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Part 2: Debt-ceiling debate (or debacle) & consumer bankruptcy

See late-breaking news: crisis may be averted via Sunday negotiations


CNBC analyst asks: 'Can U.S. really run out of money?'

When we left the discussion in Part 1, the concluding sentiment was "We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out.”
Offering counterpoint--and a jab at the president--John Carney at NetNet/CNBC.com asks an interesting question:
The White House insists the U.S. government will not be able to stay current on all of its obligations as of Aug. 2 unless the debt ceiling is raised.

But can the government of the United States ever really run out of money?

As alluded to in Part 1, we consumers can barely wrap our minds around such a proposition.

The government is not a household

But it also hints at the profound difference between a government and an individual consumer--or even a hustling, bustling, multi-member household. As Carney points out, the government and a household do share similarities. Each has a bank account (well, OK, not every household is attached to a bank account, but that's another story) and each has income and outgo.

Of course, one big difference is the sheer volume; Carney says (in the July 26 piece), "At the start of the day last Friday, the bank account of the United States government at the Federal Reserve Bank of New York had $83 billion in it. That day the bank received $7 billion in deposits, and saw around $13 billion in withdrawals. So by the end of the day we were down around $6 billion, to $77 billion."

Bonds and the debt ceiling

Carney goes on to list several examples of deposits into the gummint's accounts, and several examples of the kinds of checks the gummint writes for salaries, interest payments, agency funding, etc. Then he hits on a crucial point:
A big source of deposits for the government is usually the government selling bonds. And that’s where the debt ceiling comes in: if the government cannot sell any more bonds because it’s hit the debt ceiling, it won’t have the funds to pay for all those things it makes withdrawals for. That includes social security checks and interest payments on the debt.

So what happens next?

Would Fed back a hot check from Treasury?

Then he reverts to the family/household budget metaphor, and throws in a swipe at Obama:
When the government writes a check, it goes to whomever is getting paid. The payee then deposits it in its own bank account. The bank then submits it to the Federal Reserve for clearing.

So far, that’s just pretty much the same thing that happens when anyone else writes a check. Except for something very strange—the Obama administration seems to be insisting the Federal Reserve would not allow the U.S. Treasury Department to overdraw its account.

Millions of Americans have overdraft protection on checking accounts that allow them to write checks in excess of the amounts deposited in the accounts. These are sometimes controversial because banks often attach high fees to overdrafts, which mean that you could put a $3 cup of coffee on your debit card and get hit with a $35 fee. But those kind of fees are generally waived for very wealthy bank customers who, ironically, enjoy feeless overdrafts.

There's a couple of good points in that passage, both of which underscore the need for our new Consumer Financial Protection Bureau. Alas, more topics for another time. Carney's thrust here is that the government has a "built-in" overdraft protection. He says that in his pre-finance writer days, when he was merely a lawyer, that he was never "terribly wealthy" but still managed to arrange free overdraft protection with his bank. Then he asks what I consider a disingenuous question: "If I could have that kind of protection as a young associate in my 20s, shouldn’t Treasury Secretary Tim Geithner be able to get the same deal from the Federal Reserve bank he used to run?"

Obama 'fibbing'--because Fed would allow Treasury overdraft protection (really? and we know this how?)

Then comes the big indictment of Obama:
In truth, the Obama administration is either fibbing or misunderstanding the financial system. The United States almost certainly enjoys unlimited overdraft protection from the Federal Reserve because there is almost zero chance the Federal Reserve would ever bounce a check written by the U.S. government.

Bottom line: these alternate-universe theories are pure conjecture

The problem with his argument is that every time he gets near a conclusion that would demonstrate how the Fed could simply extend uncontracted "overdraft protection," he qualifies it by saying the law is "murky" or "not exactly clear on this point."

In that sense, Carney's hot-check analogy smacks of the thesis propounded by the 14th Amendment boosters who got fired up when ex-Prez Bill Clinton tossed that Texian-sounding boast into the arena: "Why, if I were back in office..." blah blah...

Truth is, nobody knows whether either approach work. Moreover, either one has the downside risk of jamming all three branches of government into more of gridlock than we have now.

Isn't it more prudent to work within the framework we know, rather than cavorting off into unknown areas of such import, when the world economy hangs in the balance?

Update: News Flash--Apparently an agreement has been reached but not yet signed

This just in from USA Today:
President Obama and congressional leaders said Sunday they have reached a tentative, two-step deal to increase the nation's $14.3 trillion debt ceiling, cut future government spending and avert an unprecedented default.

"We're not done yet," Obama said in an 8:40 p.m. announcement to reporters at the White House. But the agreement would "end the crisis Washington imposed on the rest of America."

The deal reached by Democratic and Republican leaders in Congress, Obama said, would first cut nearly $1 trillion in spending over the next 10 years while raising the debt ceiling by the same amount.

Congress must approve the deal and Obama must sign it by 11:59 p.m. Tuesday to stop the U.S. government from defaulting on its debts, which would trigger a drop in the nation's AAA credit rating and force interest rates up for all types of consumer loans.

Alternative viewpoint

Paul Krugman at The New York Times says Obama caved, and this deal is bad for the U.S. and bad for the economy that is still struggling to emerge from the Great Recession; read his column here.

Revised ending, in light of late news

Well, see--we didn't need to launch into potentially extra-legal waters, after all. Will there be tough consequences ahead? Almost assuredly--but probably nothing as bad that awaited us had we limned the envelope of Constitutional crisis.

If you're facing a financial crisis of your own, you can take this as a measure of comfort. The immensely powerful protection of the Bankruptcy Court is still yours to invoke, with its funding intact and salaries being paid to judges and trustees who work day in, day out to be fair in the effort to afford U.S. consumers the chance to start over.

Consider free case evaluation

If you're interested in learning more about the power of bankruptcy protection, please, browse our site for more information; if you need help filing for bankruptcy protection for yourself, consider signing up for a free case evaluation.


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