President Obama and his advisers have insisted repeatedly that the only way to avoid a default is for Congress to raise the debt ceiling.
Yet each time the clock starts ticking for lawmakers to vote to raise it or face a default, the question inevitably arises whether there is another way out.
That’s for a good reason: The possibility that the U.S. could fail to make a payment on its bonds or other obligations is so unthinkable that other alternatives that would normally be unthinkable become thinkable.
Among those alternatives are some that President Obama could undertake unilaterally, by stretching the limits of what is practical or what is legal.
As the Treasury Department runs down the measures it has to keep paying the bills under the debt ceiling -- Secretary Jack Lew expects them to be exhausted by Oct. 17 -- the calls for Obama to circumvent the debt ceiling will grow louder.
On Monday, for example, Morgan Stanley economists said the administration will “have to break a law. Full stop.”
Here are a few drastic measures Obama could use:
The trillion-dollar platinum coin
The idea to mint a trillion-dollar platinum coin is based on a loophole written into a law meant for commemorative coins that allows the Treasury secretary to instruct the U.S. Mint to create platinum coins in any denomination. Some have suggested an accounting trick: the Treasury could create an extremely high-value coin, place it in its account at the Federal Reserve, and then draw on its Fed reserves to continue paying its obligations — without raising the debt ceiling.
Doing so would not raise inflation. Joseph Gagnon, a former Federal Reserve economist now with the Peterson Institute for International Economics, explained to the Washington Examiner that creating and depositing a coin at the Fed “would have no immediate effect since it is just an accounting gimmick.”
“The gimmick is that Fed holdings of Treasury bonds count toward the debt ceiling but the Fed holding a platinum coin does not,” Gagnon explained.
The Treasury said earlier this year that it did not think the coin idea was legal and that the Fed told them it would not accept such a coin as legal tender.
That doesn't mean that the idea has been completely killed. For example, just over a week ago, former Clinton Treasury official J. Bradford DeLong endorsed the idea of minting a $1 trillion coin or 1,000 $1 billion coins.
Asserting constitutional authority
The most straightforward way Obama could avoid Congress would be to simply assert that he has the power to raise the ceiling himself.
Some legal scholars believe that the executive's emergency powers include the power to avoid a default. “It has long been understood that the president should act to protect the country,” University of Chicago law professor Eric Posner told the new york times.
Other legal analysts have suggested that the president is bound to raise the ceiling himself by the 14th Amendment, which was adopted in 1868 to address issues relating to slaves and slave states following the Civil War and provides that “The validity of the public debt of the United States ... shall not be questioned.”
Obama administration lawyers have repeatedly said that Obama doesn’t have the power to unilaterally raise the debt ceiling. On Monday morning, Obama economic adviser Jason Furman said it’s not just the Constitution preventing Obama from raising the ceiling on his own — doing so wouldn’t be “economically sound.”
“You don’t want to open up a Treasury auction where your lawyers think it’s OK and a bunch of other lawyers are suing you bringing the case to the Supreme Court while all sorts of political bedlam is underway,” Furman said.
Bloomberg's Matt Levine has proposed financial wizardry to avoid the ceiling.
The way the Treasury finances government operations is by selling bonds to investors for cash, and then paying the investors principal and interest over time.
The debt ceiling applies to the face value of Treasury bonds outstanding, not the price paid for it. So the Treasury could save room under the debt ceiling by issuing a bond that had a face value of $100 but offered much higher than the usual interest rates. The Treasury could get much higher prices from investors for such "premium bonds.”
If the Treasury replaced its maturing bonds with premium bonds, it would lower the face value of the debt subject to the limit.
Such high-coupon rate bonds are prohibited by Treasury rules, but Obama could revise those rules by himself.
An assist from the Federal Reserve
The Federal Reserve now holds more than $2 trillion of Treasury debt, thanks to its ongoing program of stimulus purchases of Treasury bonds.
The Fed is like a private bank in that it has some independence from the government, but it is also a public entity in that it is not a profit-making enterprise and doesn’t have to maximize shareholder value.
In 2011, then-Rep. Ron Paul suggested that the Fed could simply destroy some of its Treasury holdings, thereby lowering the debt subject to the limit.
The idea might sound crazy, but Center for Economic and Policy Research economist Dean Baker called it “actually a very reasonable way to deal with the crisis,” noting that the Fed could offset any monetary side effects with its other monetary policy tools.
Others aren’t so sure. “I don't think Fed can cancel Treasury debt in any sense that would help,” Gagnon said, noting that Treasury debt still counts against the limit even if the Fed wipes it off its books.
There is another way for the Treasury to get revenue other than through taxes. It could sell federal assets and use the proceeds to make interest and other payments.
The government owns trillions of dollars’ worth of land, buildings, mortgage-backed securities, student loans, and, of course, $350 billion of gold in current prices at Fort Knox and other locations.
It’s one more option that the Obama administration — and previous administrations — has ruled out, noting that a quick sale would mean a huge loss for taxpayers and would stoke panic in the markets.
Furthermore, as the Treasury pointed out in 2011, “even if Treasury were to take these extreme actions -- at great cost -- the total value of the assets sold would only buy a limited amount of time” and the debt ceiling would soon need to be raised again.