BPC's Financial Regulatory Reform Initiative regularly highlights news articles, papers, and other important work which illuminate current and new thinking within financial regulation. We circulate these articles to provide a full view of cutting edge ideas, reactions and positions. The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members, or the Bipartisan Policy Center.
BPC's Financial Regulatory Reform Initiative regularly highlights news articles, papers, and other important work which illuminates current and new thinking within financial regulation. We circulate these articles to provide a full view of cutting edge ideas, reactions and positions. The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members, or the Bipartisan Policy Center.
In a vivid illustration of just how far our political discourse has fallen, the upcoming confrontation with the debt ceiling has brought with it serious discussion of defaulting on our obligations, minting trillion dollar coins, and printing IOUs.
Back during the 2011 debt limit event, there was much talk of the president invoking the 14th Amendment (“… the validity of the public debt of the United States, authorized by law … shall not be questioned”) to unilaterally resolve the debate. Considering the enormous potential costs of issuing debt with unknown legal validity – including higher interest rates and jeopardizing the reserve currency-status of the dollar – it’s good that the White House Press Secretary Jay Carney quashed the idea during a December press conference, stating: “This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling – period.”
Absent an increase in the debt ceiling, there will come a day when Treasury exhausts its borrowing authority and runs out of cash on hand to pay the nation’s bills. Starting on that day – which the Bipartisan Policy Center (BPC) refers to as the X Date – daily revenues will be the only means by which Treasury can cover the payments that come due. Since the federal government is running a large deficit, these cash flows will be insufficient to meet all obligations.
In recent weeks, some policymakers and media mavens have opined that if the United States pays in full and on time the principle and interest on its sovereign debt, then that means no “real” default has occurred, just a “technical” default. First, elementary but important facts:
- The United States issues sovereign debt, which pays interest to holders of that debt and is redeemed at face at maturity;
- Sovereign debt is NOT the only indebtedness of the United States – we have millions of payment obligations that come due every day;
- Either of these categories of debt can be paid only if the United States Treasury has the money to do so; and
- A failure to pay any of these debts is to default on those debts.
Michael Stubel contributed to this post.
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We honored two remarkable men and BPC founders, Senators Howard Baker and Bob Dole, for their distinguished military service, storied careers in elected office, and combined public service of more than a century. Vice President Joe Biden made remarks along with nearly every former living and current Senate majority leader.
On January 7, the Bipartisan Policy Center (BPC) released the second part of its debt limit analysis. In November, BPC had projected that the debt limit would be reached in the last week of 2012, and special accounting maneuvers known as “extraordinary measures” would allow Treasury to continue to pay federal obligations in full and on time until some point in February 2013. With the passage of the American Taxpayer Relief Act of 2012, otherwise known as the fiscal cliff deal, and updated government financial data, BPC has been able to update and refine that projection, which includes a close analysis of daily cash flows over the upcoming months.
The Bipartisan Policy Center (BPC) recently released a debt limit report projecting that if the debt limit is not increased, the federal government will likely have insufficient cash to pay all of its bills in full and on time (what we call the “X Date”) at some point in the range of February 15 through March 1, 2013. The BPC estimate was based on certain assumptions, including that the tax filing and refund payment processes do not experience major delays. Because tax refunds make up a substantial portion of cash outflow in February, a significant delay to either the tax filing season in general or the refund payment process in particular could result in a later X Date.
“This morning, I attended a briefing by the Bipartisan Policy Center on the debt ceiling. They did amazing work on this issue. They really got into the weeds on it, more so than anyone I’ve seen before. They were looking, literally, at how many checks the government sends a month and how our payment software works. I want to tell you some of the things they found because after you hear this, you’re not going to want to bust through the debt ceiling.”
Today, the Consumer Financial Protection Bureau (CFPB) issued the much anticipated Qualified Mortgage (QM) rule, which is a significant advancement in creating a more stable financial system. The QM rule was required under the Dodd-Frank Act to ensure that certain unsustainable practices in the mortgage market which were at the heart of the financial crisis would not happen again. Prior to Dodd-Frank, the Federal Reserve was empowered to identify risky mortgages and ban predatory practices, under the Home Ownership and Equity Protection Act of 1994. The Fed failed to use this authority in a timely manner. The initial rule was not even proposed for 13 years; until December 2007, long after the shenanigans in the mortgage market had reached their zenith and ironically the exact month that the Great Recession began. This delayed action was one of the clearest examples of regulatory failure which laid the seeds of the financial crisis.