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Friday, July 29, 2011

Can the Fed Use its Over-Draft Power to Get Around the Debt Ceiling?

In my eternal search for more arcane problems of statutory interpretation for my course in Administrative & Regulatory State, I am wondering if anyone has any insights as the statutory powers of the Federal Reserve and the Department of Treasury to manage any debt crisis resulting from failure to raise the debt ceiling. There have been, of course, a bunch of (to my mind) rather thin Fourteenth Amendment arguments about why the statutory debt ceiling is unconstitutional. But forget all of that constitutional stuff, for a moment. Looking only at the various statutes conferring power on Treasury and the Fed, could the magic of statutory interpretation dissolve the danger of default?

Specifically, what counts as "debt" for the purposes of the debt ceiling? Suppose that the Federal Reserve Board honors the federal government's various checks by selling off its own stock of U.S. bonds or simply printing more money. Felix Salmon of Reuters suggests that these exercises of the Federal Reserve's over-draft power would not count as "debt" for the purposes of the debt ceiling, and he lauds this method of finance as "the first best solution to the debt-ceiling problem." Is he right? The 1917 statute creating the debt ceiling (codified at 31 U.S.C. section 3101 et seq.) does not seem to have any definition of "debt" or "note" at all. (Section 3103 authorizes the Secretary of the Treasury to issue "notes," but it does not define the term or mention the overdraft power of the Fed). James Bullard, President of the St. Louis Federal Reserve apparently has denied that the Fed could honor Treasury's checks, but I have yet to hear an argument.

Is that argument obvious? I hope not: This could make a great question for Administrative & Regulatory State. Moreover, resolving the issue through the boring murkiness of statutory interpretation would seem to be the usual way in which (to use Adrian's Vermeule's phrase) "our Schmittian Administrative Law" allows agencies to do what they want to do. The advantage of using murky statutory interpretation over more dramatic constitutional arguments is precisely that such a move is so routine and boring that it will calm the relevant markets. (Oddly, Adrian and Eric Posner recently called for the President to take the much more dramatic step of publicly declaring that the debt ceiling was void citing "necessities of state" -- just the sort of Wagnerian exercise of emergency power that would make bond markets go all jittery and defeat the purpose of the declaration. Adrian and Eric might be right that the President can face down Congress, but bond markets are stronger than Congress -- and they like legal regularity, not charismatic politics).

But banking law is not my thing, so perhaps some reader could walk me through the statutory argument against the Fed's power?

Posted by Rick Hills on July 29, 2011 at 11:13 PM | Permalink

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In some cases the US Code does provide guidance as to whether an obligation is part of the debt subject to the limit.

For example, the social security trust funds' bonds are included in the debt subject to the limit; the key is that obligations issued under 31 USC § 3101 are subject to the limit.

42 USC § 401(d) authorizes issuance of govt obligations to the soc sec trust funds under chapter 31 of title 31. It reads, in part, "The purposes for which obligations of the United States may be issued under chapter 31 of Title 31 are hereby extended to authorize the issuance at par of public-debt obligations for purchase by the Trust Funds."

31 USC § 3101 places a $14.294 trillion limit on the face amount of obligations issued "under this chapter" (chapter 31 of title 31) and of certain other obligations.

There is of course the question whether any particular obligation was issued under Chapter 31 of Title 31.

Posted by: Mark Scarberry | Jul 30, 2011 9:27:05 PM

how about presumptive repeal?

any comments on implicit repeal?

if congress passes statue A and then later conflicting statute B-do not the cannons of construction say statute B repeals statute A?

replace A with “debt ceiling” and B with “recent appropriations bill” and walllah!!

Posted by: bob | Jul 30, 2011 10:35:45 PM

This is a place where seeing the relevant OLC memoranda would be useful. I assume Treasury could use its emergency stabilization fund for this purpose (it used that to bail out the money market funds) by trading that money in for warrants or IOUs or something. But that's small potatoes. But more generally, without wanting to sound too cynical, given that Treasury has devised the nitty gritty rules for the coming and and sending out of money, I don't see why it couldn't create a conduit funded with expected future revenues and finance things through it. It would be technical and unsatisfying, but Treasury wouldn't be issuing more debt, the conduit would be. Many a financial institution has done the same thing - it's just off balance sheet finance. Then you'd have to ask yourself whether this technicality would run afoul of the clear purpose of the debt ceiling, who would have standing to make a case out it, whether it would be a political question, and so on.

I'm not saying that this would obviously work - I don't know if it would square with accounting principles, and it could be that there's statutory language foreclosing this sort of thing. But it would be the first thing I would think of.

Posted by: David Zaring | Jul 30, 2011 11:33:28 PM

This is a place where seeing the relevant OLC memoranda would be useful. I assume Treasury could use its emergency stabilization fund for this purpose (it used that to bail out the money market funds) by trading that money in for warrants or IOUs or something. But that's small potatoes. But more generally, without wanting to sound too cynical, given that Treasury has devised the nitty gritty rules for the coming and and sending out of money, I don't see why it couldn't create a conduit funded with expected future revenues and finance things through it.

Posted by: dresses | Aug 4, 2011 4:22:10 AM

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