Debt ceiling, overdrawn Fed accounts: Standing to sue?

Factual Questions
1

This is a GQ. Factual answers about the law, such as there are.

I was trying to read up on the legalities of various unorthodox responses to the debt ceiling issue.

The perennial favorite on the internet is the platinum coin gambit. Lawful? Probably not, at least according to this post by Jonathan Adler at Volokh, although there are some who disagree. But if it’s not legal, what about consequences? Would anyone actually have standing to sue if the administration were to take such action? Again, probably not. If the administration decided that they wanted to deposit a trillion dollar coin at the Fed, the courts wouldn’t do anything to stop them because no one would have standing. (Keep in mind, the administration has already ruled out the platinum option, even if it’s legal. They will not do this.)

But that raises another intriguing possibility, one which is significantly more likely to happen if we approach the debt limit with the current ceiling in place. What happens if the government makes a purchase drawn on its Fed account, and the account doesn’t have enough money? What happens if the government overdraws its account?

In an accounting sense, there is no problem whatever. Ledgers have two sides, debits and credits, and there’s nothing in the Universal Laws of Bookkeeping that mandates that the government’s account at the Fed must always have a credit balance. In a practical sense, well, what’s the Fed going to do? Bounce the government’s check? Stop payment on electronic transfers? Pshaw. By the historically, er, colorful examples set by other central banks in history, there’s an excellent chance they’ll process payment normally even if the account’s overdrawn. In a legal sense… yeah, seems like a problem. The Fed isn’t supposed to expand its monetary liabilities without making a purchase, and an overdrawn account is… not exactly a purchase. Some might argue otherwise, but it seems safe to conclude there are rules agin’ it. The question is, what happens when these rules are broken? With a constant stream of expenses, and lacking any ability to raise funds from debt issuance, a few days of being overdrawn seems practically unavoidable unless they take extraordinary precautions to always stay above zero in the account. Spending just a bit too much to meet an interest payment and avoid default could just be one of those things, an unfortunate fact of government funding flows when debt is off the table.

This means that very soon we might be looking at the government’s account with a debit balance, i.e. an overdrawn account, at least for a few days.*

Against the law? Probably. But does anybody have standing to sue? If so, who? If not, why not? I have a feeling that the answer would be the same as the platinum coin question, but I want to ask to make sure.

*Two interesting wrinkles:

  1. If it were me, I’m not sure I’d actually give the Treasury account itself a debit balance. For propriety’s sake, I might put the Treasury account at 0 and then open a new account with an apparently innocuous title to keep track of how much they’re overdrawn.

  2. Given the current size of the Fed’s balance sheet, they could overdraw the account for a long time by quite a lot of money, a trillion dollars or more, and still have no monetary effect on the economy, since the Fed would “sterilize” such a large injection, almost exactly like what central banks used to do in the olden days when they received an unexpectedly large influx of gold. This would work very much like the platinum coin, actually, and delay a debt ceiling confrontation by a year or more, at which time we could have the same sorts of fun financial discussions once again when the currency was in a much more precarious state. Not a high probability scenario. Only temporary overdraws seem likely given a debt ceiling impasse.

2

The basic question for standing is whether anyone is particularly harmed beyond the general harm imposed on the public or taxpayers at large. There are other related doctrines, and of course a million wrinkles, that could come into play, but that’s the threshold inquiry.

Arguably, the recipient of the funds is harmed by the legally speculative nature of the funding source, but that’s of course circular since if they don’t have standing then there’s no threat!

Who else could be said to be harmed?

3

In the case of extraordinary actions that may be viewed as undermining congressional power over the purse, I wouldn’t think that lawsuits would be the preferred remedy to those actions. My first thought would be impeachment of those responsible, and quite significant statutory reforms of the various agencies, including the Fed.

4

The New York Times has a running debate among high-end legal types on Can Obama Ignore the Debt Ceiling?.

Interesting reading, but no real conclusions are reached. Thomas Geoghegan does argue that state attorneys general could sue, but it’s clear he’s pulling that out of his ass. This is a political question rather than a legal one.

5

Section 4 of the 14th amendment says, in part:

The rest of the section concerns the Confederate debt. It is certainly arguable, although not ironclad, that under this section, the debt limit is unconstitutional. In addition, who could have the standing to sue if Obama produces an opinion of a Justice Dept. lawyer saying so? After all, Bush found lawyers to condone torture (essentially by defining it is non-torture). The House could, and given that they have nothing else to do, probably would, impeach Obama, but obviously there is no way the Senate would go along. But I really cannot see any court getting involved.

6

One issue that either makes this very simple or very complicated is that all of the spending bills and revenue bills are passed by Congress as well as the debt ceiling bill. The best argument I’ve heard is that Congress does not need to repeal a law to change it. Simply passing a newer law that contradicts the previous one is sufficient so that if Congress passes a spending bill or a revenue bill that would involve exceeding the debt ceiling that Congress has in effect nullified the debt ceiling.

7

Section 4 of the 14th Amendment states that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Although the scope of this language is unclear, constitutional authorities, including Professor Laurence H. Tribe and the administration’s own lawyers, do not believe it can be read to allow the president to continue borrowing above the debt limit to fund the ongoing activities of government. Such an interpretation would conflict directly with the Constitution’s explicit grant of authority over borrowing to Congress, not the executive. It would also depart from a century of precedent in which every president since the debt limit’s enactment has treated it as a binding constraint on his ability to borrow. Finally, taking such an action would subject the president to extensive litigation and probably efforts at impeachment, which in turn would make investors worry about the validity of Treasury securities issued above the limit. These concerns would, at minimum, result in increased borrowing costs and would undermine the original goal of safeguarding the reliability and security of Treasury debt. Sorry — it’s a nonstarter.

8

The problem, I think, would be purely political. There’s no practical reason why the Fed can’t allow the Treasury to overdraw its account. Certainly commercial banks allow their customers to do it, at least of they like them well enough. Some businesses have arrangements with their banks that allow them to overdraw into the 7, 8, or 9 figures, depending on the size of the business. (Enron’s went into the hundreds of millions, before they went bankrupt.)

The political issue would be that if you were against it, you’d consider an overdrawn account to simply be a loan from the Fed. Which, in truth, it would be. So if you’re of the opinion that the government can’t “borrow,” without explicit permission from Congress, this would be borrowing just as much as if the Treasury had formally applied for a loan from the Fed (by, for example, issuing Treasury bond).

On a different note, what do you mean specifically, by “sterilizing”?

Do you mean reducing, or reversing QE?

If so, what would it do, or how would it help?

9

[missed edit window]
Edit: on the political side, it’d be a bad move for Obama. Republicans would claim he’s usurping Congressional power, as well as disregarding the Constitution. And (for once) they’d have a point. Obama wouldn’t get any credit for it, only blame. He’d only be saving the Republicans from their own stupidity, while setting himself (and his party) up for more attacks down the road.

10

There’s a nugget of truth in there, but that’s not at all how things work.

Basically, if several laws appear to contradict each other, the first question that is asked is whether one can interpret all the laws in such a way that they do not conflict with each other. In this case, it is: spending bills only pertain to spending, not to the raising of revenue. Therefore, spending bills do not raise the debt limit.

However, if two laws did contradict each other, in general, the more specific or the most recent law would trump the more general or the older law. But there is no conflict of laws in this case.

11

Congress could sue, assuming they went that route. The President is usurping their Constitutionally-derived powers: they’re the injured party. If they did sue, I suspect the Supreme Court would take it up, and after an indeterminate number of months, render an opinion.

But I don’t think they’ll go that route. I think they gain more by railing against the President, and by attempting to impeach him.

12

The real issue is spending.
A government agent - department, congress, administration, whatever - can only spend what they are authorized to spend. That authorization is the budget or similar resolutions passed by congress.

If as is happening now, congress has not passed a budget or continuing resolution, departments are not authorized to spend.
If the debt ceiling is not raised, then technically the government would be “borrowing” if they go negative on their Fed account. Whether the constitution meant that the government cannot borrow from itself, or issue promissory notes in lieu of payments, print money, or whatever - these are details for lawyers and the supreme court.

I agree that really it comes down to whether the people making such decisions can and likely would be impeached. IIRC the only punishment from impeachment is removal from office. Again, it would be up to the courts whether the “promises” issued in defiance of the law had any validity.
Nobody has tested it because nobody wants to find out the hard way.

13

It’s a little different. Treasury bonds are auctioned on the open market: the Fed and the central bank of China are the largest buyers among many.

Moreover, the Fed is part of the federal government: in their words they are, “Independent within the federal government”. Since you can’t meaningfully borrow from yourself, no loan is taking place. Yes, this would be litigated and I trust this argument is debatable. I’m mentioning this issue (GQ!), not settling it.

:confused: But there’s an impossible triangle here: the spending, taxing and borrowing laws are in mathematical conflict: you get to choose 2 (or some combination of the three).

I’m not sure how the specificity criteria would play out. The temporal criteria seems most straightforward, though given the existence of discretionary and non-discretionary spending that one is tricky as well. Would entitlements not mentioned within the constitution have the least protection? Social security and medicare laws were passed (or rather updated) more than a year ago.

Of course the computer systems aren’t designed to prioritize spending, or so I have read, so practicality might be another criteria.

The OP: interesting. This could make the Fed a fourth branch of government, with the effective power to reset the debt ceiling at will, in the instance where Congress provides mathematically conflicting instructions to the executive branch.

14

So borrowing from the Fed by overdrawing the account would effectively be cutting out the middle-man. The government’s already borrowing from the Fed by issuing Treasuries. This would be borrowing without issuing the Treasuries.

As far as borrowing from yourself: I agree with you it makes no sense from a logical point of view. But nevertheless a huge chunk of the debt is exactly that: the government borrowing from, and lending to, itself. The Fed’s already lent a couple of trillion, (despite the fact it’s actually part of the government,) and several trillion more represent the Social Security trust fund.

15

There’s a logical conflict between the laws, not a textual one. We have to interpret the text of laws, because the fundamental rule of interpreting law is that the legislature says what it means, and means what it says… even if the legislature is horribly confused.

16

I see. When the logical conflict follows from elementary school arithmetic and is furthermore grasped by legislators, I have difficulty with this distinction. But thank you for pointing out that it exists within the law.

Or maybe there’s no conflict. The executive is directed to obey three mutually exclusive laws: any two are consistent with each other. So the executive is directed to disobey the law. There’s nothing illogical about that. It’s just that fulfilling the spirit of the oath of office becomes difficult and the letter impossible. Arguably it would be hard to argue that the President is guilty of a high crime when he can’t do the logically impossible, but that would be a political call anyway.

17

The Constitution is not a guarantee of good laws. If you don’t like it, start a debate in another forum. I’m just telling you what the law is.

18

The first footnote in the OP was written with this objection in mind. Maybe just an empty facade. The article I cited in the OP also discusses this:

So there’s one legal argument that an overdraft is different from constitutionally defined debt, for whatever it’s worth.

Here’s a post from a previous thread on the platinum coin that gets into the details. The process is essentially the same in this case, since the coin is just a legal gimmick that supposedly makes the whole thing legal. “Sterilization” is step three. The last time the US government sterilized monetary base entering the system was the 1930s, when they were issuing Treasuries to buy up gold that was flowing into the country after the devaluation. They actually went too far with it at the time.

In today’s context, I guess some people might call it reverse-QE.

19

FTR, I intended no snark, though I can understand my post being read that way. In my defense, surreal situations are difficult to discuss when one lacks familiarity with the technical terminology. Sincere thanks (really!) for explaining things.

To be clear, I know there are reasonable person principles embedded in the law, but I have no idea whether or how they would apply in this instance. So I’m left with my discussion above.

20

Got it, sorry for misreading your previous post.