Enterprising saviors of the Republic continue to look for ways out of the debt limit box, and here’s another one: the Treasury Department could simply go overdrawn at the Federal Reserve:
This is nothing to do with the 14th Amendment or with coin seignorage — this is just the simple mechanics of bank accounts. Treasury has an account at the Fed; at last count it was in credit to the tune of roughly $77 billion. Money’s coming in; money’s going out. Come August 2, it’ll be down to zero. But hey, zero’s just a number. We’ve all gone overdrawn at our bank at some time or another: why should Treasury be any exception?
The idea here is that after August 2, Treasury can simply carry on with business as usual. Money will come in to its bank account; money will go out. And the balance will dip below zero: Treasury will have an overdraft at the Fed. You think the Fed’s going to bounce Treasury’s checks?
Accounts payable like this don’t count against the debt.
Of course, like all of these plans, most of which are structurally sound, they rely on people with far different perspectives to actually execute them. Barack Obama would have to invoke the 14th Amendment; Timothy Geithner would have to mint a trillion-dollar coin; and Ben Bernanke and his Federal Reserve Board would have to basically ignore the overdrawn Treasury account. Neil Irwin says they would be unlikely to do so.
Fed officials are monitoring the situation, and Bernanke and William C. Dudley, president of the Federal Reserve Bank of New York, met with Treasury Secretary Timothy F. Geithner late last week to discuss options. The Fed acts as the “fiscal agent” for the Treasury, a role akin to being the federal government’s banker.
But despite that role, considerable legal restrictions on what the Fed can do make it hard to imagine the central bank being able to address the immediate crisis. And there is no appetite within the independent-minded Fed to intervene in a fundamentally political dispute, particularly one as polarizing as how much the government should spend and how it should pay for it.
“I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt,” Bernanke said at a congressional hearing this month.
Unfortunately, we have creative solutions and uncreative people unwilling to carry them out.
About the only way we’re going to avoid some manner of default by August 2nd is because we found a little change in the couch to last us another week.