Former Mint Dir. Philip Diehl explains the Coin to Ezra Klein

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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.

Dear Ezra,

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.

Philip Diehl
Former Director, U.S. Mint, and chief of staff, U.S. Treasury Department

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Beowulf
3 years 6 months ago

“Federal reserve agent” is referring to regional Fed banks.

Guest
Beowulf
3 years 6 months ago

“couldnt he (or the Fed) just forgive that debt if they so choose?”

That’s the trillion dollar gift option.
http://monetaryrealism.com/ben-bernanke-and-the-trillion-dollar-gift/

Guest
3 years 6 months ago

The Treasuries in question are owned not by the Board of Governors, a federal agency, but by the Federal Reserve Banks, a consortium owned by member banks in their districts. Private banks, with a modest element of public governance, and true Creditors of the United States.

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firebill88
3 years 6 months ago

Question – I keep hearing that “unwinding the 3 trillion of QE” is going to be painful – why? Bernanke has creates the portfolio of bonds, and they never had that portfolio before. Instead of “unwinding” it, couldnt he (or the Fed) just forgive that debt if they so choose?

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Matt Franko
3 years 6 months ago

“and the practical reason being that the Federal Reserve would need to cooperate and wouldn’t, it wouldn’t work.”

Hey Patterson: time to start looking for a new set of fiscal agents bud….

Guest
Beowulf
3 years 6 months ago

Matt, yeah it’s disturbing a former Tsy official like Patterson doesn’t understand that the Federal Reserve Act itself has a dispute resolution provision as one-sided as a Saudi divorce court.
“[W]herever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”
http://www.law.cornell.edu/uscode/text/12/246

To boil this down for Patterson, if the Secretary exercises his authority to deposit public money and the Fed refuses the deposit, I don’t know what they’d call that at Goldman Sachs but to a federal judge it’d sure look like a conflict between the powers of the Fed and the powers of the Secretary of the Treasury. This isn’t rocket science. In baseball ties go to the runner, in the FRA ties go to the Secretary.

Guest
joe bongiovanni
3 years 6 months ago

Perhaps the hundredth-anniversary will be a good time for some minor technical amendments to the Act that solidifies the independence of the bank from the corruption of politics in these uncertain times.
A few words here and there, and we’re outta here.

Guest
Philip Diehl
3 years 6 months ago

Nice. I’m stealing this argument.

Guest
Beowulf
3 years 6 months ago

please do, then I can cite you as the source. :o)

Guest
3 years 6 months ago

Overdrawing the government’s account at the Fed does not appear to be against the law, so that may be a good way to test the Fed’s response. The Fed may allow overdrafts, at least for a while, but might resist accepting the coins because it would be a more dangerous precedent to set. Jay Carney has explored the option in this link: http://www.cnbc.com/id/43899646

Guest
joe bongiovanni
3 years 6 months ago

Carney’s piece didn’t exactly say that it was not against the law for the Treasury to write rubber-checks. It is certainly against regulations on government finance, which are based upon the laws.
The article implies acceptance of a periodic rubber-check crisis which works itself out in order to avoid the issue of the (coinage) money-creation power.

From the link:
“”Notice that this would do something very odd. It would give the U.S. Treasury Department control of the money supply—something usually credited to the Fed. But by writing checks on an empty bank account, the Treasury would be inflating the money supply. It would be printing money to pay its bills, more or less. Monetizing its obligations, rather than borrowing or taxing to pay them.””

Rather than borrowing, yes. But not rather than taxing. In addition to taxing would be the new money created by the government for spending on the goods and services which pass into the economy, as part of our national economic throughput. By definition, not inflationary.

“Something usually ‘credited’ to the Fed”.
The difference being that the Treasury can put money into the economy where we all live, work and spend. The Fed can put non-cash reserves into non-economy accounts on its ledger books, where they stay until removed.

Imagine, a sovereign nation giving its Treasury control over the national money system for the good of the people.

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