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Ending the Debt Limit Crisis: Dear Ben Bernanke

US Politics & Gov't  (tags: Barack Obama, Ben Bernanke, debt ceiling limit, debt crisis, Federal Reserve, treasury bonds, treasury department )

- 1654 days ago -
So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government's debt. - Interesting opinion piece by Alan Grayson

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Angelika R (143)
Saturday October 12, 2013, 1:05 pm
Warren Buffett calls the debt ceiling a “nuclear weapon, too horrible to use.” Obama administration official Jason Furman says the consequence of a default on U.S. government debt is “too terrible to think about.” When asked about a default, Wells Fargo strategist James Kochan simply commented, “Holy cripes.”

With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy. A default by the U.S. government on $17 trillion of debt — debt that has been considered the safest in the world — could be far worse.

But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.

So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.

This wouldn’t solve the debt problem entirely. The Federal Reserve doesn’t own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who’s counting?)

Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default.

The debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.

Last year, the Federal Reserve declared a “profit” of roughly $91 billion, much of which came from interest payments from the U.S. Treasury. The Federal Reserve then quickly remitted nearly all of this profit right back to the U.S. Treasury.

The Federal Reserve does this every year. Reducing or eliminating this unearned “profit” actually will provide a more realistic view of federal finances.

I am a Democrat, and known as a progressive. But this idea was put forward a few years ago not by me, or by a member of my party, but by Republican Representative Ron Paul.

He thinks, as do I, that the Federal Reserve’s dramatic expansion of its balance sheet is simply a way of financing the government by printing money. The Fed isn’t really “buying” Treasury bonds, it is just letting the government finance its deficit by adding to the money supply.

If this plan were enacted, there conceivably might be some operational problems for the Fed, but nothing compared to the nightmare of a default on Federal debt. Some of the Fed’s Treasury debt facilitates Fed open market operations, which is part of how the central bank manages the money supply. Surely it would be much easier for the Fed to change its money supply management techniques, though, than to figure out how to manage open market operations using defaulted Treasury bonds.

While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet. In any event, preventing a financial meltdown, with its attendant risks of interest rate and price spikes as well as staggering employment losses, is certainly central to the Federal Reserve’s mandate of ensuring price stability, maximum employment and moderate, long-term interest rates.

Bernanke could alleviate the debt ceiling crisis simply by canceling the debt held on the Fed’s balance sheet. I’ve written to him, and asked him to do so.

Let’s hope that he does.

JL A (281)
Saturday October 12, 2013, 2:20 pm
Now that the House played a game secretly eliminating the discharge option--around for 200 years--to prevent the Senate CR from coming up for a vote (and apparently did it in a way inconsistent with the rules to do so) in language not disclosed and secretly added to another bill, this may the best option to not have the US destroyed by the 30 or so in the GOP that would rather destroy the country than let go of pushing their positions not supported by the American people that they have repeatedly lost on.

Angelika R (143)
Saturday October 12, 2013, 3:52 pm
We'll also have to wait for the result of that discharge petition though there's little hope that enough Reps will sign on.
However,"The Democrats claimed that their strategy has a realistic chance of success, pointing to a Congressional Research Service study which found that seven discharge petitions have received 218 signatures in the last 30 years. In 12 other cases, the House allowed a vote before a petition received 218 signatures, according to the study."

Past Member (0)
Saturday October 12, 2013, 5:36 pm
The gov't bailed out Wall Street and the banks. The gov't will bail out itself. Meanwhile, the American people will continue to wait for their bailout, help, or any crumbs that the masters can throw our way.

Alan Lambert (91)
Saturday October 12, 2013, 5:44 pm
This is as good an idea as minting the Trillion Dollar Platinum coin that was brought up 2 years ago.

Roxie H (350)
Sunday October 13, 2013, 3:31 pm
Gosh reading all those big words gave me a migraine. Sometimes I have found that lies hide in large words. Not everything brilliant is spoken in big words, this guy makes me shiver, he reminds me of people I do not really like. Thanks for the thoughts though Angel

Roxie H (350)
Sunday October 13, 2013, 3:34 pm
Oh, one add-on. I have sat on 2 round table discussions with a few people mentioned on this thread during the past couple weeks. We were discussing this exact thing, Debt Ceiling, shut down and Wall Street. It was completely understandable and pretty simple, CLEAN would be a start.

Angelika R (143)
Sunday October 13, 2013, 3:39 pm
" this guy makes me shiver, he reminds me of people I do not really like."- you're not refering to Grayson, but to Bernanke, I guess/hope ?
No doubt clean CR would be,-if only...!!

Roxie H (350)
Sunday October 13, 2013, 3:46 pm
Bernanke, yes my girl

Roxie H (350)
Sunday October 13, 2013, 7:39 pm
-_- geesh I didn't mean to scare everyone off your story, ugh, good thing I am taking a LOA. see note in mail dear one
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