In the meantime, expect to see conservatives argue that the various workarounds available for the administration are sufficient and going through the debt ceiling wouldn't be that bad, contrary to the available evidence, to push back against the administration's strategy (and force them into "negotiate").

    ...While Downplaying IOUs and Other Shadow Currency. Several people are putting out the idea that instead of minting a platinum coin, the administration should begin to prepare IOUs, scrips, or other forms of shadow currency promising future payments once the debt ceiling is raised.

    As NYC Southpaw notes, this is the equivalent of saying we will “postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order” that are almost certainly “a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.”

    This is a weaker option than the platinum coin on every angle, inviting more legal challenges, uncertainty and constitutional issues while also inviting blowback for the administration in the form of how they are prioritized and the likely bank profits. (To use game theory terms, the platinum coin strictly dominated the IOU shadow currency strategy.)

    Since it is weaker across the board, and the administration is trying to downplay both points at which this strategy could be deployed (under “avoid” as well as “workarounds”) expect little play on this topic in the weeks ahead.

    Sequestration Complicates This. As many have noted, the debt ceiling will occur at the same time as the large spending cuts in the sequestration come into play. One doesn’t have to be cynical to think that the debt ceiling will be in the background of any sequestration negotiations. Removing the platinum coin tells us little about this will play out, though throwing in the debt ceiling might make a bad deal look better for the administration and Democrats.

    Finally if the administration gets the better of the GOP on sequestration, it could make the GOP more likely to threaten default to compensate for what see as a loss of power. In theory, the payouts of one game shouldn’t affect a completely different game, but life is often more complicated than what game theory can tell us.

     

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  • Rortybomb

    On the Geithner Legacy

    Jan 11, 2013Mike Konczal

    As Ben Walsh of Reuters mentions, the Tim Geithner Legacy Project is underway. There was a large post by Neil Irwin in the Washington Post, arguing that he'll be one of the most important Treasury secretaries in history. Joe Weisenthal argues he's done a great job guiding us out of the recession compared to other countries. As there will be several pieces like this in the weeks ahead, I want to make some general criticisms. This will probably go across several posts.

    I: Sugar

    Joe Weisthnal notes that our recovery has been better than other financial crisis recessions.

     

    Four things about the chart. First, I’d note as a matter of the empirical research that “financial crisis” isn’t a coherent unit of measurement for these purposes. If Finland was going to have a recession three-times worse than the United States, it would also have a "financial crisis" at some point. But that doesn't mean the recessions are identical. This idea that financial crises creates long recessions when long recessions really create financial crises is the weak part of the whole Rogoff-Reinhart argument.  So I’m not sure these are equal starting points for a comparison.

    Second: Joe argues that what saved us was bailing out the financial sector with a blank-check. Maybe, but I'd need to see more. What has the financial sector done to boost the real economy during this time period? The financial sector shutdown in 2009, even after the bailouts. The government became the de facto financial sector during the worst of the crisis and in its aftermath. A more generous or more harsh bailout wouldn't have changed this fact.

    The biggest threat to the real economy would have been the shutdown of the commercial paper market, which the Federal Reserve backstopped and ran by itself through emergency lending facilities (but only after TARP had passed). The private student loan market collapsed, which had to be taken up by the public sector (a relationship that became permanent in Obamacare). FHA basically took over the housing market, saving it when the financial sector disappeared. The private market was incapable of generating funding to save the auto industry, which the government had to do. So, ummm, thanks financial sector?

    (To go further, while the best and brightest of the financial sector were busy gambling and not beating the S&P 500, the United States provided financing for long-term R&D investments in things like energy during the recession. As root_e notes, what value does a private capital market even provide at this point?)

    Third: The real credit for that graphic almost certainly goes to House Republicans, which wouldn’t take yes for an answer when it came to prematurely getting to austerity. Geithner, as Zachary Goldfarb reported in the Washington Post, famously had this exchange with Christina Romer:

    By early last year [in 2010], Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009. [....]
     
    Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.
     
    Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”
     
    In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.
     
    “There was this move to exit fiscal stimulus a lot sooner than we should have, and we’ve been playing catch-up ever since,” Romer said in an interview.

    If running large fiscal deficits are what is keeping the economy afloat as it delevers, Geithner’s choice to turn to the long-term would have been a disaster if the Republicans would have met him halfway.

    Fourth: The other credit goes to Ben Bernanke, who hasn’t taken his foot off the pedal (but should be pushing more). It’s worth noting that, besides the destruction it has put on families and communities, the lack of a serious response on housing has put monetary policy in check. Experts in monetary policy have noted how the Federal Reserve has pushed for the lowest mortgage rates in modern history only to find that Treasury had no plan in place to allow underwater mortgages to refinance. By the time they did put programs in place, in Spring 2012, the way it was setup and the lack of public refinancing means that a huge amount of the monetary stimulus is going to banks’ profits.

    II: A Tale of Two Programs

    Speaking of housing, let’s compare two programs instituted under Secretary Geithner.

    The first is the FHA Short Refi program. It is an $8.1 billion dollar line of credit allocated through TARP designed to "enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth." According to the latest SIGTARP numbers, it has modified 1,772 mortgages and allocated $57 million dollars for potential future claims as well as expenses. Which means it has spent less than 1 percent of its funds, even though those funds are allocated for this purpose. I’ve noted it would be perfectly legal for Treasury to use this fund to provide up to around $100 billion dollars of funding for a HOLC program, like the one Senator Merkley has proposed, and it can be done without going to Congress.

    The second is the Public-Private Investment Program for Legacy Assets, also referred to as PPIP or the “Geithner Plan.” Here Geithner proposed a program that would have private hedge funds team up with the government to purchase one trillion dollars of “legacy assets,” or the toxic waste of bad, illiquid mortgage-backed securities on the Too Big To Fail banks' balance sheets. The hedge funds would provide some money and expertise as well as take the first losses, with the FDIC’s fund providing the leverage and eating all the remaining losses.

    This program was correctly identified as the public writing a “put option” on those debts. As such, the public insurance would cause the hedge funds to overbid for the assets, which would help get them off the balance-sheets of the banks.

    PPIP was killed quickly for a number of reasons, including the fact that this subsidy wasn’t enough for the banks' balance sheet, but it is worth noting two things. The core instinct was to put programs in place in 2009 to bid up, rather than write down, bad mortgage debt. Instead of trying to get those assets written down to a manageable level quickly, public money and power was utilized towards trying to keep that value up. That’s the opposite of what one should do in a balance-sheet recession. And the recent evidence all points to the prolonged recession being a result of a large debt overhang.

    The other is the contrast between creativity and energy shown in the pursuit of getting the public to take over the garbage loans of the TBTF banks, and the lack of interest in taking already allocated money for housing relief and using it towards its stated goals. The FDIC fund isn’t meant for this kind of gambling; it reflects a form of social insurance banks and depositors pay to prevent panics. Meanwhile the government isn’t even bothering to spend the money already allocated through programs like FHA Short Refi, much less using them in creative ways. If only half that energy was put into motion on behalf of debtors and homeowners.

    Follow or contact the Rortybomb blog:

      

    As Ben Walsh of Reuters mentions, the Tim Geithner Legacy Project is underway. There was a large post by Neil Irwin in the Washington Post, arguing that he'll be one of the most important Treasury secretaries in history. Joe Weisenthal argues he's done a great job guiding us out of the recession compared to other countries. As there will be several pieces like this in the weeks ahead, I want to make some general criticisms. This will probably go across several posts.

    I: Sugar

    Joe Weisthnal notes that our recovery has been better than other financial crisis recessions.

     

    Four things about the chart. First, I’d note as a matter of the empirical research that “financial crisis” isn’t a coherent unit of measurement for these purposes. If Finland was going to have a recession three-times worse than the United States, it would also have a "financial crisis" at some point. But that doesn't mean the recessions are identical. This idea that financial crises creates long recessions when long recessions really create financial crises is the weak part of the whole Rogoff-Reinhart argument.  So I’m not sure these are equal starting points for a comparison.

    Second: Joe argues that what saved us was bailing out the financial sector with a blank-check. Maybe, but I'd need to see more. What has the financial sector done to boost the real economy during this time period? The financial sector shutdown in 2009, even after the bailouts. The government became the de facto financial sector during the worst of the crisis and in its aftermath. A more generous or more harsh bailout wouldn't have changed this fact.

    The biggest threat to the real economy would have been the shutdown of the commercial paper market, which the Federal Reserve backstopped and ran by itself through emergency lending facilities (but only after TARP had passed). The private student loan market collapsed, which had to be taken up by the public sector (a relationship that became permanent in Obamacare). FHA basically took over the housing market, saving it when the financial sector disappeared. The private market was incapable of generating funding to save the auto industry, which the government had to do. So, ummm, thanks financial sector?

    (To go further, while the best and brightest of the financial sector were busy gambling and not beating the S&P 500, the United States provided financing for long-term R&D investments in things like energy during the recession. As root_e notes, what value does a private capital market even provide at this point?)

    Third: The real credit for that graphic almost certainly goes to House Republicans, which wouldn’t take yes for an answer when it came to prematurely getting to austerity. Geithner, as Zachary Goldfarb reported in the Washington Post, famously had this exchange with Christina Romer:

    By early last year [in 2010], Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009. [....]
     
    Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.
     
    Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”
     
    In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.
     
    “There was this move to exit fiscal stimulus a lot sooner than we should have, and we’ve been playing catch-up ever since,” Romer said in an interview.

    If running large fiscal deficits are what is keeping the economy afloat as it delevers, Geithner’s choice to turn to the long-term would have been a disaster if the Republicans would have met him halfway.

    Fourth: The other credit goes to Ben Bernanke, who hasn’t taken his foot off the pedal (but should be pushing more). It’s worth noting that, besides the destruction it has put on families and communities, the lack of a serious response on housing has put monetary policy in check. Experts in monetary policy have noted how the Federal Reserve has pushed for the lowest mortgage rates in modern history only to find that Treasury had no plan in place to allow underwater mortgages to refinance. By the time they did put programs in place, in Spring 2012, the way it was setup and the lack of public refinancing means that a huge amount of the monetary stimulus is going to banks’ profits.

    II: A Tale of Two Programs

    Speaking of housing, let’s compare two programs instituted under Secretary Geithner.

    The first is the FHA Short Refi program. It is an $8.1 billion dollar line of credit allocated through TARP designed to "enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth." According to the latest SIGTARP numbers, it has modified 1,772 mortgages and allocated $57 million dollars for potential future claims as well as expenses. Which means it has spent less than 1 percent of its funds, even though those funds are allocated for this purpose. I’ve noted it would be perfectly legal for Treasury to use this fund to provide up to around $100 billion dollars of funding for a HOLC program, like the one Senator Merkley has proposed, and it can be done without going to Congress.

    The second is the Public-Private Investment Program for Legacy Assets, also referred to as PPIP or the “Geithner Plan.” Here Geithner proposed a program that would have private hedge funds team up with the government to purchase one trillion dollars of “legacy assets,” or the toxic waste of bad, illiquid mortgage-backed securities on the Too Big To Fail banks' balance sheets. The hedge funds would provide some money and expertise as well as take the first losses, with the FDIC’s fund providing the leverage and eating all the remaining losses.

    This program was correctly identified as the public writing a “put option” on those debts. As such, the public insurance would cause the hedge funds to overbid for the assets, which would help get them off the balance-sheets of the banks.

    PPIP was killed quickly for a number of reasons, including the fact that this subsidy wasn’t enough for the banks' balance sheet, but it is worth noting two things. The core instinct was to put programs in place in 2009 to bid up, rather than write down, bad mortgage debt. Instead of trying to get those assets written down to a manageable level quickly, public money and power was utilized towards trying to keep that value up. That’s the opposite of what one should do in a balance-sheet recession. And the recent evidence all points to the prolonged recession being a result of a large debt overhang.

    The other is the contrast between creativity and energy shown in the pursuit of getting the public to take over the garbage loans of the TBTF banks, and the lack of interest in taking already allocated money for housing relief and using it towards its stated goals. The FDIC fund isn’t meant for this kind of gambling; it reflects a form of social insurance banks and depositors pay to prevent panics. Meanwhile the government isn’t even bothering to spend the money already allocated through programs like FHA Short Refi, much less using them in creative ways. If only half that energy was put into motion on behalf of debtors and homeowners.

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  • Rortybomb

    Should President Obama Announce No Prioritizing Payments in the Debt Ceiling, or Start Minting Platinum Coins Daily?

    Jan 9, 2013Mike Konczal

    Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

    What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

    The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

    And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

    It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

    Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

    The Real Problem With a Trillion Dollar Platinum Coin

    The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

    I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

    Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

    So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

    It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

    Thoughts?

    Follow or contact the Rortybomb blog:

      

    Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

    What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

    The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

    And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

    It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

    Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

    The Real Problem With a Trillion Dollar Platinum Coin

    The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

    I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

    Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

    So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

    It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

    Thoughts?

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    What Was Just Watered Down in Basel's Liquidity Requirements?

    Jan 8, 2013Mike Konczal

    Let’s say you were trying to make a personal budget. We can imagine two reasonable ideas you would want to incorporate into this budget. The first is that you want to make sure you can pay your bills if your income suddenly freezes up or you suddenly need cash. You want to make sure your savings are sufficiently liquid in case there is an emergency.

    Another rule is that you want your time horizon of your debts to match what you are buying with those debts. You don’t want a 4-year mortgage and a 30-year auto loan; you want a 4-year auto loan and a 30-year mortgage. And for our purposes, you really don’t want to buy either on a credit card, since the payment terms can fluctuate so often in the short term.

    These two ideas are behind two of the additional special forms of capital requirements designed by the Basel Committee on Banking Supervision in Basel III. The first is a “Liquidity Coverage Ratio” (LCR), which is designed to make sure that a financial firm has sufficiently liquid resources to survive a crisis where financial liquidity has dried up for 30 days. The second is a “Net Stable Funding Ratio,” which is designed to complement the first rule and seeks to incentivize banks to use funds with more stable debts featuring long-term horizons.

    Basel has just introduced some changes into their final LCR rule, so let’s take a deep dive into this capital requirement rule. Before we introduce some headache-inducing acronyms, remember that the basics are simple here. Banks have a store of assets and they have obligations that they have to make. Or, at the simplest level, banks have a pile of money or things that can be turned into money and people and firms who are demanding money. So any watering down of the rule has to impact one of those two things.

    Remember that in a crisis it is hard to sell assets to get the cash you need to make your payments. Also, crucially, others will want to take out more from the bank if they are worried about the bank’s assets, like in a bank run. So both of these items are stressed in the rule to get numbers sufficient to survive a crisis. Banks would prefer to count riskier kinds of things as those safe assets, and assume that firms would want to take less in times of crisis. Each allows them to have to hold less high-quality capital.

    There are three major changes announced. The first is that the requirements will be slowly phased in each year for the next several years, fully online by 2019. This is to avoid putting additional credit stresses on the financial system right now. There's also a clarification that assets can be drawn down in times of crisis. But how will these regulations look when they are online? The other two changes are the way the actual mechanisms are calculated.

    Let’s chart out those last two changes that were just introduced:

    Originally there were just two levels of assets, level 1 and level 2. The second change is to create a new level of assets, called “Level 2B.” Level 1 is unchanged, as well as the old Level 2, which is now Level 2A. Level 2B will be no more than 15 percent of total assets, but it will include lower rated corporate debt (BBB- or above) and, more shockingly, equity shares. Equity is not what you want as a liquidity buffer, as its value will plummet and volatility will skyrocket during crises. In a crisis all correlations go to 1, and that’s especially true in a financial crisis. The fact that it might have done well in the 2008 crisis is no excuse because, as Economics of Contempt pointed out on this topic, there were massive government bailouts and interventions in the market, which is what we want to avoid.

    On the plus side, rather than just putting equities in “Level 2,” they created a separate bucket with harsher penalties. Equities will receive a 50 percent haircut toward qualifying, much larger than the 15 percent haircut Level 2A assets get.

    The third change is the lower outflow rate for liquidity facilities, corporate deposits as well as other sources of outflows. To get a sense of this, stable deposits with a serious system of deposit insurance – think of your FDIC savings account – originally had a 5 percent outflow. A bank would have to be prepared for 5 percent of its deposits to leave during this financial crisis. That has been reduced to 3 percent in the new rule.

    These changes are particularly large for liquidity facilities. Instead of the assumption that firms will go gunning for any emergency liquidity that they can find, and as such use up most of these outlines, there are much more financial-friendly outflow estimates. In fact, many of these rates have been cut by more than half, with Basel now estimating that liquidity facilities, for instance, will only be drawn down 30 percent instead of 100 percent.

    These are dramatic reductions. If they are predicated on more closely aligning with 2008 numbers, backstopping the entire liquidity of the financial markets was the whole point of the bailouts and the Federal Reserve’s emergency interventions. The numbers should be much worse in this case.

    There is finally a global rule declaring a necessary, but not sufficient, minimum level of liquidity in financial firms. Liquidity does nothing if a firm is insolvent, but it by itself can generate panics. However these rule changes almost all entirely benefit the financial system, and call for less liquidity than in the first drafts. Undercounting the liquidity facilities, as well as letting more of the HQLA consist of assets like stocks and MBS, is a major change from the previous version.

    The Basel committee notes that its Liquidity Coverage Ratio is an absolute minimum rate, and that “national authorities may require higher minimum levels of liquidity.” Authorities within the United States should take this seriously. Dodd-Frank calls on regulators to put in sufficient liquidity regulations for large financial firms. Basel III provides a baseline, but regulators could go further by themselves if necessary via their Dodd-Frank mandate. Understanding why the outflow assumptions have so dramatically changed will be one point to follow.

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    Let’s say you were trying to make a personal budget. We can imagine two reasonable ideas you would want to incorporate into this budget. The first is that you want to make sure you can pay your bills if your income suddenly freezes up or you suddenly need cash. You want to make sure your savings are sufficiently liquid in case there is an emergency.

    Another rule is that you want your time horizon of your debts to match what you are buying with those debts. You don’t want a 4-year mortgage and a 30-year auto loan; you want a 4-year auto loan and a 30-year mortgage. And for our purposes, you really don’t want to buy either on a credit card, since the payment terms can fluctuate so often in the short term.

    These two ideas are behind two of the additional special forms of capital requirements designed by the Basel Committee on Banking Supervision in Basel III. The first is a “Liquidity Coverage Ratio” (LCR), which is designed to make sure that a financial firm has sufficiently liquid resources to survive a crisis where financial liquidity has dried up for 30 days. The second is a “Net Stable Funding Ratio,” which is designed to complement the first rule and seeks to incentivize banks to use funds with more stable debts featuring long-term horizons.

    Basel has just introduced some changes into their final LCR rule, so let’s take a deep dive into this capital requirement rule. Before we introduce some headache-inducing acronyms, remember that the basics are simple here. Banks have a store of assets and they have obligations that they have to make. Or, at the simplest level, banks have a pile of money or things that can be turned into money and people and firms who are demanding money. So any watering down of the rule has to impact one of those two things.

    Remember that in a crisis it is hard to sell assets to get the cash you need to make your payments. Also, crucially, others will want to take out more from the bank if they are worried about the bank’s assets, like in a bank run. So both of these items are stressed in the rule to get numbers sufficient to survive a crisis. Banks would prefer to count riskier kinds of things as those safe assets, and assume that firms would want to take less in times of crisis. Each allows them to have to hold less high-quality capital.

    There are three major changes announced. The first is that the requirements will be slowly phased in each year for the next several years, fully online by 2019. This is to avoid putting additional credit stresses on the financial system right now. There's also a clarification that assets can be drawn down in times of crisis. But how will these regulations look when they are online? The other two changes are the way the actual mechanisms are calculated.

    Let’s chart out those last two changes that were just introduced:

    Originally there were just two levels of assets, level 1 and level 2. The second change is to create a new level of assets, called “Level 2B.” Level 1 is unchanged, as well as the old Level 2, which is now Level 2A. Level 2B will be no more than 15 percent of total assets, but it will include lower rated corporate debt (BBB- or above) and, more shockingly, equity shares. Equity is not what you want as a liquidity buffer, as its value will plummet and volatility will skyrocket during crises. In a crisis all correlations go to 1, and that’s especially true in a financial crisis. The fact that it might have done well in the 2008 crisis is no excuse because, as Economics of Contempt pointed out on this topic, there were massive government bailouts and interventions in the market, which is what we want to avoid.

    On the plus side, rather than just putting equities in “Level 2,” they created a separate bucket with harsher penalties. Equities will receive a 50 percent haircut toward qualifying, much larger than the 15 percent haircut Level 2A assets get.

    The third change is the lower outflow rate for liquidity facilities, corporate deposits as well as other sources of outflows. To get a sense of this, stable deposits with a serious system of deposit insurance – think of your FDIC savings account – originally had a 5 percent outflow. A bank would have to be prepared for 5 percent of its deposits to leave during this financial crisis. That has been reduced to 3 percent in the new rule.

    These changes are particularly large for liquidity facilities. Instead of the assumption that firms will go gunning for any emergency liquidity that they can find, and as such use up most of these outlines, there are much more financial-friendly outflow estimates. In fact, many of these rates have been cut by more than half, with Basel now estimating that liquidity facilities, for instance, will only be drawn down 30 percent instead of 100 percent.

    These are dramatic reductions. If they are predicated on more closely aligning with 2008 numbers, backstopping the entire liquidity of the financial markets was the whole point of the bailouts and the Federal Reserve’s emergency interventions. The numbers should be much worse in this case.

    There is finally a global rule declaring a necessary, but not sufficient, minimum level of liquidity in financial firms. Liquidity does nothing if a firm is insolvent, but it by itself can generate panics. However these rule changes almost all entirely benefit the financial system, and call for less liquidity than in the first drafts. Undercounting the liquidity facilities, as well as letting more of the HQLA consist of assets like stocks and MBS, is a major change from the previous version.

    The Basel committee notes that its Liquidity Coverage Ratio is an absolute minimum rate, and that “national authorities may require higher minimum levels of liquidity.” Authorities within the United States should take this seriously. Dodd-Frank calls on regulators to put in sufficient liquidity regulations for large financial firms. Basel III provides a baseline, but regulators could go further by themselves if necessary via their Dodd-Frank mandate. Understanding why the outflow assumptions have so dramatically changed will be one point to follow.

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    Rortybomb's Best of 2012 Roundup and Linkfest

    Dec 31, 2012Mike Konczal

    I want to thank everyone who has read, commented, emailed, tweeted, shared and otherwised engaged with me and this blog over the past year. Especially as I moved from the old blog to the new one here. I'm pretty happy with how 2012 went, and I hope to keep it going into 2013. Here's a recap of the best stuff I was up to in 2012 for those who would want a best of list. (Here's the equivalent list for 2011.)

    One goal for 2012 was writing some longer think pieces, and that went went pretty well. Some of my favorites were a piece on the ideology of mass incarceration for Jacobin, the death of public higher education and the Master Plan for Dissent (with Aaron Bady), a lead essay for a forum on debt reduction and the recession for Boston Review, and a piece against coupon government and for public provisioning for New America (a shorter version in Dissent here).

    The most read blog post of the year (which may be the most read thing I've written) was an animated gif explanation to the recent Jackson Hole conference on monetary policy, both here and at Business Insider. The election provided most-read posts number two and three: I wrote a post showing how Mitt Romney's 5-point economic plan was the same plan from 2008 and 2004, and I argued for a policy agenda that followed from the "you didn't build that" comment. Back when everyone was trying to figure out why the Federal Reserve wasn't being aggressive, my interview with Joe Gagnon on the Fed started a debate on the topic. I also analyzed four histories of the 47 percent meme after Mitt Romney's blunder tape.

    Personal favorite blog posts that are a little extra econ-geeky: updated my topological map of theories of the recession with latest information, an argument for why taxing capital income is fair, as well as taking apart that dubious "uncertainty index" that floats out there in the economic debates.

    At the end of the year I started contributing economic articles to the American Prospect, and you can see the list of articles here. I'm trying to build out where liberalism will evolve post-Obama, and I've written about how liberals will fight over full employment, and the future of the welfare state. The second was read widely on the right, as Bryon York went around Fox News, conservative radio and articles about how it was the liberal agenda. As he wrote, "Obama's liberal supporters do have a second-term agenda, and it is a far-reaching one. That agenda, laid out a new article in the liberal magazine the American Prospect, is enough to set off alarm bells among conservatives in Washington and around the country."

    Four things: I'm going to engage more with comments at this site, now that I have a mechanism to see when they are posted easier. Second, if you are looking to expand your magazine subscriptions in 2013, consider subscribing to some of the magazines I've had the privilege of writing for in the past year. These magazines are nurturing all kinds of new talent, and that pipeline is important for the years ahead. Third, feel free to leave a comment with some ideas, either specific to this webpage or more general, about what you'd like to see here in the year ahead. And fourth, thanks for reading and hope to see you in the new year!

    Follow or contact the Rortybomb blog:

      

    I want to thank everyone who has read, commented, emailed, tweeted, shared and otherwised engaged with me and this blog over the past year. Especially as I moved from the old blog to the new one here. I'm pretty happy with how 2012 went, and I hope to keep it going into 2013. Here's a recap of the best stuff I was up to in 2012 for those who would want a best of list. (Here's the equivalent list for 2011.)

    One goal for 2012 was writing some longer think pieces, and that went went pretty well. Some of my favorites were a piece on the ideology of mass incarceration for Jacobin, the death of public higher education and the Master Plan for Dissent (with Aaron Bady), a lead essay for a forum on debt reduction and the recession for Boston Review, and a piece against coupon government and for public provisioning for New America (a shorter version in Dissent here).

    The most read blog post of the year (which may be the most read thing I've written) was an animated gif explanation to the recent Jackson Hole conference on monetary policy, both here and at Business Insider. The election provided most-read posts number two and three: I wrote a post showing how Mitt Romney's 5-point economic plan was the same plan from 2008 and 2004, and I argued for a policy agenda that followed from the "you didn't build that" comment. Back when everyone was trying to figure out why the Federal Reserve wasn't being aggressive, my interview with Joe Gagnon on the Fed started a debate on the topic. I also analyzed four histories of the 47 percent meme after Mitt Romney's blunder tape.

    Personal favorite blog posts that are a little extra econ-geeky: updated my topological map of theories of the recession with latest information, an argument for why taxing capital income is fair, as well as taking apart that dubious "uncertainty index" that floats out there in the economic debates.

    At the end of the year I started contributing economic articles to the American Prospect, and you can see the list of articles here. I'm trying to build out where liberalism will evolve post-Obama, and I've written about how liberals will fight over full employment, and the future of the welfare state. The second was read widely on the right, as Bryon York went around Fox News, conservative radio and articles about how it was the liberal agenda. As he wrote, "Obama's liberal supporters do have a second-term agenda, and it is a far-reaching one. That agenda, laid out a new article in the liberal magazine the American Prospect, is enough to set off alarm bells among conservatives in Washington and around the country."

    Four things: I'm going to engage more with comments at this site, now that I have a mechanism to see when they are posted easier. Second, if you are looking to expand your magazine subscriptions in 2013, consider subscribing to some of the magazines I've had the privilege of writing for in the past year. These magazines are nurturing all kinds of new talent, and that pipeline is important for the years ahead. Third, feel free to leave a comment with some ideas, either specific to this webpage or more general, about what you'd like to see here in the year ahead. And fourth, thanks for reading and hope to see you in the new year!

    Follow or contact the Rortybomb blog:

      
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