Monday, May 30, 2011

More on the debt ceiling

In a previous post (and on Jared Bernstein's blog) I suggested that the Fed fund the Federal government if the Republicans block an increase in the debt ceiling. Here are a few more thoughts.

The Fed has a balance sheet of $2.76 trillion. If it prints that much money (as the government needs it) while simultaneously selling items from its balance sheet that would keep the government in business without affecting the money supply for quite a long time. In addition, even in the unlikely chance that the Fed exhausts it balance sheet before the debt ceiling issue is settled, the President could assure the world that once the debt ceiling is raised, the Treasury would borrow back the excess money and return it to the Fed. I think such a promise could be made believable. Then the Republicans would be in a position of either forcing the Fed to continue printing money—exactly what they complain about now with respect to "debasing the currency"—or finally realize that the debt ceiling is the wrong way to deal with spending issues.

I’m not clear whether it can be said that the government “owns” the Fed’s balance sheet. If so, or if a reasonably good case could be made along those lines, then selling items on the balance sheet would be comparable to selling any other Federal property. That’s exactly what the Republicans are suggesting. So let’s do it!

The Fed regularly returns to the Treasury most of the interest payments it receives on US Govt bonds that it owns. Thus there is a real precedent for having the Fed give money to the Treasury. It can refer to that precedent when it sells assets and gives that money to the Treasury.

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