Nathan Tankus is the research director of the Modern Money Network. He also writes the Notes on the Crises newsletter.
There has been more buzz about the trillion-dollar platinum coin since my last piece for FT Alphaville, where I argued that the Federal Reserve would have to accept the coin if the Treasury tried to deposit it.
Treasury Secretary Janet Yellen was asked by the Wall Street Journal about the trillion dollar platinum coin; she said the Federal Reserve might not accept the deposit, and further claimed that it isn’t legally obliged to, either.
She didn’t say that issuing a trillion-dollar coin is illegal, however. This, in and of itself, is remarkable. It suggests that while she isn’t comfortable with the platinum coin proposal, she does not want to completely close the door to it by claiming it is not a legal option at all.
More generally, the responses to my argument have highlighted a normally neglected part of the Fed’s responsibilities: its role as fiscal agent. The most substantive engagement came from writer Josh Barro, who argued that other end runs around the debt ceiling such as issuing low face value bonds were better because they don’t require the Fed’s reluctant co-operation. I disagree with this claim, but it is understandable why Barro believes it. Most people do not realise that the Fed’s fiscal agent responsibilities extend beyond providing bank accounts for the Treasury Department and processing payments for it.
As the longtime house historian of the New York Fed Kenneth Garbade has documented, “Treasury securities” are in practice a book-entry system administered by the Fed, even as they remain the Treasury’s liabilities. They are held in “securities accounts” and when a bank or insurance company wants to sell a Treasury security, they use the Fed’s “Fedwire Securities Service”. The book-entry system, incidentally, was introduced in response to a couple of crises, including the disappearance of $7.5mn of Treasuries in 1963 and threats to liquidity from an “insurance crisis” in 1970.
The Fed is also integrally involved in Treasury auctions. As its services website explains: “the Federal Reserve assists in the auction by accepting and processing tenders, issuing securities to the successful bidders and serving financial institutions.” The New York Fed administers all of the Fed’s open-market operations, trading with a select group of bond dealers called “primary dealers” who, in exchange, are required to bid on Treasury auctions.
In other words, if you’re trying to avoid requiring the close co-operation of the Fed or its regional banks as a fiscal agent, auctioning a Treasury security is the wrong strategy. It may sound like a process that is more independent from the Fed than depositing a high-face-value platinum coin, but this is a myth generated by neglect of the details of how the Treasury market works.
Additionally, as Bloomberg’s Treasuries reporter Elizabeth Stanton pointed out, there are a number of operational issues with trying to modify the Treasury auction schedule and issue new types of Treasury securities, especially ones that would be clouded with the same (at best) legal uncertainties as the coin. In contrast, depositing the trillion-dollar coin is operationally simple even if its legal uncertainties are different from any unconventional-Treasury-security-related gimmicks.
Bottom line: issuing a weird bond may be more attractive to DC pundits and play well with an audience that likes needless complexity, but when you examine it up close it is not actually a more viable or less risky option.
Nevertheless, Barro’s commentary brings up a few questions that need attention: how seriously does the Fed take its fiscal agent responsibilities, and does it believe it can pick and choose which responsibilities to carry out? Perhaps most explosively, does the Fed believe it can interfere with the White House’s determination that breaking the debt ceiling is the least unconstitutional option?
Put differently, do Fed officials believe that their judgment on constitutional questions supersedes the executive branch?
Interestingly, former Fed chair Alan Greenspan said a number of times behind closed doors that the Fed was not independent in its role as a fiscal agent. In 1995, for example, he said: “On the issue of how we deal with the Treasury in this government, as fiscal agent we involve ourselves in various types of support for the Treasury and that does in one sense impinge on the independence of this institution.” In 2004 he reiterated these comments, saying “there are a number of awkward relationships that we have in our role as fiscal agent, none of which to my knowledge has ever triggered any event that would be of concern to us”.
Yet.
This brings me to my questions for Fed Chair Jay Powell, which I hope journalists will ask at the press conference on Wednesday. These questions are important; it matters if the leadership of the Fed believes that it’s their prerogative to decide whether the government defaults, or to interfere with Treasury issuance under any circumstances.
1) If the Treasury attempted to avoid default by depositing a trillion dollar coin at a regional Fed Bank, would the Fed’s Board direct that bank to reject the deposit of the coin?
2) Would the Fed fully co-operate with a Treasury attempt to avoid default by issuing consols or low-face-value, high-coupon bonds once the debt ceiling is reached?
3) If the Treasury attempted to avoid default by issuing more Treasury securities beyond the limit set by the debt ceiling, would the Fed interfere with their issuance in any way, including (but not limited to) its role as a fiscal agent?
I hope Powell gets asked these questions and answers them. They are profoundly important. The trillion dollar platinum coin — or the quirky Treasury bond proposals, for that matter — may seem silly. However, they have brought up fundamental constitutional questions which are very serious. Powell can clarify at tomorrow’s press conference that the Fed’s judgment does not supersede the President’s when it comes to questions of constitutional interpretation.