Thursday, January 17, 2013

Institutional role of the Federal Reserve

It's been interesting to see people explore the legalities and procedural norms around the $1T coin. SRW has a good round up here and then slips in his editorial:
Kevin Drum and John Carney argue (not persuasively) that courts might find this illegal or even unconstitutional, despite clear textual authorization. For an executive that claims the 2001 “authorization to use military force” permits it to covertly assassinate anyone anywhere and no one has standing to sue, making the case for platinum coins should be easy-peasy...

I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious...

The economics of “coin seigniorage” are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling...
To me, the $1T coin won't fly for the same reason that a Republican Whitehouse, Congress, and Senate won't be able to disband the State Department it upsets the informal governance structures established by the agencies who actually run Washington DC. Presidents, Senators, and Members of Congress come and go, but the career bureaucrats who staff the agencies are forever.

The Federal Reserve is the currency issuer in the current monetary structure. If the Treasury can mint the coin, then they usurp this core function from the Fed and it's not clear to me that either of them want to disrupt the institutional arrangement they have enjoyed for about 80 years. And the debt ceiling is not an institutional quirk, it is a core plank that supports the concept of limited Sovereignty which is at the heart of the Democratic political system. Gulliver binds himself.

5 Comments:

Blogger beowulf said...

"or the same reason that a Republican Whitehouse, Congress, and Senate won't be able to disband the State Department..."
Only the Pentagon could pull that off. :O)

The problem here is Tsy and the Fed could easily have finessed this issue so the Fed kept the whip hand on monetary policy. For example, Tsy and the Fed could have issued a joint statement that they agreed only the Fed can order coins from the Mint and that Tsy isn't allowed to put coins to it (I disagree, see 31 USC 3302, but Paris is worth a mass and all that).

After making that point, the Fed could announce the NY Fed had placed a Mint order for a trillion dollar in coinage and the Secretary of the Treasury had agreed to comply with this order. Easy Peasy indeed.

8:12 PM  
Blogger winterspeak said...

beowulf

totally agree. according to the formal requirements, a $1T could legally happen, and as you say the Fed & Treasury could have finessed it somehow if they chose to manage optics.

therefore, I think the reason it didn't happen is because the Fed & Treasury didn't want it to happen. And the reason for that is, IMHO, because it disrupts the informal institutional arrangements that the two entities have built up over the past 80 years or so. Congress & Presidents come and go -- we're talking institutions here!

9:00 AM  
Blogger circuit said...

I'm fine with your take on the coin but I don't get the last part about the 'core plank'.

Are we to understand that democracies require a debt ceiling to function properly? What about other democracies without such an institutional feature?

6:45 PM  
Blogger beowulf said...

"And the reason for that is, IMHO, because it disrupts the informal institutional arrangements that the two entities have built up over the past 80 years or so. Congress & Presidents come and go -- we're talking institutions here!"

This is a good way of putting, I think you're probably right. Did you see Oliver Stone's biopic Nixon? It sort of illustrates your point that institutions stay in place while the politicians come and go.

11:33 PM  
Blogger winterspeak said...

it's been a while since I saw Nixon, and I don't remember that being my major takeaway from that film ; )

I do like Yes, Minister, however, which makes a similar point : )

9:35 AM  

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