Counterparties: Prioritization nation

January 15, 2013

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House Republicans are reportedly threatening to force a government shutdown — or even a default — to get the spending cuts they want.

This is all about the debt ceiling, of course. The US hit its statutory spending limit on December 31; since then, the Treasury Department has been using a series of “extraordinary measures” to keep the country from defaulting. Those measures, Treasury Secretary Tim Geithner, said into a letter to House Speaker John Boehner yesterday, could expire in mid-February. If they do, some 80 million payments a month could be at risk. Geithner does not say bond payments could be at risk, but that didn’t stop Fitch warning that it — just like S&P, last time around — might downgrade the USA as a result.

bill resurrected by Republican Senator Pat Toomey would require Treasury to prioritize general debt obligations —  think bond payments — any time the US hits the debt ceiling. In 2011, Treasury suggested this kind of prioritization is “default by another name.” Similarly, Keith Hennessy, a former Bush Administration economist, says that “the sanctity of contracts and the US government’s credibility” are at stake: not paying benefits or bills, he writes, would be  ”the first step to becoming a banana republic”. President Obama echoed this critique yesterday in a press conference.

In practice, as Derek Thompson says, prioritization is frightening. “Some days, the government would get enough money to pay Social Security checks and Medicaid providers,” he writes. “Other days it wouldn’t”. And that’s assuming prioritization is even possible. Brad Plumer notes that every day Treasury gets about 2 million invoices from government agencies, which are processed automatically “dozens of times per second”. No one knows whether it’s is legal or even possible to pay bondholders with certainty while deprioritizing everyone else owed money by the government. JD Foster at the Heritage Foundation, for his part, thinks the Treasury Department will always pay bondholders first, even if the legality of doing so is murky.

The best outcome, of course, is that Congress votes to raise the debt ceiling before any such measures become necessary. For the other possible outcomes, check out Quartz’s Choose Your Own Adventure-style chart. — Ryan McCarthy

On to today’s links:

Housing
New foreclosure settlement cash “being distributed with no regard to whether a borrower suffered harm” – Joe Nocera

Oxpeckers
The one time publisher of Twain and Hawthorne publishes Scientology propaganda as “sponsored content” – Gawker

The Fed
Burning questions, uncontroversial answers — starring Ben Bernanke – Binyamin Appelbaum

Alpha
Dan Loeb is on a heroic quest to cut pay at Morgan Stanley (and boost his investment) – WSJ
Herbalife provides the same service as Alchoholics Anonymous: Social support – John Hempton

TBTF
JPMorgan gets a wrist slap from regulators who should’ve caught them – Lisa Pollack
Suddenly, everyone loves bank stocks again – Bloomberg

Regulations
How rating agency reform failed – FT

Remuneration
Morgan Stanley pleased to announce that 2012 bonuses will be paid in 2013, 2014 and 2015 – Reuters

Funny Because It’s Not True
“Coca-Cola announced that… all sweetened fizzy drinks will be voluntarily recalled” – Ken Layne

Long Reads
An extended argument that student debt can can make us better capitalists – Jacobin

Awesome
Walmart says it will hire any military veteran discharged in the last 12 months – Matt Yglesias

Hackers
How the legal system failed Aaron Swartz – New Yorker

Housing
The number of underwater homeowners fell by 4 million last year – Bloomberg

Right On
The quest for the right kind of stupidity – FT

Wonks
Both the Fed and the Treasury “emit interchangeable obligations that are in every relevant sense money” – Steve Waldman

Bold Covers Letters
“I have no qualms about fetching coffee, shining shoes or picking up laundry” – Business Insider

3 comments

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And so the decline of the US as a Great Power has begun, initiated by crazy partisan Republicans mostly voted into power because of their stance on gay marriage, or abortion and without a clue about economics or foreign affairs. China, of course, is laughing.

Another example of how China is on the way up is information released today by CambridgeIP on the number of patents issued on the new wonder material Graphene. They show China with a significant lead over the US with roughly 25% more patents on this new technology.

Congress really needs to get a grip!

Posted by FifthDecade | Report as abusive

Is Felix ever going to explain why he’d rather see millions of people harmed by a government closure than have his sensibilities offended?

Posted by Zdneal | Report as abusive

Is Felix ever going to explain why he’d rather see millions of people harmed by a government closure than have his sensibilities offended?

Posted by Zdneal | Report as abusive