In the aftermath of this summer's debt-limit crisis, attention is turning to how to stop the Republicans from using the same tactics again and again in the future. In a new column on Verdict today, I discuss some of the dangers posed by the proposals to use novel financial strategies to get around the debt limit. Here, I want to discuss how we might minimize those dangers.
The basic problem, as both Professor Dorf and I have been framing it for the last several weeks, is that reaching the point where the debt limit is binding creates an impossible choice (a "trilemma," as Professor Dorf put it), with the President being forced to violate at least one of the spending, taxing, or debt-limit statutes. Some scholars, however, have suggested that there really is no trilemma at all. If there are strategies that could allow the President to meet all three laws, and those strategies themselves are legal, then the President would be required to pursue those strategies.
The two possibilities that have received the most attention are the "Big Coin" and "Exploding Option" strategies (along with a very clever and satisfying twist on credit default swaps). We can certainly hope that people will explore other choices as well, but for now, it is useful to think about the dangers of Big Coins and Exploding Options.
As I explain in my Verdict column, every successful financial/monetary system is based on a shared belief in a legal and economic fiction. Currencies (even commodity-based currencies) are only as useful as people allow them to be, which means that it is necessary for (nearly) everyone to live from day to day without worrying that the money that they use will ever become worthless. As soon as enough people start to think that a country's money is (or is about to become) worthless, a country's money becomes worthless.
This uncomfortable fact makes it essential that a government (and all financial institutions) never give people reason to stop and think about what money is or how it comes into being. As I mention in my column today, I was surprised to find myself writing a column for FindLaw two years ago, explaining that the Fed was "creating money out of the thin air," but that there is no other way to create money. It was truly shocking to see financial writers (of all people) make a big deal out of the Fed's strategy to create the necessary liquidity to battle the financial crisis.
My argument about Big Coins and Exploding Options, then, is that both run a very serious risk of making people lose confidence in the entire financial system. Both strategies run the danger of being too clever by half, with their seemingly magic-wand solutions exposing the ephemeral nature of money. (The core social psychology is the same whether the currency is created by fiat or is tied to a commodity. I will not take the time here to explain the equivalence.)
If we can make our borrowing needs go away, for example, by having the government mint a couple of platinum coins marked "One Trillion U.S. Dollars -- E Pluribus Unum -- In God We Trust," then it all begins to look like a big scam. Similarly, if we can "sell" the Fed an option to buy the national parks, knowing that the Fed will never collect, then people's inchoate suspicions that we are all suckers in a game run by the powers that be might seem to be validated.
Perhaps I am being too much of an alarmist. Maybe the dangers that I am describing are not likely to play out, because the public's ultimate self-interest in not rocking the boat will win the day. At the very least, however, it is worthwhile to think about how to describe these strategies to minimize the danger of shaking public confidence in the financial system and the nation's currency.
This means that we must give serious thought to labeling and framing issues. If the public's confidence in the financial system must be maintained, then public relations is a big part of a successful strategy. In a private conversation, for example, Professor Dorf expressed profound misgivings about the issuance of Big Coins, in part because he viewed the strategy as "too cartoonish." That insight captures the essence of the problem. If the strategy can easily be ridiculed by political cartoonists (as well as late night comedians), then we have a serious problem. The strategies will become nonstarters, and the people who propose those strategies will lose credibility.
Labeling and framing exercises can seem trivial and dishonest. If behavioral psychology has taught us nothing else, however, it is that people can accept or reject exactly the same proposal, depending on how it is described. As a starting point, therefore, it is essential to come up with better labels for the strategies. From an academic's standpoint, "big coins" and "exploding options" are part of the allure, allowing us to acknowledge that we are all having a good time thinking through these issues. For public consumption, it is obviously necessary to be more serious.
For the coinage option, it seems to me that part of the problem is that the word "coin" carries with it a sense of small stakes, of "chump change." Even if the word "coin" is in the Constitution and has a broad enough meaning to include the types of coins under discussion here, it is important to make such coins seem different in some meaningful way. As a start, we might call them something like "ingots," a word that is familiar but is just exotic enough to give the strategy gravitas. Part of such a strategy would also require that the "coin" not look like a coin. Something the size and shape of the OED might serve the purpose. The goal, after all, is to make people think that something of substance has occurred. The "coin" ought to look impressive.
Of course, none of this will stop people from wanting to know how much the ingot weighs, and then writing frantic blog posts about how the metal in the ingot is not worth a trillion dollars. Moreover, we cannot erase the history of describing these as "big coins" (including this blog post). We are, however, dealing with imperfect and risky choices -- which is why Choice A is so obviously to get rid of the debt limit entirely.
For the "Exploding Option," the labeling problem might seem to arise from its use of a term from financial engineering. People do not understand collateralization, derivatives, and so on. Why should they trust a strategy that is based on an "option"? I suspect -- and I emphasize that all of this is a matter of guessing what the public will be least likely to reject -- that the public is still inclined to trust financial arrangements that it does not really understand. People put their 401(k) money in mutual funds, without knowing what a mutual fund is (or what a 401(k) really is), or where mutual funds put their money. For that matter, people put money in savings accounts without understanding that the money is not really waiting in a vault.
Again, therefore, the key seems to me to be to find a label that sounds impressive and that does not stoke suspicions that something odd is afoot. Thus, "exploding" must go. More to the point, the more we can rely on labels that sound somewhat familiar, the better. Although I am not sold on this, I wonder whether there is something in the term "sale and leaseback" that could be useful. It sounds important and substantial. It removes the idea that the Fed would actually foreclose on Yellowstone and bar the public from entering. It is even something that many states and cities have been doing for the last few years (for example, with state lotteries and toll roads). The less this sounds like on-the-fly innovation, the better.
This discussion, of course, only scratches the surface. My larger point is to suggest that any strategies that might help us avoid another debt-limit confrontation need to be viewed by the public as legitimate and substantial. Otherwise, these strategies could be much more damaging than having a President
[Update: The phrase "having a President unilaterally raise the debt ceiling," which I originally used at the end of this post, critically mischaracterizes my point. The President, when faced with a trilemma, must obey the spending and taxing laws, which would require him to treat the debt ceiling statute as void. That is very different than saying that the President could unilaterally raise the debt ceiling, which would involved rewriting a statute. Clearly, although the President must not enforce unconstitutional statutes, he cannot write statutes on his own. I regret the misleading choice of words.]