A Cook Book for Book Cookers

Now the old world can address the fiscal imbalance of the new.  It seems that some of the best minds in the USA are trying to figure out how the US Treasury can disburse money without issuing debt.   Finally a topic I know something about.  There are many ways.

1) Paul Krugman proposes Moral Obligation Coupons.  OK so that’s just one of the best minds, but he has a very good mind.

2) Everyone proposes minting a $ trillion Platinum coin including Josh Non Ricardian Equivalence Barro.  I’d just add that the coin should be made now and Obama should carry it in his pocket when negotiating uh refusing to negotiate so he can pull it out and threaten to tell Geithner to declare it worth $ trillion.

3) It’s Greek to me.  Look over here we are very expert in borrowing without issuing debt.  How do you think Greece managed to get so deep in debt ?     The trick (described by my colleague Gustavo Piga) is to make a very bad speculative bet.  Greece (following a country which will remain nameless) made REPO deals with banks involving currency exchange — the bank gave Greece a great deal on the spot market and Greece gave the banks a great deal on the forward market.  In effect the deal consisted of an actual arms length market priced speculative position and a loan.  But since they were officially linked, it was not 100% certain that Greece would be paying the banks when the futures contract matured.  So by only for governments allowed accounting practices, Greece had not issued debt.

I think it would be best to explain exactly what is being done and how failure to raise the debt limit could cause the US to act like Greece this March.

4) Preferred shares.  OK this is close to 1.  Preferred shares are not debt. The whole key to TARP was that preferred shares are not debt.  Government agencies can issue preferred shares and the Fed can buy them.

5) Gagnon style.  heyyyy what about just good ol Fannie and Freddie ?  IIRC They are only 85% owned by the Federal Government exactly so that their debt does not appear as Federal debt.  86% and the balance sheets would have to be unified.  They owe the Treasury a lot of money.  They can issue debt instruments which the Fed can buy for an absurdly high price.  They can repay their debt to the Treasury.  Now they would have to have something to sell (say absurdly over priced MBS so it would be Gagnon style QE too).  Of course dealing with DeMarco might make dealing with Republicans in Congress seem easy.

6) If potential US Treasury default isn’t a financial crisis, I don’t know what is.  The Fed can lend to any entity during a financial crisis.  I think they could make 0 interest loans to federal contractors to be repaid when the Treasury pays them in exchange for their not billing the government.

7) Ask the big banks for a bailout.  What goes around comes around.  We saved them when they were in trouble.  They can give money to the US Treasury.  These are moral obligation coupons again.  They can demand limits on, say, compensation of Congress persons as part of the deal ala TARP.