Forget the trillion dollar coin: Try the IOU

USC professor Edward Kleinbard suggests IOUs are the best way to combat the debt ceiling.

We’ve heard all this talk about the trillion dollar coin to solve the debt ceiling problem. But USC professor Edward Kleinbard propossed something a little different in his op-ed for the New York Times:

However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.”

Kelinbard said the idea of IOUs is just less risky than the trillion dollar coin. He said it “stands on much firmer constitutional ground” and exposes the president to a lesser risk of impeachment.

Isn’t this just more debt?

Kleinbard argues that the IOU doesn’t promise to pay you any money at any particular time. The IOU would basically say “we’ll pay you money but we just can’t do it right now."That doesn't seem great for a 68-year-old on Social Security on the face of it -- but Kleinbard argues that government IOUs could be good for both banks and ordinary people.

“You turn around and sell it for a small discount, and the banks will say ‘we’ll buy it at a small discount’. Think what U.S. Treasury bills yield right now. If you bought this paper at a 1 percent discount and the issue was resolved in a month. You would be getting a return of 1 percent a month instead of 1 percent a year. The financial institutions would find this attractive,” said Kleinbard.

Kleinbard said neither an IOU program nor the trillion coin are good ideas, but it’s all about which plan is best to “defang an artificial crisis and enable us to have the debate we need to have about long term spending in regular order.”

Edward Kleinbard was once the chief of staff at the Congressional Joint Committee on taxation.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.
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What the professor failed to explain in his less than complete suggestion is that the GOP/Tea Party is attempting to enforce "fiscal discipline" on the federal government by forcing it to act like one of the States rather than as a soveriegn. When a state runs out of money and can not pay its bills, it will issue IOUs to persons that it is required to pay money to. For example, it gives IOUs to its employees, medicare receipients etc instead of cash. California has pulled this stunt before rather than raise taxes. Once revenues return, they buy back the IOUs.

This may make sense as a financial solution but it makes for poor governing. Because a dollar is worth more to a poor person than a rich person, it places a regressive tax on the poor to benefit bond holders which are generally rich (and whom must be paid first - at least per the California Constitution). But the federal government is different because it is a soveriegn and issues currency. The professor's idea is a false solution.

The debt limit is an artificial limit, placed by Congress, which through its intransigence may do the unthinkable and default on American debt rather than make good on our soveriegn promises. Alexander Hamilton recognized the problem a long time ago and accepted the States' debts in exchange for the sole right to issue a national currency. Asking the US to act like a State, rather than a soveriegn, weakens our currency, wrecks the promise made by Hamilton hundreds of years ago and condemns us to a road of ruin.

Eliminate the debt ceiling and act responsibly when revenues return AFTER the economy recovers. Raise taxes when the revenues return and/or fairly reduce expenditures. But this current path is absurd beyond measure.

I prefer the “and others” part of this proposal, such as the holders of government securities and complex financial instruments, such as derivatives. Instead of asking grandma and grandpa to help facilitate feeding the greed of largely unregulated financial speculation, which would only add insult to injury, how about putting a moratorium on the interest paid on the national debt? Instead, we’ll send bondholders I.O.U.’s, and stop buying up all the private debt on account at Fannie Mae with Treasury dollars. We might even include little American flags in the bargain, and thank investors for doing their part to help restore America to Americans, and for keeping us from devolving into corporate and financial rule, devoid of democracy.

Kai how could you let your guest get away with suggesting - twice - that someone on social security could take their IOU to a bank and for a DISCOUNT get cash for their IOU? Let the banks that caused the crisis, that got the bailouts once again profit from their criminal deeds? How many social security recipients can afford to give up even one cent of their monthly check? As a penalty and contrition, you should have suggested that the banks be mandated to accept the IOUs at face value and maybe even pay the bearers a "finders fee" for their inconvenience. Let the banks hold the IOUs from now until kingdom come! What a disgusting story! I hope one of your senior relatives takes you out to the woodshed on this one.

This is a fabulous idea. First ones to get the IOUs instead of a check are President Obama, current and past members of Congress, Federal government workers & retirees, etc. Maybe then we'll get serious about reducing government spending to match tax revenues.

Please President Obama, take Edward Kleinbard's insane advice. I'd love to see the wrath of the American people rain down on you.

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