(hoisted from comments)
Here’s the text of an email I just sent to Ezra Klein commenting on an interview with former Treasury chief of staff Mark Patterson that was published on his blog yesterday afternoon.
Your interview with Mark Patterson was interesting, especially the part about the viability of the coin. Here it is:
“The coin is a clever, nifty idea but it has problems. The one that gets overlooked the most is it wouldn’t actually make everything normal after it was invoked. It would be subjected to all kinds of challenges and litigation. As a straightforward matter the Federal Reserve wouldn’t give Treasury a trillion dollars for that coin. We looked carefully at it, but for both practical and legal reasons, the legal reason being the law obviously wasn’t meant for anything like this and the practical reason being that the Federal Reserve would need to cooperate and wouldn’t, it wouldn’t work.”
First, from a strategic point of view, the administration must reject all alternatives to passing a clean debt limit bill. Any escape hatch reduces pressure on the House GOP to relent. The House default caucus is inclined to deny reality and grasp at straws, so it’s crucial that their Wall Street and business allies, likewise, see no means of escape.
Second: well, of course the TDC would be subject to challenges and litigation. The question is how well could it withstand a challenge. The fact that the law wasn’t meant to authorize a TDC is irrelevant as long as minting one is fully consistent with the law. As co-author of the law, I happen to believe minting the coin is fully consistent with the law, and I take comfort that Laurence Tribe agrees. The legal case for minting the coin is far stronger than Mark allows, but as I’ve said, for reasons of strategy what else would he say?
Third, at first glance, the problem with the Fed refusing to accept the TDC would seem to be a show-stopper. It’s a bit more complicated than that. The $1 trillion would go on the books when the coin left the loading dock of the West Point Mint., not when it went into the Fed’s vaults. Theoretically, the coin could be delivered and held in the vault of a bank in NYC (or anywhere else, for that matter) until the Fed had the good sense to accept it. But I don’t think it would come to that.
Why? Because Ben Bernanke understands the difference between the worldwide implications of a US default and those of minting a TDC coin. Besides, for Chairman Bernanke, what’s another $1 trillion? He has already created $3 trillion out of thin air through QE, and he might well create another trillion through QE before the Fed finally turns off the spigot. If you’re willing to employ unprecedented monetary tools to prevent another great depression, do you draw the line at the TDC? As a matter of fact, unwinding a TDC will be much easier and less risk-prone than unwinding $3+ trillion in QE.
And do we really think that if the President and Treasury Secretary conclude minting the TDC is necessary to prevent a default that Bernanke will so “no” and let us go over the precipice?
Finally, this statement from Mark: “The one that gets overlooked the most is it wouldn’t actually make everything normal after it was invoked.” So true. “Normal”, today, is a debt limit crisis every nine months or so. We can figure on another one before the November elections. After minting the coin, the “New Normal” will be no more debt limit crises. The threat to throw the world economy under the bus will lack any credibility, and we can go back to something closer to fiscal sanity.
Former Director, U.S. Mint, and chief of staff, U.S. Treasury Department