BREAKING THE IMPASSE ON THE DEBT LIMIT

There's some chatter among the punditocracy to the effect that the Obama administration could invoke article 4 of the 14th amendment to break the impasse over the debt limit.

"Article 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

I seem to recall Dan Rather on Rachel Maddow’s show Friday state that the requirement for Congress to raise the debt limit was in a bill passed by Congress and, therefore, subordinate to the constitutional requirement that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

If so, that would seem to give Obama some leverage at least with regard to the existing debt, though maybe not new debt, since it would not have been “authorized by law.”

Here’s where it gets interesting. There’s about $5 trillion in existing, authorized but unissued (to the public) debt sitting in the Social Security and Medicare trust funds. These government bonds went straight from the Treasury into the trust funds to replace the surpluses the government previously spent on non-trust related matters. If (big if) by executive order the government could strip those bonds from the trust funds and issue them to the public, it could then use the proceeds to pay for the current deficits while at the same time rolling over other maturing debt in the hands of the public. Alternatively, the Fed could buy the bonds (although that could pose an inflationary risk). The government continues to function without an increase in the national debt -- simply a change of ownership of the bonds from the trusts to the public or the Fed. The $5 trillion is enough to underwrite 3 or 4 years worth of deficits at the current rate. The government could later replace the trust’s bonds when Congress finally gets its act together and raises the debt limit.

Since, as I recall, it was the Reagan Republicans who began the practice of raiding the trust funds (established by the Greenspan Commission in the mid-’80s) to spend the Social Security and Medicare surpluses on things like wars and tax cuts for the rich, and replacing the plundered funds with unissued bonds, the Republicans may find themselves hoisted by their own petard.

Should be interesting.