Obama, Meet The Bond Market Vigilantes

Treasury Secretary Timothy Geithner, Senators Chuck Schumer and Patty Murray have tossed around the idea that somehow the fourteenth amendment empowers President Obama to ignore Congress and the debt limit ceiling if no deal is reached. The argument is; the debt must be paid and if the debt ceiling is not raised the country cannot pay its debts. Try that at home. You want to get your credit card limit raised but MasterCard says no. Does it follow you can't pay your bills. Ok they live in a land where parallel lines do indeed meet and tax credits are expenditures. If the debt limit is not raised can the Treasury continue to issue bonds. Certainly, it must continue to issue bonds because as older bonds mature they must be replaced by new bonds of the same amount as long as issuing those bonds does not push beyond the debt limit.

Suppose Geithner and Obama listen to Schumer and Murray. Who's going to stop them? The pat answer is no one because the Senate is controlled by the Democrats and the courts, should they hear the case, will have to rule in favor of Obama and Geithner. One hopes they will have the good sense to ask someone other than a lawyer before embarking on this fools errand for while Obama and Geithner can print bonds until the cows come home selling the bonds is a different matter. Enter the bond market vigilantes, who will ask themselves if they really want to lend money to these hustlers who are trying to push paper that is not backed by the Congress of the United States. The vigilantes will reason that if a President can issue debt on his own authority a future President can negate the debt on his own authority. Who's going to stop him? There are a finite number of suckers born everyday but the operative word here is "finite". Roughly speaking, market vigilantes are bond traders who keep the borrower's credit limit within their estimation of the barrower's ability to pay. If the traders do buy at all, they expect to earn a risk premium in the form of higher interest rates. Another cause for worry for perfidious borrowers are the rating agencies, Moody's and Standard and Poor. They were very late to the party in 2008 when the financial meltdown hit and have tried to regain their credibility by over zealous rating ever since somehow trying to prove that two wrongs make a right. Will they consult the fourteenth amendment or just downgrade US bonds to CCC?

Over at the Washington Post Dylan Matthews writes that Obama has to break some laws. Matthews argues that Obama must either break the law by not spending the money appropiated by Congress or invoke the fourteenth and break the statutory laws relevant to the debt limit. Given the dismal jobs report it looks like ignoring the debt limit is the law to break. What does this guy eat for breakfast? Sugar cubes? Are laws dependant on the unemployement rate? Or maybe the Dow Jones Industrial Average is a better measure of legality. Like the rest of us who write, Matthews can afford to be wrong. The nation and its leaders don't have that luxury.