FDR Liveblogs World War II: July 30, 1941
America’s Decline Watch: The Months the Locust Hath Eaten

I Really Do Not Understand What the Treasury Is Doing...

Saying over and over again that August 3 is the date that checks start bouncing, claiming that there are no additional devices that can be used to avoid the crunch, and now claiming that it must make payments in the order in which they arrive. All these seem to me to be wrong. The standard assumption among people I talk to is that we understand that Treasury is saying these things to put pressure on the congress, but that we all informed observers no better--that we are in on the con. But there is no surer sign that you are the mark somehow than confidence that you are in on the con…

Felix Salmon is equally puzzled:

Can Treasury prioritize bond payments?: One of the more curious pieces of rhetoric in this whole debt-ceiling debate is coming from Treasury…. [I]t’s trying as hard as it can to get people to believe that if the debt ceiling isn’t raised, it’ll end up defaulting on Treasury bonds. Here’s Binyamin Appelbaum:

Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs…

This is scary — it raises the unthinkable spectre of a payment default on America’s bonded debt. Maybe that’s exactly what Treasury wants: a mini-crash in the bond market could be just the thing to concentrate minds in Congress…. But is it actually true?… Appelbaum pointed me to this report from the Congressional Research Service…. [A]lthough it all gets very murky very quickly, that’s largely the fault of Treasury, which seems to be doing its best to muddy the waters….

GAO’s 1985 opinion posits that Congress’s legislative silence simply leaves the determination of payment prioritization to the discretion of the Treasury Department. Conversely, Treasury appears to assert that the lack of specific legislative direction from Congress operates as a legal barrier, effectively preventing it from establishing a prioritization system. “Appears to assert” is right. A lot of this asserting is taking place on background: Treasury will talk a lot about the legality or otherwise of prioritizing payments if it’s off the record, but try to shine some daylight onto those arguments and they tend to scurry into the shadows. Check out how carefully Tim Geithner chooses his words here:

The idea of “prioritization” has been rejected by every President and Secretary of the Treasury who have considered it. It is unwise, unworkable, unacceptably risky, and unfair to the American people. There is no alternative to enactment of a timely increase in the debt limit.

All of this is absolutely true. But note the word conspicuous by its absence here: “unlawful”. When pressed, Treasury will say that prioritizing debt repayments is unwise — but will stop short of saying that they’re not allowed to do that. And insofar as Treasury’s legal argument has any basis at all, it seems to be based on the absence of any explicit instructions from Congress with regard to what should be prioritized. Yet Treasury is the agency saying most vocally that it doesn’t want Congress to pass any such law.

If push comes to shove and the debt ceiling isn’t raised, then, my base-case scenario is that the government will continue to pay all of its debts… find some other way of ensuring that the government meets all its obligations — not just Treasury bonds, but everything else as well. After all, Treasury has repeatedly said that any kind of failure to pay an obligation constitutes an event of default — it’s not just bond coupons which matter.

Felix's view is the common view on Wall Street and of Ms Market. But it is, after all, based on a belief that Felix (and Wall Street, and Ms Market) are in on the con…

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