Framing Platinum Coin Seigniorage: Part Five, Institutional Objections
This series provides a framing document for Platinum Coin Seigniorage (PCS). In the four previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn't really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.
Parts two, three, and four, and this post (Part Five), and the remaining post in this series considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you're seeing, if you're following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I'll consider some objections to PCS and HVPCS based on their predicted institutional impact.
The platinum coin is “the first cousin of defaulting on our debt”
This objection is from Ezra Klein; he says:
. . . It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.
The “banana republic” stuff is just name-calling. What does using HVPCS, which is authorized by legislation passed in 1996, have to do with being a banana republic? Sure, we've never used HVPCS before to pay down debt and cover deficit spending, but why is it not a superior way to do these things than issuing debt instruments, which require us to deal with bond markets and to provide risk-free interest payments mostly to wealthy elites and foreign nations? It seems to me that it is that method of financing that is much more consistent with the methods used by the Latin American banana republics in the 20th century than HVPCS would be.
And why is the platinum coin the first cousin of defaulting on the debt? Ezra Klein says that it proves to the financial markets that we can't be trusted to manage our economic affairs in a rational and predictable way. But why would it prove that?
It would prove that we've changed our way of paying off debt instruments and deficit spending alright; but that doesn't mean that our new way of doing things wouldn't be predictable and rational, and that financial markets wouldn't know exactly what we were going to do. They'd know, for example, that the US wouldn't be rolling any more debt by issuing new debt instruments, even though they may not like that as well as they like what we're doing right now. They'd also know that with austerity off the table; we'd be likely to deficit spend a lot more to create full employment here, which they might guess would also be good for their flagging export-based economies.
As for our borrowing costs rising; just how does Ezra Klein suppose that would happen since 1) we'd use HVPCS to end sales of debt instruments altogether; and 2) our interest rates on still outstanding debt are mostly fixed, except for the relatively small volume of bonds that are inflation-protected?
This last notion of Ezra Klein's makes two things clear. First, he's fixated on using Trillion Dollar Coins or less; and has never thought through the implications of using a $60 T coin, having freaked out over the small-ball TDC proposal. And second, he hasn't yet figured out that our bond interest rates can only go up if the Federal Reserve raises the Federal Funds Rate which it, and it alone, controls. He still thinks that the bond vigilantes and their “confidence” in US bonds determines our interest rates.
Compromises the independence of the Federal Reserve
That's true. But, the vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large. I am all for the President ordering the Secretary of the Treasury to use HVPCS, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone has the authority to issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.
Destroying the institutional structure of the financial system
I don't know about its destroying the institutional structure of the system; but I will point to a few critical impacts I think HVPCS is likely to have. First, as Warren Mosler has pointed out in his characteristically pithy way,
“And all the coin does is shift interest expense from the Treasury to the Fed. . . “
This is Warren's assessment of the financial system impact. But, second, an HVPCS coin would have a critical impact politically, because as I have pointed out time and again, it would end austerity politics for good, because it would end the debate over the national debt.
Third, it would make Treasury financing operations much more transparent than they are now. “The secrets of the temple” would be much more out in the open. That's important, because right now the Federal Reserve and the banks escape accountability, since the American people don't understand their role.
Fourth, the Federal Reserve Banks would have to pay IOR to maintain their target Federal Funds Rate. From the viewpoint of the public, that kind of operation would look like the bank savings accounts that people are familiar with. The Fed holds reserves and pays depositors an interest rate. Right now, when the Treasury pays interest on securities, that looks like debt to the public, not like the savings accounts that security accounts are like functionally. So, IOR replacing securities in response to HVPCS would greatly improve the political optics of government financing deficit spending.
And fifth, John Lounsbury makes this important point:
The reason Mosler's one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.
A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government to pay interest to private institutions to finance operations would be no more.
That might well be beginning of the end for today's institutional structure of the financial system. And I have to confess that after the many banking fiascos of the past 30 years, I can't view that as a bad thing for either this country, or the rest of the world.
But that's just me; maybe Ezra Klein has a different opinion?
(Author's Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)
(Cross-posted from New Economic Perspectives.)