Something that I think has gone missing in most discussions of the “constitutional option” of simply ignoring the debt ceiling is that if you think that’s illegal, it’s not clear what the legal alternative is. Bondholders have a legal right to be paid. But so do Social Security beneficiaries. Contractors have, well, contracts. All the federal government’s spending obligations are spelled out in appropriations bills or laws providing for mandatory spending. If you look at any particular option, it seems legally questionable. But obviously something has to be done.
That, I think, is the right context in which to understand Reuters’ report on the small Treasury team looking at Plan B measures to avoid a default. They’re looking at the constitutional option, they’re looking at old memos about payment prioritization, they’re looking at the attitude of the New York Fed, etc. Reuters portrays this as somewhat at odds with the fact that “Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money.” But the right way to understand this is that Geithner really doesn’t have any great tricks up his sleeve. Obviously, if Congress doesn’t do the responsible thing, something or other will happen. The U.S. Treasury won’t just vanish into a puff of smoke. But anything they do will be legally controversial and probably damaging to American credit.