I think this is an interesting discussion and worth a listen.
I agree with quite a bit of it. I could be wrong, but I do not think that the Obama Administration has willfully passed up a few convenient ways to circumvent this debt ceiling impasse, two of which were relatively doable, and the last being a 'little more radical.' I looked into each one and they all appeared to be risky and improbable of success.
Invoking the 14th Amendment to nullify the debt ceiling would undoubtedly provoke a Constitutional challenge by the Republicans. It would go to the Supreme Court and would likely be overruled there after generating considerable uncertainty, given the current makeup of the court. The debt ceiling has been in place for a long time, since 1917 as I recall, and it would not be easily dispensed. I do think it is a bad law, and should be nullified, but by legislation, not by the judiciary and not in a crisis of this sort.
Selectively defaulting on Treasury debt being held by the Fed is also probably a non-starter because the ratings agencies have said that this would be considered a default, and would trigger a CDS event. Selectively defaulting even if the Fed agreed would be a far-reaching event. I did consider some action by the Fed to write off the debt on its own accord, but I don't see that happening as it would appear to be overtly partisan. This is more an artificial political fight than a genuine financial crisis. If you don't understand this, you are not understanding the ebb and flow of the drama.
As for the third alternative, slightly more complex, it involves the Mint creating a falsely valued asset, like a trillion dollar platinum coin, and selling it to the Fed at face value. The Constitutionality of this would also be challenged, as it would be a form of fraud and pure money printing. I think it is much more awkward than having the Fed just buy more Treasury debt in the open market and send the interest back to Washington, ex expenses, which they already do. But that does not help with the debt ceiling.
There is a possibility that Obama could resort to Executive Order after the deficit ceiling deadline passes, but that would be a very clumsy political maneuver. It will be interesting to see if the CDS are triggered, in which case the government may have to nationalise some of the banks. Hardly a desirable outcome.
So I don't see a viable solution in any of these three suggestions, and view them as being clever, without being practical. Just as political people rarely understand the finer points of economics, so the economists rarely understand the finer points of Washington politics.
I hasten to add at this point that Yves is far more knowledgeable in the financial area than I am, and I have the utmost respect for her. She has knowledge and integrity, which are rare commodities to find in combination these days. I do not want this to be viewed as a criticism in general, but it is an important point since some do believe in these alternatives, and they did seem to play into some of her later thinking. Yves has probably forgotten more about finance than I know, and her book is an absolute gem and a must read.
I struggle with the question of Obama's motives, that he always wanted to cut entitlements. I don't agree with this based on what I have seen, although it is difficult to assess someone's motives. I think this theory is weakened because there really is not any 'easy way out' yet shown, and the House Republicans are hardly allies of Obama. In fact, they have shown a determination to make this a political event, and to stretch it out if possible into the 2012 elections.
I cannot imagine that he wants this, and if anything has been bending over backwards to try and avoid it. He is a compromiser, non-confrontational, and although one would like to think that there is a method to his madness, and there may well be, in fact we just don't know what his motives are. I suspected he was positioning the Republicans to take the blame, but the excesses and extortion are their own. Like Clinton, he is trying to force them to eat the consequences of their actions. Hence the exaggerated gestures of compromise to look reasonable. He could be sincere, but since politicians rarely are I would not count on it.
The Republican right and the financiers are indeed looking like extortionists, as they mention in this video, and setting up opportunities to threaten the operational integrity of the country in order to get their way, in support of ideas not accepted by the majority of the people. They can obstruct, they can use the threat of damage, but they cannot win by normal means because they are a minority. But since they are an ideological minority they are willing to use methods not usually considered appropriate, and that are dangerous and potentially destructive.
This debt ceiling 'crisis' is not an aberration but a recognizable modus operandi from the new Right's playbook, cutting taxes for the wealthy, and then declaring a financial crisis, and seeking to gut social and popular policies and laws and organizations which the monied interests oppose. It is using crisis to circumvent the political process. This is being done at the state level in Wisconsin and New Jersey, for example.
I was involved with politics on the periphery, and did some work in Washington years ago. I don't have any inside knowledge or insights anymore, but I like to think I am seasoned enough to figure out what is going on. And I don't think it is honorable or in the best interests of the country.
