Jul 26, 2011

Ron Paul Has A Plan!

Ron Paul has a plan! And - it's so "wacky" that it might actually work! It's also very easy, and simple: The Fed simply takes a match to the $1.6 trillion in Treasury obligations it currently holds on its balance sheet as a result of its various QE programs!

Ta-da! The government suddenly has $1.6 trillion in room under the debt cap, enough to last us maybe a couple of years. And the Tea Party will be placated since they hate the Fed, and love Ron Paul! Yea!

Surprisingly, Dean Baker, of the left-leaning Center for Economic Policy Research, thinks this idea is so crazy it just might work:

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds.

This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion.

This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

In addition, there’s a second reason why Representative Paul’s plan is such a good idea. As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest.

There are a lot of potential problems with this idea. Maybe most importantly, the Fed would lose a huge tool for eventually tightening monetary policy in the future — namely, the ability to swap its Treasury debt for some of the cash sloshing around the banking system. Eh, but they don't even know where the gold is, or that gold is even money.

Mr. Baker thinks there are ways around this problem and that Mr. Paul’s idea at least deserves a fair hearing:

In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source.


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