Sunday, January 13, 2013

The Elephant in the Treasury - Why the Palladium Coin Was Rejected

The elephant in the room at the Treasury and Fed is the fear of being accused of "monetizing the debt". When the country is at the "zero bound" where interest rates on Federal debt are being constrained by Federal Open Market Committee policy to approach near-zero percent, then the difference between debt and money approaches near-zero.

So why the Treasury and Fed concern about a palladium coin valued at $1 trillion? It would solve the big problem of the debt ceiling. Paul Krugman has pointed out in his column in the print edition of the NY Times on Friday, January 11, that the Congress failing to authorize the debt ceiling forces the Executive Branch to withhold authorized payments, which blurs the roles of the Executive and Legislative branches.
Raising the debt ceiling wouldn't grant the president any new powers... [and] if the debt ceiling isn't raised, the president will be forced to break the law; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.
The palladium coin would also not appear to require Congressional approval - although the law does seem to require a "marketing plan" for the coin to be submitted to the Congress and a $25 palladium coin issue went through the Congressional legislative process in 2009-2010 as I have previously noted.

Here are some objections:
1. Separation of fiscal and monetary policy is an article of institutional and theoretical faith than no one wants to interfere with. For the Treasury to issue a trillion-dollar coin to deposit at the Treasury would open up all kinds of questions about this separation.
2. The zero-bound situation is temporary and everyone would like to escape from this difficult world as soon as possible. Former Fed Governor Larry Meyers said in December 2008 that at the zero bound the FOMC has nothing much to do and they should all take a very long vacation.  I am sure, however, he was not expecting the vacation to last until 2013.
3. A system with Federal Reserve independence is more resilient than one where the Fed and Treasury are combined. It's the 100th anniversary of the creation of the Fed, which was created to maintain orderly financial markets (the Fed was a remedy for the Bankers Panics of 1907-1908) and to preserve the value of the dollar. The fear that a head of state might tamper with the money supply to finance a war or excessive consumption is well founded. A monetary authority protecting the value of the people's money is a widely emulated institution.

So, however annoyed we may be about GOP misuse of the debt ceiling as a bargaining chip for something else, and thereby interfering with the conduct of government, the Treasury and Fed are right in opposing something that would blur the distinction between them.

However, some other plan better be ready to thwart a debt-ceiling blackmail.