Asymmetrical Information - Megan McArdle

01.14.13

RIP Platinum Coin: May 14th, 2010-January 12th, 2013

A novel idea whose time has gone

In May 2010, an idea was born: if Republicans refused to raise the debt ceiling, just mint a huge-denomination platinum coin, deposit it at the Fed, and continue paying the nation's bills.  The idea allowed the executive to bypass a recalcitrant Congress, but didn't cause the problems that they would have run into if they'd simply tried to issue debt (who wants to buy a bond that hasn't been authorized by Congress?)  Those opposed to the idea (rightly) said that it would be a politically disastrous power grab by the executive branch.  Its partisans (rightly) said that it resolved the insanity of laws which command the government to spend more than we raise in tax revenue, but forbid the government to borrow the necessary money.

There was much back and forth over the associated issues: would the market panic, or would traders be happy to see the standoff resolved? Would it actually be legal under the relevant statutes?  Even if it wasn't legal, would anyone have standing to sue?  Would the courts insert themselves between the president and congress? And whose face should be on the coin?  

It was hours of fun for the entire pundit-family.

Well, this weekend, Treasury ended our pundit fun and killed off the toddler notion.  "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit," a spokesman told Ezra Klein.  

This was about what I expected; the president would have been unwise to risk a constitutional crisis at worst, and hand the GOP a potent political talking point at best.  What's interesting is the insertion of the Fed into this.  I've seen some speculation that the idea died because the Fed made it clear they wouldn't accept the coin for deposit.  

There's been some pushback on this, of course; coin proponent Joe Firestone argues that legally, the Fed doesn't have the authority to refuse.  This may be--I'm no expert in the relvant law.  But of course, the Fed can effectively "refuse" by placing an enormously high price on any attempt to make such a deposit.  The resignation of Ben Bernanke, or even one or two less well-known Fed governors, would be an unmitigated disaster for the country, and the administration.  Even a public statement that they are accepting the coin under protest would be a bit of a problem, she said with dramatic understatement.

The reason that this is most interesting to me is that if it's true, it means that the coin's demise came from an entirely unexpected quarter.  I've read a fair amount of coverage of the coin, and I didn't see anyone suggest that the Fed might not take the deposit.  We were all looking at how the markets or the courts would react.  

Of course, it's also possible that Treasury is just deflecting some of the criticism from the members of its base who were hoping the administration would go to the mat on this.  "Look, even if we wanted to mint the coin, those bankster-loving austerians at the Fed won't let us."  Either way, if you ever thought punditry was anything close to a science, this should be enough to disabuse you.