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Now that the "crisis"
over the federal debt ceiling has been averted, we can leisurely explore two
of the wackier proposals that emerged during the state of panic. Not
surprisingly, the schemes involved the Federal Reserve and its ability to circumvent,
not just standard accounting, but also the traditional divisions of political
power. It's worth studying the episode carefully because we will probably see
one or more of these "solutions" promoted as the only answer to
another crisis in the not-too-distant future.
Bernanke and
Geithner Don't Need No Stinkin' Debt-Ceiling
Increase
Late last week, when more and more
analysts contemplated the horror of a US government default and partial
shutdown, Jack Balkin —
a professor of constitutional law at Yale — outlined strategies that the White House
could use to evade the pesky borrowing ceiling imposed by a fickle Congress:
Are there other ways for the
president to raise money besides borrowing?
Sovereign governments such as the
United States can print new money. However, there's a statutory limit to the
amount of paper currency that can be in circulation at any one time.
Ironically, there's no similar
limit on the amount of coinage. A little-known statute gives the secretary of
the Treasury the authority to issue platinum coins in any denomination. So
some commentators have suggested that the Treasury create two $1 trillion
coins, deposit them in its account in the Federal Reserve and write checks on
the proceeds.
The government can also raise money
through sales: For example, it could sell the Federal Reserve an option to
purchase government property for $2 trillion. The Fed would then credit the
proceeds to the government's checking account. Once Congress lifts the debt
ceiling, the president could buy back the option for a dollar, or the option
could simply expire in 90 days. And there are probably other ways that the
Fed could achieve a similar result, by analogy to its actions during the 2008
financial crisis, when it made huge loans and purchases to bail out the
financial sector.
The "jumbo coin" and
"exploding option" strategies work because modern central banks
don't have to print bills or float debt to create new money; they just add
money to their customers' checking accounts.
These suggestions should horrify
anyone who understands the importance of sound money. Not only are the
proposals themselves preposterous, but the mere fact that they are being
discussed is a symptom of the cultural decadence wrought by the government
and the Fed's responses to the 2008 financial
crisis.
Money for Nothing
When critics of the Fed assert that
Bernanke creates money "out of thin air," they mean the following:
The Federal Reserve has the power to buy whatever assets it wants at whatever
price it wants. In principle, Treasury Secretary Geithner could sell a
paperclip to the Fed for $2 trillion. The Fed would simply write a check made
out to the Treasury, drawn on the Fed itself.
When the Treasury deposited this
check with its own bank — which just so happens to be the Fed —
then its own "checking account" balance would go up by $2 trillion.
This money wouldn't come from anywhere in the sense that some other account
would need to be debited $2 trillion. On the contrary, the system's total
reserves (and what is called the "monetary base") would have
swelled by $2 trillion. The Treasury would be free to start paying bills by
writing checks on the $2 trillion in its account.
The only kink in the plan would be
the state of the Fed's balance sheet. Initially it could value the paperclip
at $2 trillion — what the Fed paid for it — and list the
paperclip among its other assets such as Treasury bonds and mortgage-backed
securities.
"These suggestions should horrify
anyone who understands the importance of sound money."
Of course, people in the financial
markets would cry foul. They would know that if the Fed's books were "marked to market," the paperclip
would be worthless and the Fed would suddenly be insolvent according to
regular accounting rules. (Its liabilities, in part consisting of bank
reserves — which are dollar-denominated claims on the Fed — would
have risen by $2 trillion, while its assets didn't budge.) But this would
merely be an embarrassment rather than a legal obstacle because the Fed has
put into place Orwellian rule changes that allow it to
shield its shareholder equity from capital losses.
The difference between my absurd
paperclip scheme and the two proposals discussed by Balkin
is one of degree and not of kind. As of this writing, platinum is trading for
a little less than $1,800 per ounce. Thus, $2 trillion in platinum would
weigh about 35,000 tons, almost one-sixth the weight of the Sears
Tower. (Those would be two of the heaviest coins Bernanke would likely
encounter in his life.) Clearly, the platinum coins stamped "$1
trillion" would not actually be worth that in terms of the metal content.
Things are just as bad with the
option scheme in which the Fed would quite deliberately pay $2 trillion for
an asset that it intended to hold until it expired as worthless. At least my
hypothetical paperclip would still be useful after 90 days.
Debasing the
Money, As Well as the Public's Ideology
Conventional
"open-market" operations are a convoluted form of legalized counterfeiting, as I've explained
before. The virtue of Balkin's discussion is that
the sleight-of-hand is minimized and most readers will be able to see the
naked redistribution in all its glory (or lack thereof). We are moving ever
closer to the point at which the government runs the printing press to
directly pay its bills, just as surely as the monarchs of old who added
base metals to the coinage of the realm.
The danger of these proposals
doesn't consist solely in the price inflation and transfer of purchasing
power that they would entail if implemented. No, simply the discussion
of them by allegedly sophisticated scholars further degrades the public's
understanding of money. More and more Americans are "learning" that
saving and frugal living is a sucker's game, because the Treasury and Fed
will simply create money to bail out their rich buddies.
Conclusion
Flawed as it is, the US
Constitution vested fiscal authority with the Congress — rather than
with the Executive Branch — for an important reason. The president has
several advantages, not least of which is his (or her) ability to wage war.
Therefore the Constitution seeks to limit that power by keeping the purse
strings in the hands of elected representatives.
If the Treasury ever falls back on
a scheme such as the ones Balkin discusses, the
United States will be one step closer to an outright dictatorship. The
American president now claims the authority to execute US citizens without any judicial
oversight at all. This is not a person to whom we should grant a printing
press.
Robert P. Murphy
Essay originally published
at Mises.org here. With permission
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