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Thursday, January 31, 2013

Sanchezed at the Barclays Center Last Night


I went to see the Brooklyn Nets take on the Miami Heat last night at the Barclays Center.  At halftime, the game was tied, and the Nets even led 55-53 in the third quarter before the bottom fell out.  The Nets were then outscored 32-8 over the next 8:49.  The run began normally enough with a  DWade basket, but turned into an avalanche when the Nets committed four turnovers in five possessions, and failed to score on the fifth, while the Heat scored on all five of their corresponding possessions, and the lead blew up from 5 to 16 points in just over 2 minutes. To describe how a professional team could be so thoroughly outclassed in a nationally televised game, I can think of only one word:

Sanchez.

Here is my dictionary entry for "Sanchez":

v. i. 1. To commit several successive turnovers that the opposing team converts into quick scores, transforming a competitive game into an embarrassing blowout in an astonishingly short period of time;  2.  To perform extremely far below the level of proficiency associated with a professional athlete in a nationally televised game.  

n.  A sudden collapse by a team in a nationally televised professional sporting event which causes them to lose in a blowout.

Origin of the term:  The term dates to Thanksgiving Day 2012, when the New York Jets, led by Mark Sanchez,  playing on national television, fumbled three times in four touches over a span of 52 seconds, and their opponent, the New England Patriots, converted each one into a touchdown.  The most infamous of the three consecutive fumbles occurred when Sanchez ran headfirst into the backside of one of his teammates, fell to the ground and lost control of the ball, which the Patriots picked up and ran in for a touchdown - and the word was born.


Use it in a sentence: 

1.   As a verb:

Last night, the Brooklyn Nets Sanchezed in the third quarter, when they committed four turnovers in five possessions that the Miami Heat converted into baskets, turning a 5-point game into a 16-point blowout in just over two minutes.

2.  As a noun:

The following game action from the Brooklyn Nets' loss against the Miami Heat last night is an example of a classic Sanchez:

6:15   
NETS: Evans Turnover: Out of Bounds

5:56   
HEAT: Wade Turnaround Fadeaway shot: Made
[MIA 64-57]

5:38   
NETS: Williams Turnover: Offensive Charge

5:30   
HEAT: Chalmers Floating Jump shot: Made
[MIA 66-57]

5:03  
NETS: Johnson Turnover : Bad Pass

4:58  
HEAT: James Alley Oop Dunk Shot: Made 
[MIA 68-57]

4:29
NETS; Johnson Jump Shot: Missed
HEAT: Haslem Rebound

4:20
HEAT: James 3pt Shot: Made
[MIA 71-57]

4:02
NETS:  Johnson Turnover : Bad Pass

03:47
HEAT:  Bosh Jump Shot: Made
[MIA 73-57]

Sanchez FAQ:

Can a Sanchez occur in scholastic sports?
No.  A Sanchez only occurs at a professional level and must involve players who are being paid millions of dollars performing abysmally.

Can a visiting team Sanchez in an away game?
Yes, but the purest form of Sanchezing is to achieve a complete melt down in front of one's fans, as the Jets did against the Patriots on Thanksgiving and the Nets did in the third quarter of their game against the Heat.

If the other team fails to take advantage of a series of turnovers, is that Sanchezing?
No. That is just boring.  Sanchezing require that dire consequences promptly follow incompetence.  For example, when the Nets committed four turnovers In five possessions and the Heat scored each time, that is Sanchezing.  But, when the Nets committed another trio of consecutive turnovers in a 32 second span toward the end of the quarter, but the Heat did not convert each turnover into a basket, that is not Sanchezing.  They were too tired to Sanchez the Nets further at that point of the game. 

Tuesday, January 29, 2013

Larry Tribe on Intrasession Recess Appointments; A Tale of Two Administrations


Reading up on the intrasession recess appointment issue I wrote about a couple of days ago, I came across a couple of writings on the subject from the eminent Constitutional law professor Laurence Tribe, whom I've always admired, so I looked to them for guidance.  I was disappointed.

In 2004, Professor Tribe submitted an amicus brief to the Supreme Court on behalf of the late Senator Edward Kennedy, calling on the Supreme Court to grant certiorari in the Evans v. Stephens decision and declare all intrasession recess appointments unconstitutional. The brief is here; an article by a co-author summarizing its argument is here, which precisely foreshadows Noel Canning when it states: “First … the term ‘the Recess’ refers solely to recesses between "Sessions" of the Senate, and not to intra-session adjournments….  Second, even if the Senate break that began last Friday were deemed ‘the Recess,’ the vacancy in the office of U.N. Representative did not ‘happen’ during that recess—it occurred instead while the Senate was sitting.”  I’ll call the brief “2004 Tribe” for the rest of this post.

In January of last year – I’ll call that “2012 Tribe” – Professor Tribe wrote an op-ed in the New York Times, which does not mention his earlier position, but defends the Constitutionality of President Obama’s intrasession recess appointments at issue in Noel Canning (and also that of Richard Cordray to head the CPFB). 

I was disappointed in seeking guidance because the two writings are pretty much contradictory.  The former is virtually identical to Noel Canning in rejecting the Constitutionality of intrasession recess appointments and the latter argues the President has an overriding duty to make them if laws aren’t getting enforced.  The 2012 article is really just making the "inherent power" argument that gets deployed whenever the Executive branch has expanded its power in American history in Constitutionally controversial fashion. It's always there and it's always conclusory, and it's used far too often, in my opinion, for a healthy Constitutional government. 

Here are some of the arguments 2012 Tribe makes, juxtaposed against 2004 Tribe’s statements on the same point.

2012  Tribe: “the scant judicial doctrine on recess appointments will surely benefit from careful assessment of text, history and structure….”

                    “The President’s right to [make intrasession recess appointments] is clearly stated in the Constitution ….”

2004 Tribe:  “the text, structure, purpose and function and pre-1921 history of the Recess Appointments Clause all confirm … that the President may not make ‘recess’ appointments during intra-session Senate breaks….” Amicus Brief at 11.  Pages 13-15 of that brief lay out the textual interpretation, which foreshadows very accurately that of Noel Canning.

*****

2012 Tribe says “Past practice … points the way. Presidents have long claimed, attorneys general have long affirmed and the Senate has long acquiesced to the president’s authority to make recess appointments during extended breaks within a Senate session.”

 2004 Tribe: “Nothing could be further from the truth.  In fact, both Judge Pryor’s appointment and the Government’s novel legal interpretation break with over 200 years of Executive Branch practice and Department of Justice’s interpretations ….”  Amicus Brief at 5. The pro-Presidential power position is described as “a sea change” and “groundbreaking” development that only occurred “over the past two decades”. 

*****

2012 Tribe quotes Alexander Hamilton:  “[The Recess Appointments Clause] aims, as Alexander Hamilton wrote in Federalist No. 67, included facilitating appointments ‘necessary for the public service to fill without delay.’”

2004 Tribe quotes a little bit more of Federalist 67:  “In Federalist No. 67, Hamilton explained that the recess appointment power was designed ‘to be nothing more than a supplement to’ the Appointments Clause, for use when ‘it might be necessary for the public service’ to fill without delay certain vacancies that ‘might happen in [the Senate’s] recess.’ The Recess Appointments Clause was added because ‘[t]he ordinary power of appointment is confined to the President and Senate jointly, and can therefore only be exercised during the session of the Senate.’ The Federalist No. 67, at 408 … The clear implication, of course, is that recess appointments would be ‘necessary,’ and thus permissible, only outside the ‘session of the Senate.’” Amicus Brief at 16.

*****

2012 Tribe: “attorneys general going back to Harry M. Daugherty in 1921 have held that the Constitution authorizes such appointments.”

2004 Tribe: “Daugherty’s ‘functional’ test misinterprets the clause.” Amicus Brief at 11.

 *****

The three NLRB members (and, for what it’s worth, Richard Cordray, the appointed head of the CPFB), were nominated on Wednesday January 4, 2012.  Noel Canning explains that the Senate had convened the preceding day, as required by Section 2 of the Twentieth Amendment, to begin the new session, so these could not have been intrasession appointments. “[T]he Senate was operating under a unanimous consent agreement which provided that the Senate would meet in pro forma session every three business days from December 20, 2011 through January 23, 2012”  So even if the pro forma sessions are called “shams” and ignored, from January 4 to 23 is only 19 days. 

2012 Tribe says such appointments, made during no more than a 19-day recess, struck “a badly needed blow for checks and balances with strong support both from the text and the original purpose of the recess appointment clause.”

2004 Tribe:  “Before 1982, Presidents virtually never made intra-session recess appointments during Senate adjournments of shorter than one month.”  Amicus Brief at 10.

“There is no evidence that the Framers thought it necessary to empower the President to make unilateral appointments while the Senate was adjourned within its session for short periods [referring to breaks such as “two weeks”]”  Amicus Brief at 17-18. 

“It is absurd to imagine that the Framers drafted the Recess Appointments Clause to provide the President such a power, to be exercised during intra-session Senate breaks lasting a fortnight, or a weekend, or overnight.”  Amicus Brief at 12.

*****

Although I have some sympathy for the functional argument, it's difficult to make the case textually, and it doesn't come across well when its advocate has to contradict himself to make it.  


Sunday, January 27, 2013

Intrasession Recess Appointments Case Should Go to the Supreme Court


Friday, a panel of the D.C. Circuit invalidated President' Obama's expansive assertion of a power to bypass the normal Senate role on major appointments by filling vacancies during "intrasession recess appointments", i.e., any time within a legislative session when the Senate is not actively doing business (a "legislative session is comparable to a year -- there are typically two, and occasionally three sessions in a Congress).  The decision was unanimous on the lack of power to make intrasession appointments, although there was a dissent on another issue.  All three members of the panel were appointed by Republican residents, but confirmed by bipartisan votes in the Senate.  The decision is based on the text of the Constitution and does not turn on any of the facts of any of the individual appointments.  If upheld at the Supreme Court, it will limit the power of any President, not just this president.  I think the decision is the right one, but the odds are high that the issue will wind up before the Supreme Court. The case is Noel Canning v. NLRB.

Background

If a party to an NLRB proceeding does not comply voluntarily with the NLRB's orders, the NLRB needs to go to court to get an order of enforcement.   But a federal court cannot enforce an NLRB decision if the NLRB had no authority to reach its decision.  The Supreme Court decided that in New Process Steel, L.P. v. NLRB (2010) — Justice Stevens writing for an otherwise "conservative" 5-4 majority and Justice Kennedy writing the dissent — decided that NLRB must have three validly appointed members for its orders to be enforceable in federal courts.  At the time the NLRB reached its decision against Noel Canning, the NLRB had two members whose appointments had been ratified by the Senate and three on purported recess appointments by President Obama as to which there had been no advice and consent of Senate .

Language of Constitution

“[t]he President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.” Art. II, § 2, cl. 3.  It's very clear that this means the President can make "intersession appointments", i.e., appointments during the period between sessions of the Senate when the Senate is by definition not in session.  The issue is whether the President can make them during breaks within a session, such as on holidays or weekends, or conceivably even in the dead of night.

Arguments and the Court's Opinion

The NLRB argued that Presidents can pretty much do what they want.   Unfortunately that put them in an untenable position, similar to that which bedeviled the government in the Obamacare litigation, of arguing for a power as to which there is no cognizable limit, for essentially doing away with any separation of power or other check and balance relating to the issue. "The Board never states how short a break is too short, under its theory, to serve as a “recess” for purposes of the Recess Appointments Clause."

The expansive approach to intrasession appointments has been based on nothing more substantial than a memo, which the panel rejects as vague and flimsy, written by Warren Harding's Attorney General — one of the weaker sources one can imagine,  given the patronage nature of appointments in that era and the corruption that took place in that particular administration and even within the Department of Justice during his tenure.

Taking a largely originalist approach, the panel distinguishes "the Recess" which the Constitution uses twice from mere "adjournments" which it refers to six times.   The word "the" is interpreted to refer to a specific single recess, that between sessions, not just to "a" recess, or "any" recess.  The "Recess" is always opposed to a "Session" which refers to the usually two or sometimes three sessions per Congress and thus means what occurs outside of a session; while "generic break[s] in proceedings" within a session, the panel opines, are captured by the word "adjournments" or variations thereon.

The Constitution specifies that the appointment expires "at the end of the next Session".  This might be considered ambiguous because the word "next" makes sense whether the appointment is made between two sessions, or during a "break" in the first of two.  But I don't think defenders of an intrasession appointment power can get much mileage of this.  First, it doesn't make sense applied to an appointment made within the last session of a Congress.  No recess appointment has been understood to run past the end of a Congress and through the first session of a subsequent Congress.  And it makes little sense that an appointment made in the first of two sessions last longer than an inter-session appointment.  So the best reading is that it only refers to appointments between sessions.  Second, they're still left with the extreme position that the President has power which, fully exercised, would render the Constitution's provisions about the advice and consent of the Senate a nullity or, at best, mere act of grace by a benevolent President, an implausible construction of the Constitution based on everything we know about the importance of separation of powers to the Framers, and an unwise one as well:  as the panel writes, "The power of appointments to offices was deemed the most insidious and powerful weapon of eighteenth century despotism  Freytag v. C.I. R., 501 U.S. 868 883 (1993)."

The Government argued that limiting the President's intrasession appointments would upset the balance of power between President and Senate.  The President's spokesperson and his allies are likewise maintaining this argument in their public advocacy to overturn it.  But the court coolly points out that that intrasession appointments were so rarely used for the first 160 years of Constitutional government, that you can count the number of intrasession Recess Appointments on one hand — implying that either it's implausible that we had 160 years of no balance or we got along fine being so unbalanced..  Really, the panel says, it's the government's interpretation that would defeat the careful separation of powers reflected in the Appointments Clause. 

This seems to me to be absolutely right.  Recess appointments are just another example of the modern expansion of executive power, a negative, not a positive, development for Constitutional government.  If a President has the power to make appointments any time the Senate is not actively doing business, then there is no "balance" outside of the President's will.  A President could fill every open Cabinet position, every agency head, every judicial vacancy on the first weekend of a legislative session.  Whether one might agree or disagree that that is a better method of governing, it is in no way a "balance" between Senate and President.  The riposte might be that the voters can express their views at the next election if they approve of that style of governing, but that, of course, is not the case regarding a lame duck like President Obama.  There really isn't any way to defend the power to make intrasession recess appointments that ensures a "balance" between President and Senate.

Why the Case Should Go to the Supreme Court.

The panel notes a conflict with an 11th Circuit case, Evans v. Stephens, 387 F.3d 1220 (11th Cir. 2004), cert. denied, 544 U.S. 942 (2005) that reached an opposite conclusion of the President's intrasession recess appointment power. That case involved a challenge to whether Bush 43's appointment of a judge to the 11th Circuit during an 11-day "recess" in the Senate was valid.  The court heard the matter en banc and decided, mainly relying on definitions of the word in dictionaries from the mid-18th century, that it was. 

The Noel Canning panel contends that the 11th Circuit defined the issue without reference to whether the Senate was in session, which served to eliminate the issue itself and thus nothing the 11th Circuit said should be given any weight.  This is a little facile.  The 11th Circuit did consider, like the D.C. Circuit, whether "the Recess" means one specific kind of recess, that at the end of a legislative session, or whether "the Recess" means a generic recess, as in "the dog is a quadruped".  They expressed their view in a double negative: "We do not agree that the Framers' use of the term 'the' unambiguously points to the single recess that comes at the end of a Session.  Instead , ... 'the Recess ' ... could just as properly refer generically to ... intersession or intrasession ...."  Personally, I find that reasoning unpersuasive; it's nothing more than presuming what the President did was Constitutional and placing on the challenger a  burden to convince them otherwise.  That is not what I think is the role of the courts in the separation of powers.  I think the Court is meant to patrol the way governmental units wield their power to make sure they adhere to the Constitution at all times. That one branch decides its action is Constitutional is of little importance, other branches and other Constitutional actors  have their view as well, and the Court has the job of striking the right balance.

But it's a direct conflict between the two circuits, so it provides a very strong basis for the issue go to the Supreme Court.

What struck me most about the two decisions is that Noel Canning does not directly address a Supreme Court opinion discussed in Evans, which is, while not completely on point, certainly inconsistent with the reading of Noel Canning.   Wright v. U.S., 302 U.S. 583 (1938) repeatedly uses the words "adjournment" and "recess" either interchangeably or in the opposite manner of that divined by the D.C. Circuit.  For just one example, at 598, the Court says:
Paragraph 4 of section 5 of article 1 provides: 'Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting.'  It will be observed that this provision is for a short recess by one House without the consent of the other 'during the Session of Congress.' Plainly the taking of such a recess is not an adjournment by the Congress. The 'Session of Congress' continues.
(Italics added).  As Evans notes "the question of the meaning of the word "Recess" in the Recess Appointments Clause was not before the Court. We note, however, that ... [this] usage by the Supreme Court tends to support our accepting the President's interpretation that a "Recess" includes a break during a Session."  In response, Noel Canning simply repeats the panel's view that "the Constitution uses 'adjournment' to refer generally to legislative breaks. It uses 'the Recess' differently and then incorporates the definite article. Thus, the Eleventh Circuit’s interpretation of  'adjournment' fails to distinguish between 'adjournment' and 'Recess,' rendering the latter superfluous and ignoring the Framers’ specific choice of words."

What Might Happen at the Supreme Court

Superficially, one might assume that if Noel Canning goes to the Court, as it most likely will, Justice Stevens's replacement, Justice Kagan, will side with the New Process Steel dissenters and uphold the President's agenda, but I think that underestimates not only her, but Justice Kennedy as well as the rest of the Court. 

In her capacity as Solicitor General prior to taking the bench, Justice Kagan provided the Supreme Court a letter in connection with New Process Steel in which she stated that "the Senate may act to foreclose [recess appointments] by declining to recess for more than two or three days at a time over a lengthy period" - pointing to pro forma sessions that the Democratic-controlled Senate employed in 2007 to block George W. Bush from making recess appointments (in particular, recess appointment of the then-chairman of the NLRB).  It is certainly conceivable, but hard to imagine, that Justice Kagan would both fail to recuse herself and would abandon her prior public position.  

When Justice Kennedy concluded his dissent in New Process Steel by observing that the majority's reading left NLRB "defunct for extended periods of time", one can imagine that he might embrace a functional defense of intrasession appointments, upholding them to the extent needed to keep a Congressionally created organ of government functioning (although that only applies to one of the three NLRB appointments at issue in Noel Canning).  I don't think there is a textual basis for that, however.  And unlike New Process Steel, Noel Canning won't present a statutory construction issue of Congress's intent, but a major separation of powers issue that will fairly obviously determine to a great extent the scope of all Presidents' power to bypass the Senate on appointments.  I don't think political considerations will drive the decision in so simplistic a way.  And for the same reasons, I doubt the Court will  uphold broad power in the fashion of Evans.  I don't think an argument for unlimited power that the Government has been maintaining will go anywhere at the Court. 

Defenders of any sort of recess appointment power would have an uphill battle, in my opinion.  Assuming the rest of the Justices remain aligned as they were in New Process Steel, the Executive branch would have to pull off a triple play of sorts: (1) getting Justice Kagan not to recuse herself, (2) persuading her to adopt a position at odds with her prior public position, and (3) persuading Justice Kennedy not to go with the rest of the conservatives. If Justice Kagan does recuse herself, and the Court splits 4-4, then the result in Noel Canning would stand as it is. So the odds seem to favor an affirmance. 


Eating Quinoa is not Colonialism


One of my children forwarded me a piece from the UK's Guardian assailing "vegans" and other "food lovers" for consuming ... quinoa.  The "unpalatable truth", as the author sees it, is that foreign demand has pushed up the price to such an extent that poorer persons in Peru and Bolivia, where most of it is grown,  allegedly can no longer afford it, and must replace it with chicken and other "imported junk food".  And the "food miles" it represents are also problematic.  The author sighs that "the quinoa trade is yet another troubling example of a damaging north-south exchange". 

The article elicited a response from PETA, which the Guardian paraphrases as "Eating quinoa may harm Bolivian farmers but eating meat harms us all."

A focus, like the author’s (or PETA's for that matter), on the moral aspects of diet may be well-intentioned but so often the degree of scrutiny tends to become so obsessive that it frankly becomes as unhealthy and antisocial as the practices it criticizes.  Eating is an activity that billions of people engage in multiple times a day.  To subject that amount of human activity to perpetual moral inquisition, scolding and flagellation is a degree of intrusion and control associated mainly with immorally oppressive regimes.
 
I decided to investigate the author’s complaints.  (The first thing I noticed is that articles on this subject tend to crop up in the northern winter, leading me to wonder if there were any mixed motives in reporting on developments in the southern hemisphere at that time). When I looked at the links that were embedded in the article, I found that they really didn't support her claims that strongly.  Her only source for them was an article from her own newspaper, which indeed indicated that quinoa was more expensive than chicken in Lima, but did not indicate whether anyone was worse off for that.  Among the contrary evidence in the article was a statement that "the crop has become a lifeline for the people of Bolivia's Oruro and Potosi regions, among the poorest in what is one of South America's poorest nations."  [It should be noted that, while Bolivia is relatively poor within South America, its people have higher per capita income than many other nations, for example, Vietnam ]   Evo Morales — the leader of Bolivia, a socialist and an ally of Hugo Chavez — is quoted to say "For years [quinoa] was looked down on just like the indigenous movement.  To remember that past is to remember discrimination against quinoa ...."  So one socialist thinks eating quinoa is inclusive and progressive!  And the UN has declared 2013 "the year of quinoa", and the UN is never on the side of oppression.
  
The news article also says that quinoa generated $120 million in trade surplus for the two nations, triple what they earned from it three years earlier.  There was absolutely no evidence in the article to support the Guardian's characterization of exporters as “fat cats” (any editor who allows an article to be published using the cliche “fat cat” should be fired, by the way) or its claim that supermarkets  were "creaming off the profits".  The profit margins of large supermarkets are notoriously low; they really do “make it up on volume”.

A Time article from 2012 contradicts those allegations:  "’We worked hard to keep quinoa out of the hands of middlemen,’ says [quinoa growers’ association] general secretary Ciprian Mayorga …. Strong growers' unions have also kept multinational agro companies at bay. Production remains family based, average plots range from 1 to 15 hectares (2.5 to 37 acres).”  Quinoa is “produced by small-scale Andean farmers … who reap direct benefits of its international popularity. Recently, those benefits have skyrocketed: quinoa's price has tripled since 2006, triggering a boom in the poorest region of South America's poorest country.” 

I came across an NPR article from two years ago quotes a Bolivian farmer who, they say, belongs to an organic farming cooperative that sells to Whole Foods and Trader Joe's,  that quinoa is changing the lives of its farmers for the better.  "’Before people didn't go to study,’ he says. ‘They were born, they grew up, and that was it. They went on to herd sheep and llamas. Nothing more. Now people here, we think about doing something with our lives.’ Thanks to his earnings from quinoa, Choquetopa's oldest daughter is now in medical school.”  Time quotes one farmer saying “Now we've got tractors for our fields and parabolic antennas for our homes…” and another saying “Seventy percent of the region's high school graduates can now afford to attend university, … ‘thanks to quinoa.’"

The spokesman for Bolivian quinoa exporters, whose views may be taken with a grain of salt, as he is hardly unbiased, is quoted in the Guardian saying of the farmers:  "They have westernized their diets because they have more profits and more income.  Ten years ago they had only an Andean diet in front of them. They had no choice. But now they do and they want rice, noodles, candies, coke, they want everything."   And another source "who runs a quinoa farming collective" "agrees" with him.
 
Even if one assumes that a “Westernized” diet including cookies and coke is not a good thing for the Bolivian quinoa farmers, “more profits and more income” and more “choice” for what is characterized as one of the poorest regions in South America would seem to be good things.  So how are the good and bad to be balanced?  To conclude that consumers must stop eating quinoa because the farmers are using the proceeds of their sales in ways that we find suboptimal seems to be a very paternalistic judgment for people living thousands of miles away who have never lived the farmers' lives to make.  Also, which is more oppressive, paying poor farmers a fair trade price for their crops and letting them spend it as they see fit, or reducing their income, which they seem to be trying very hard to increase?  What other options does someone growing crops 10,000 feet above sea level have to better their lives materially?

This to me is not a moral dilemma, because there are multiple benefits and multiple costs arising from the increase in quinoa demand.  There is no moral scale on which multiple kinds of costs and benefits can all be weighed and no moral unit by which they can all be compared with each other.  To fit this into a simple moral prism, you have to blind yourself to some portion of the facts, be they the costs or the benefits.  And I don’t think disregard of fact is a morally defensible stance.
  
Rather, this is to me a simple story about development economics: new information brings the developed world's attention to a commodity available in a less-developed nation; demand goes up;  supply is somewhat constrained over the short-term, so its price goes up; and the growers in the less-developed nation quickly get richer, which leads them to buy things they want, which for whatever reason tends to have a high proportion of “Western” items.  This isn’t the first time this has happened in the last half-century.  There seems to be plenty of empirical evidence that this is how lots of people want to behave, that people don't want to live forever in a life of agrarian poverty.  I struggle to see how one could adamantly claim that poor farmers would be better off getting less money for their crops, that poverty is better for them because they will just spend the extra money suboptimally.  Frankly, if that were the case, then all "fair trade" would be morally reproachable; this is just a specific example of that general theme. 

Over time, other sources of supply ought to respond to the price signal being sent by quinoa buyers, and the resulting opportunity for profits, and a balance should arise in supply and demand.  In an article two months ago, NPR also reported that US farmers and grain breeders "are making a real effort to begin growing the crop here.  To date, it has been difficult and only one farm in the Rockies has done so while some say the Andean products are much better tasting.  But now grain breeders in the US believe they have developed some varieties better suited to the lower altitudes of North America and a quinoa industry will soon boom".  So the price signal is working, and bringing more supply to the global market to meet the demand.  If you think that quinoa prices should be driven downward and that this will benefit South American farmers even though they will have less money, then I guess you should be happy about this. 

One hopes that the Bolivian – Peruvian growers will make sound decisions about land management to sustain their role in the market and also that their health systems will effectively educate their own people on the dietary benefits of their local crop.  I imagine their own governments, the UN and other NGO’s can provide assistance in these respects.  The articles I have linked here contain some evidence of that going on.  I could even imagine those nations imposing Pigovian taxes (fat taxes, carb taxes, etc.) on the supposedly undesirable competing foodstuffs to diminish the price differential vs. quinoa.  But helping the Bolivian and Peruvian quinoa growers to hold on to and manage improving prosperity should be the concern of the socially conscious food consumer, not returning them to a condition of poverty out of an overzealous sense of morality.  

Saturday, January 26, 2013

The King Embraces His Subjects When They Master the Sport of the Realm




Much of the $75,000 prize will disappear to the taxman, but a middle-aged white guy getting props on a basketball court from King James?  Priceless. We are all witnesses.

Friday, January 25, 2013

The AMR "Make-Whole" Decision


A couple of days ago, Bloomberg's "Bill on Bankruptcy" led with a segment in which their bankruptcy expert Bill Rochelle opined that the decision issued last week in the AMR bankruptcy by Judge Sean Lane, in which he denied investors a “make-whole payment” in connection with a refinancing was :"vulnerable on appeal".  I had also seen a story on Debtwire [very expensive paywall] in which the investors and their advisors made the same claim.   As the "make-whole" issue has been litigated a few times in the same court in the past decade, it seemed odd that the court would commit an error, but you never know, so I downloaded the opinion and read it.  I really can’t see how the appeal will succeed. The media seem to be missing at least half of the analysis.

Judge Lane’s analysis is very thorough, but I can boil it down for blog purposes to a few simple points; as in other posts on legal topics, I won’t burden the reader with case citations or the like – this is not a law review article, legal opinion or brief, just a blog post.

1)  A “make-whole” payment is a contractual provision that is meant to compensate an investor in some fashion for lost future income when a debt instrument is prepaid at a time when interest rates have declined such that the investor is presumed to earn less from reinvesting the proceeds than had the financing remained outstanding until maturity. One of the basic principles of “make-whole” litigation is you start by looking at the contract because it’s just a claim under a contract to begin with.  Generally, the burden is on the creditor to show a make whole payment was clearly intended under the contract.  Here, there are two separate contract provisions that speak to the “make-whole” issue:  in the case of a “voluntary redemption” the creditor clearly gets the additional payment;  in the event of a bankruptcy, although the contract says that the principal of the loan automatically comes due, the contract clearly says there is no “make-whole” in that case.  (For a contract to address the issue so clearly has not always been the case, but it has become more common, because of the number of cases in which the issue has arisen in the past decade.)  Normally, the specific language of the bankruptcy clause would be enough to end the dispute under prevailing case law.

2) Here, however, this debt had been made the subject of an “1110 election”. Section 1110 privileges asset-backed financings in airline bankruptcies, requiring the airline, if it wants to hold on to its equipment and keep operating, to make up any missed payments by the 60th day after the bankruptcy filing and agree to perform all its ongoing obligations under the financing as they come due, while preserving some optionality on the debtor’s part ultimately to stop doing so and surrender the aircraft to the financing parties.  The rationale for 1110 is that, by reducing potential bankruptcy losses to the financiers, it makes it easier for the industry to raise capital more cheaply (although if this really made a difference, it would make sense to give all industries a similar benefit, in which case, why not exempt all secured debt from chapter 11’s provisions? A topic for another day.)

3) Since the airline had agreed to perform all its obligations going forward, the investors argued in a variety of ingenious ways that it was now bound to honor the “make-whole” clause when it refinanced them out.  The section 1110 affirmation had created a state of affairs such that it was as if there were no bankruptcy in effect regarding the financing, so, they contended, the refi was in reality nothing more than a voluntary redemption to take advantage of lower rates.

4) Unfortunately for the investors, the argument failed (and fails) because, while it rests on one part of section 1110, it misses entirely another provision that appears to be directly relevant.  Section 1110(a)(2)(B) provides that, even when an airline hands out 1110 affirmations, it does not have to cure any default under its financing agreements resulting from its bankruptcy filing.  By negative implication, that means any bankruptcy default in the financing documents continues to exist after an 1110 affirmation.  Since the investors’ contract with the airline clearly said that there was no “make-whole” payable when a default resulted from a bankruptcy filing, the court simply gave effect to that provision of the contract and denied the claim for a make-whole.

5) This makes perfect sense to me.  Section 1110’s protections are so valuable to financing parties that assurance of section 1110 eligibility has become a staple component of asset-backed airline financings.  I doubt a major secured financing of an airline could be completed and sold to a sophisticated investor without comfort that it was protected by 1110.  So when the AMR financing was put in place and sold, section 1110 was an issue that had to have been addressed.  Therefore, when the AMR financing contained a specific statement about what was payable in a bankruptcy, that statement should be given effect even when the airline confers section 1110 protection on the financing.  Put another way, it’s inconceivable that anybody intended a provision in an 1110-protected financing to be interpreted differently if the airline afforded the financing the protections of section 1110.  This must have been the intended result when the contract was put together.

6.  In addition, there really is no such thing as a “voluntary redemption” of debt in chapter 11.  A “redemption” refers to a company paying off its debt before maturity, but most debt instruments, and most interpretations of the Bankruptcy Code, establish that, when a company files for bankruptcy, its debt matures and becomes payable that day. The Bankruptcy Code’s automatic stay protects it from creditor action to satisfy their debts outside of the bankruptcy process, but the debts are due and payable in full that day. So a “redemption” is not a meaningful concept in a bankruptcy case.  Even if it were, repaying debt is not a purely “voluntary” act for a debtor in bankruptcy.  It has to get court authorization to do so.  If the court says no, the debtor can't do what it wants. So it's an inapplicable concept in bankruptcy.

7.  The media also miss entirely the risk of appeal being mooted.  The decision approves a motion to enter into a replacement financing under section 364 of the bankruptcy code, and 364 contains a clause that moots any challenge to the financing unless a stay is obtained upon appeal, which rarely happens because it typically requires the appellant to post a multimillion dollar bond, which investors are loathe to do.  While the appellants will no doubt argue that their appeal only goes to collateral issues that can be resolved in their favor without disturbing the financing, it is a difficult, although not impossible argument to win as the debtor may be able to present evidence that the economics of the financing are premised upon a financial condition in which no “make-whole” is owing, in which case the issue may not be perceived as collateral and the appeal will be mooted.  I note that, in Calpine’s bankruptcy a few years ago in the same court, investors’ appeal of a “make-whole” ruling in the debtors’ favor was mooted, although for different reasons. So this is not a small risk.




Sunday, January 20, 2013

Inequality, Growth, India and China

The Sunday New York Times's Sunday Review section features on its front page a piece by Joseph Stiglitz, reiterating his oft-iterated opinion that income inequality in the US retards overall economic growth.

The back page of the same section contains an op-ed by Steven Rattner in which he notes that China's economy is growing far faster - indeed, 50% faster - than India's.  Measured in dollar terms,  China's average GDP per capita is more than twice India's.

Rattner's piece is about one-quarter the length of Stiglitz's, but appears on a rough count to contain just as much quantitative data.

Why do I juxtapose these two, other than to praise Rattner's relatively more efficient writing style, compared to Stiglitz's repetitiveness and verbosity?  Because the data in Rattner's article disprove Stiglitz's thesis.

The Gini coefficient is the most often cited metric of income inequality.  The higher the number, the more income inequality exists in the subject nation.  Last year, the Asian Development Bank gave its estimates of the Gini coefficient for both nations: "The Gini coefficient – a key measure of inequality – grew in the region’s three largest economies: People’s Republic of China (PRC), India and Indonesia. From the early 1990s to around 2010, it increased from 32 to 43 in PRC, from 33 to 37 in India, and from 29 to 39 in Indonesia. Considering the region as a single unit, the Gini coefficient has leapt from 39 to 46 in the last two decades."  So China's has higher, and faster increasing, income inequality, yet is growing 50% faster than India.  And obviously Asia ex-Japan is the fastest growing of the major economic regions regions in the world, yet its income inequality has increased as well.  

Conversely, European nations display smaller Gini coefficients than the US, yet the US has grown faster than them consistently. 

If you read Stiglitz's article, you will note, I trust, that it does not prove his proposition at all. He merely lists a few illustrative data points about income inequality but does not show any quantitative relationship to economic growth.  The only statement that even approaches demonstrating a connection is when he notes that the 1920's were a period of high income inequality that ended in the Great Depression.  So: one whole data point.  And yet the 20's were a period of substantial economic growth, More importantly, the Great Depression and its causes have received more analysis from economists than any other phenomenon in economic history, and there is a widespread consensus that its principal causes were (1) the repayment burdens on Europe stemming from German reparation payments, and the loans Britain and France borrowed from the US and 2) monetary policy mistakes, principally  (a) maintenance of the gold standard, notwithstanding that the US started off with most of the developed world's gold and payment flows of the decade tended to send gold to just France and the US, but also b) the Bank of England's insistence on keeping sterling high, and c) interest rate cuts the US implemented late in the decade to help the UK  defend sterling, and 3) the excessive, destabilizing dependence of the developed world's banks on "hot money", short-term deposits, that the depositors of which (often foreign nationals) could demand withdrawal at the first news of crisis.  None of those have anything to do with income inequality. So there is no connection at all. 

If analytic merit were relevant, the relative placement and length of the two articles should have been reversed.




Kings and Queens


I’ve been listening to an album released last year by a Canadian group, Blackie and the Rodeo Kings, that doesn’t seem to have garnered much popularity in the US, as the album is ranked less than 100,000th on Amazon. But it’s worth a listen and I expect just a few more purchases will send it flying up the charts into the top 50,000.

All the songs on Kings and Queens are duets with prominent female American singers such as Lucinda Williams, Cassandra Wilson, and Emmylou Harris  -- the “Queens” of the title.   It’s a good idea because the “Kings” don’t have the greatest voices by themselves and the female vocals make the album work a lot better.

Some people compare the band’s work generally to The Band, which had a lot of Canadian ties itself.  I definitely heard this on the track “I’m Still Lovin’ You.” And the track “Heart A Mine” could have been pulled off “The Basement Tapes”.  But overall I see as many differences.  Lyrically, these songs are more intimate.  Robbie Robertson didn’t write too many songs about romantic relationships   Musically, I think they are more varied in style.  They remind me of the Jayhawks, and sometimes of Jackson Browne, both for tempo and a good dose of David Lindley-style guitar work.  There are also a couple of songs with stately tempos and heavy reverb that reminded me of Bill Frisell’s guitar work.  

Songs I especially liked were “Golden Sorrows” with Cassandra Wilson, “Black Sheep”, “My Town Has Moved Away” and “Got Me Covered” with Roseanne Cash.  “Shelter Me” features Miss Patti Scialfa joining the band for a good cover of a gospel-blues song by Buddy Miller; it sounded very much like a duet she might have done with her husband.

At least one of the band members, Colin Linden, has a solo career and on his album, From the Water, I enjoyed a Springsteen-like song “Between the Darkness and Light of Day” and the inscrutable “John Lennon in New Orleans”. 

Friday, January 18, 2013

Not That Kind of Math


Concerning the need for entitlement reforms, Politico quotes “centrist Democrat” Jack Markell, second-term governor of Delaware who, they say, is also head of the National Governors Association: “’I hope we’re the party of math,’ said Markell ….”

The Economist’s “Buttonwood” column summarizes Morgan Stanley analysis — using, as far as I can tell, math — that the governments of the developed world are all basically insolvent. “Morgan Stanley reckons the shortfalls are so large (between 800% and 1,000% of GDP in the US and UK) that the situation is hopeless.”

Monday, January 14, 2013

Tiffany Trends


In an earlier post or two, I noted some absurd statements in reporting in the New York Times.  In this post, in my own version of the "fairness" doctrine", I will make a similar point about a statement in the current Barron's.

Kopin Tan, one of their leading columnists, and someone who is always worth reading, writes: "Ho-hum sales from Tiffany (ticker: TIF) and Ruby Tuesday (RT) suggest consumers facing higher payroll taxes are cutting back."

I don't think TIF's sales are much affected by anxiety over US payroll tax increases!  To begin with, a majority of its sales are outside the US.  In its 10-K for FY11, TIF says "sales in the Americas were 50% of consolidated worldwide net sales, while sales in the U.S. represented 90% of net sales in the Americas."  So U.S. sales in the prior year were only 45% of its revenues.  So at most 45% of its sales would have any impact at all from US taxes.  In addition, a meaningful amount of sales by US stores, particularly the flagship in NYC, are to non-US buyers. 

And I don't think US payroll taxes make up a large part of the tax bill of the typical US TIF customer.  I do think income taxes and excise taxes on investment income would be important to TIF customers in the US and it is possible the approach of substantial  tax increases on upper income earners in the US affected purchases.  But that won't explain why TIF's sales growth collapsed across all regions.  In each of 2010 and 2011, all regions except Japan experienced double-digit sales increases, but in 2012, each region except Japan has had single-digit sales increases that were less than one quarter the prior year's growth.   

As for what explains the global drop in sales, I think there was a lot of disruption and uncertainty around the world in 2012.  In the Middle East, there was the Arab Spring; In China, a slowdown and a change in leadership; in Europe, the PIIGS crisis and its macroeconomic effects; in the US, an election and a looming tax rise.  Each of these could curtail discretionary spending  by the wealthiest slice of each nation's or region's population. 

I looked at a few indexes of equities, commodities and macroeconomic variables over the last three years to see if there was any obvious correlation with TIF sales growth in that period.  Gold displayed decent correlation until 2012, when it had a much better year than TIF's sales.  The best annual correlation was the 200-day / 40 week moving average of crude oil (the data I looked at was $WTIC, but I would assume since it's just percentage change I am looking at, Brent would show a very similar pattern).  I can't easily generate a chart that shows the correlation, sorry.  But that MA rose by mid to high teens in both 2010 and 2011 but was basically flat in 2012, matching TIF's Y/Y change in sales reasonably well, both directionally and in order of magnitude.  That makes sense, as the price of oil is relevant to Middle East wealth and also somewhat indicative of global economic activity, and TIF sales would logically be affected by those factors as well.   

Do note that the above is only talking about changes in TIF's sales growth, not changes in TIF's stock price.  The stock price tends to be fairly correlated with the gold price over time, with periodically wider swings.  (I was not able to embed the chart that showed this, sorry, but you can re-create it at http://www.bloomberg.com/quote/TIF:US/chart by adding GLD as the comparison and selecting either the 3Y or 5Y tab; you may find the mean reversion pattern interesting).  Which also makes sense -- as a seller mainly of processed precious metals and minerals, jewelers are the last step in the "downstream" portion of the metals and mining industry, much as gas stations are the last step in the "downstream" portion of the oil and gas industry.  So the commodity's price is a huge component of what the customer is buying in each case; the next question is how much can the retailer pass through to keep profit margins up.   And a big portion of TIF's sales are for special occasions, such as betrothals, anniversaries, and so on, and many of their customers are wealthy, so there is some inelasticity of demand and thus TIF has some ability to pass on price increases in precious metals and minerals, as long as things are going well for wealthy persons around the world.

I should note I have no position in TIF and this is obviously not a recommendation of any kind regarding trading.


Sunday, January 13, 2013

Red Wave

Red sand from Western Australia blown into the Indian Ocean, which is in the process of bringing it back



From My Modern Metropolis (http://www.mymodernmet.com/profiles/blogs/red-dust-storm-onslow ).  More images there.

One Bad Idea Down, One to Go

On the "$1T Coin" front, consistent with the analysis I set out two days ago, Ezra Klein reports that a Treasury Department spokesperson gave him this statement yesterday: "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."  Klein goes on to note that "The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless."  As I explained Friday, proponents of the "$1T Coin" had not taken the critical role of the Fed and its institutional perspective into account, a serious omission from a policy-making perspective, much like the neocons' failure to take Shiite-Sunni differences into account in their scenarios for occupying Iraq.  Klein's post also has some interesting quotes from the legislator behind the platinum coin section of the U.S. Code, who acknowledges it was never intended to do anything more than help numismatists (so that's what legislators spend their time on). Hopefully this idea's fifteen minutes of fame are over.

On the "14th Amendment solution" front, Reuters ran an article yesterday quoting several Constitutional law scholars throwing cold water on the argument, including Erwin Chereminsky at Cal-Irvine, who recognizes the obvious: "The debt ceiling is set by statute, and the president can't change statutes unilaterally.""


Saturday, January 12, 2013

The 14th Amendment and the Debt Ceiling


Today's New York Times reports that Senate Democrats called upon President Obama to employ "any lawful means" to avoid default should the "debt ceiling" be reached.  The reporter writes that "A Democratic aide said the senators would be inclined to have the president declare unilateral authority under the 14th Amendment, which says the debt’s validity 'shall not be questioned.'”

I was appalled.  All the Senators who are so "inclined" have taken oaths to uphold the Constitution.  Neither the 14th Amendment nor any other part of the Constitution confers "unilateral authority" on the President to borrow money on the credit of the United States Government.  That power is expressly within the power of the legislative branch (see Article I, section 8, clause 2: "The Congress shall have power ... to borrow money on the credit of the United States"). As Professor Laurence Tribe wrote in a New York Times op-ed, "The Constitution grants only Congress — not the president — the power 'to borrow money on the credit of the United States.' Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution." A "14th Amendment solution" is completely at odds with the law the Senators sponsoring it have promised the nation they will uphold.  

The "14th Amendment argument" rests on two prongs.  1) disregarding or misinterpreting the phrase "debts of the United States, authorized by law" in the 14th Amendment  and 2) totally misunderstanding, or twisting, what "validity" means in respect of debt incurrence.  

1.  Here is the 14th Amendment text at issue:

"The validity of the public debts 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."

The phrase "authorized by law" clearly modifies the words "debts".  Thus, for the validity of a debt of the United States to be unquestionable, that debt has to be "authorized by law".  There is no law that authorizes the United States to take on "debts" for borrowed money in excess of the debt ceiling and no law that authorizes any government official to do so without Congressional authorization.  So no Treasury notes, bills, or bonds can claim the protection of this provision if giving effect to their issuance, the total amount of debt outstanding exceeds the debt ceiling. 

Proponents would argue that the word "debts" means all payment obligations that would arise under current law; thus all such payouts are "authorized by law" not just debt for borrowed money. 

First of all, that isn't accurate. A very large portion of those so-called "debts" are actually not "debts" at all on any given day but simply forecasts of payments that are expected to be made as a result of future transactions, such as forecast salary for future services by federal workers, or projected bills on account of future visits to a healthcare provider for medical treatments covered by a federal health insurance program.  But workers could be furloughed and programs repealed, without leaving a legal debt of the government to either the worker or the program beneficiaries. The only "debts" at any given moment, are those as to which all events necessary to qualify for payment by the government have occurred. The rest is just an estimate about what will arise in the future.

Second, many Federal expenditures do not have specific payment deadlines the way bond maturities do.  So it is inaccurate to speak of the government defaulting on many types of Federal payments, even if they are "debts".  It just hasn't made them yet.

Third, as a matter of logic, the argument is fallacious and misses the point.  Saying Congress has authorized debts of a certain type -- not for borrowed money -- does not prove Congress has authorized debts of a different type -- debts for borrowed money.  There is a specific statute that says how much debt for borrowed money Congress has authorized, and debt for borrowed money in excess of that is clearly not "authorized by law".  

Fourth, if you believe that all spending is public debts and all debts should be paid, you must believe that the debt ceiling has been breached perpetually, because spending in a given year has always exceeded the debt ceiling.  But legal arguments that cause other laws and centuries of practice to be considered to have been nullities are usually rejected.

Last, the argument proves way too much. If you believe that all anticipated spending is "public debt" and its validity can't be questioned - even by a law passed by Congress and signed by the President, then logically you must believe that Congress can't adopt laws to reduce that forecast spending because that would call that future spending into question.  "No budget cuts ever" must be your mantra. Maybe it's a Constitutional violation for a lawmaker, a candidate or a pundit even to state in a speech or a column that the US won't be afford its spending in the future. Or for an arm of the government, such as its actuaries, to make such a forecast, even if it is statistically unassailable.  Tribe makes this point in his op-ed referenced above.

The proponents go on to argue that, if you believe the future payouts are all debts, there is a clear conflict between the law that establishes the debt ceiling, which will get in the way of paying them when due, and thus the 14th Amendment is violated by the debt ceiling.  Again, the premise is wrong but, in any case, there are multiple obvious answers to this. 

First, there are legally other means of paying those obligations, even if they are "debts", such as collecting taxes, printing money or selling federal property.  So there is no blatant conflict per se; rather, there are actually thousands of laws and plans and decisions that don't completely harmonize.  It's their sum that is in alleged conflict with the Constitution, as so interpreted, not the debt ceiling law alone. 

Second, even assuming a conflict exists between two statutes and further assuming it violates the Constitution, both of which I think are incorrect, nothing in that argument proves that the debt ceiling is the law that gets called un-Constitutional.  The debt ceiling limits payments under other laws, but the other laws call for payments that violate the debt ceiling law. It's a chicken and egg argument logically. The conflict can be harmonized just as logically by holding every appropriations bill passed after the debt ceiling was first adopted to be un-Constitutional.

2.  "Validity" is a legal concept in regards to a payment obligation.  It is not a financial representation or warranty or anything assuring means of payment.  It is customary in loan documentation for the borrower to represent when the loan is made that it is valid; a typical phrase is "legal, valid and binding".  That says nothing about whether the borrower will be able to pay when due, which will depend on events occurring after the loan is disbursed. For a large enough loan, a supporting legal opinion may be required by the lender, but when a lawyer says "the loan is legal, valid and binding on the borrower" no one understands that to mean the lawyer is opining on the non-legal topic of whether the loan will in fact be paid when due.  For a business borrower, payback of a debt will depend on the performance of its business and the degree of solvency and liquidity when payment approaches.  For a government borrower, it will depend upon the appropriations process and its access to capital markets.  A creditor concerned about security of payment may take collateral.  None of these concerns are legal questions having anything to do with "validity". 

In the context of a debt issuance by a legal, as opposed to a natural, person, "validity" just means that all the legal steps that the entity's governing rules establish for debt issuance have been taken appropriately, and there are no legal restrictions binding on the entity being breached by the particular issuance.  It says nothing about whether the steps necessary to have funds on hand to repay the debt when due have or will take place.  Validity is a necessary but not sufficient condition to getting a judgment in the creditor's favor in a court, but that's all; invalid debts may be paid back voluntarily and valid debts may go unpaid due to financial circumstances. For example, a credit card debt may be "valid" for purposes of getting a court judgment, but the debtor may be judgment-proof, having no assets or income available to satisfy the debt, and the debt will go uncollected.  A debt may also be valid for purposes of being allowed as a claim in bankruptcy, but the debt may be discharged without payment in full.  Whether a debt is valid or not is a legal issue but not the same as a financial issue.  

In sum, there is no credible argument that the President has unilateral authority to issue debt for borrowed money, under or in excess of the debt ceiling; the debt ceiling is not un-Constitutional under the 14th Amendment; and default in payment when due of  "debts of the United States" does not question the "validity" of that debt.  The "14th Amendment solution" is even less plausible legally than the trillion dollar coin proposal which I discussed yesterday.






Friday, January 11, 2013

Flaws in the "Trillion Dollar Coin" Gambit


A cohort of bloggers has been flogging the idea that, to sidestep the legislative obstacles to increasing the debt ceiling and operate the government and avoid default in the face of the ceiling, the Secretary of the Treasury should cause the U.S. Mint to mint a "trillion dollar coin" out of platinum (which I will refer to as a "$1T Coin" for brevity's sake), the denomination being roughly equal to the anticipated sum of net debt the Treasury would otherwise have issued to fund the projected deficit over the next year.  The coin would not contain a trillion dollars worth of platinum at market prices, which would require so many tons it is practically impossible, but would simply have a platinum content and be assigned a nominal value by the Secretary of  "one trillion dollars" on its face.  

The Secretary is then to deposit the coin in a bank -- necessarily one of the Federal Reserve Banks, as opposed to a commercial or savings bank, because 1) no commercial bank could take such a deposit without its capital ratios being driven to impermissibly low levels and 2) no commercial bank has enough disbursable money to honor checks and withdrawals in the size contemplated.  Then, having created a deposit account of $1,000,000,000,000, write checks against it to meet the obligations of the US over the course of the next year.

There are two versions of what happens then. In one scenario, the Republicans recognize they have been outfoxed and drop their opposition to the debt ceiling, at which point the Secretary returns to issuing debt and, once a trillion dollars of proceeds have come in, redeems the coin and directs the Mint to melt it down, restoring the status quo.  In another, the Fed, concerned about the inflationary impact of one trillion dollars of new money being injected into the economy without an offsetting withdrawal of liquidity from the issuance of new Treasuries, sells Treasuries from its own, recently expanded balance sheet to effectuate the offset. The latter variation puts in place a remarkable role reversal, in which the Fed takes over the Treasury's historical function of selling Treasury debt to the markets and the Treasury takes over the Fed's historical role as the creator of money.  Equally remarkably, it causes the Fed to perform a 180-degree pivot and switch from deflation fighter to inflation fighter overnight,

The gist of the argument economically is that the United States has a fiat currency and all money it creates has that nominal value assigned by "the gubmint" so this is just a larger denomination of an unquestioned principle: this is just what money is.
  
These blog posts give you some basic background on the idea, and the history of its dissemination and identify its most breathless advocates in the blogosphere. 




A good portion of the argument in favor of the idea has been legal in nature, seeking to convince the reader that the Treasury Secretary can do this as a legal matter.   Having time on my hands and liking this kind of outside the box proposition, I spent some time looking at the issue, although I don't claim to be an expert in this topic, either before or after my study of it.  I conclude that

1) there are a variety of rules or guidelines in statutory construction and there is at least a plausible "plain language" argument that the Secretary can direct the Mint to mint a $1T Coin;

2) the Treasury Secretary's willingness to exercise such presumed authority is a necessary but not sufficient condition to the practical implementation of the gambit; the cooperation of the Federal Reserve System is also required;

3) under the same "plain language" approach to statutory interpretation that supports the Secretary having power to create a $1T Coin, the Fed has a similar discretion not to cooperate; it may conceivably be required to take the deposit but it is not obligated to create the amount of money needed to turn the single coin into usable denominations of money; and

4)  an overlooked provision of Federal law prohibits the Fed and Treasury from collusion in monetizing the federal deficit, and should apply to this proposal as well.

1.  Under a plain language reading of the statutes on coinage prerogatives, the Treasury Secretary is authorized to create platinum coins in whatever denomination s/he deems appropriate.  Section 5111(a)(1) plainly authorizes the Secretary to mint coins in amounts "necessary to meet the needs of the United States.”  31 U.S.C. §  5112(k) in its entirety says "The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time."

Objections have been levied that the creation of a $1T Coin was not plausibly intended by subsection (k), which, the objectors say, was meant only to authorize commemorative coins in amounts too small to impact the money supply or the fisc.  Indeed, the bill that incorporated 5112(k), Pub L 104-280, was mostly but not entirely focused on commemorative coins and there is no evidence of any Congressional discussion about conferring unlimited money-making power on the Treasury Secretary.  Common sense suggests such a shift would have engendered some discussion, so, along the lines of Sherlock Holmes's "the dog that didn't bark", it is rational  to read the statute in a less radical fashion. The coin’s proponents have responded at length, and have managed to evoke an endorsement of their interpretation from Professor Laurence Tribe at Harvard Law School, who is indisputably one of the leading Constitutional scholars, living or dead, although it must be  note that the analysis does not involve any Constitutional interpretation, but simple statutory construction, and Tribe has elsewhere vigorously argued against literalism in interpretation (that's the main theme of his book "The Invisible Constitution").  And elsewhere in this blog I have noted how Tribe's views have seemed to switch polarity depending on which party controls the law-making arms of government.

Although I think it flies in the face of common sense to argue that two houses of Congress intended to effect a fundamental and historic change to decades of Federal Reserve control over the monetary policy of the United States via a commemorative coin law without any public debate of the policy change, I won’t dwell on that arguments any further as I have something different to offer on the topic.

Section 5111(b) says that the Treasury has a “coinage profit fund”, which the Secretary shall credit “with the amount by which the nominal value of the coins minted from the metal exceeds the cost of the metal.”  So, the “coinage profit fund” grows by a trillion dollars less the cost of minting the $1T Coin. That cost would be very small -- the coin would contain a small amount of platinum, not a trillion dollars worth at market prices (if such an amount could even be mined and smelted). So there would be a very large “coinage profit”or what economists call "seignorage".  5111(b) goes on to say that “The Secretary shall deposit in the Treasury as miscellaneous receipts excess amounts in the coinage profit fund.”.  So the “coinage profit fund” is just a bookkeeping entry; the Treasury now grows by $1T. 

2.  Title 31 has nothing more to tell us about the next step in the proposal, the deposit of the $1T Coin into an account of the Treasury at a Federal Reserve bank.  The Secretary has to do that because, the $1T is made up of millions of smaller expenditures and the Secretary needs to be able to write lots of checks and make lots of payments out of the $1T sum, all for smaller sums  than $1T.  

The basics of the depository relationship are promulgated in 12 U.S.C.  § 391: “The moneys held in the general fund of the Treasury … may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”

Similar language, from the perspective of the Federal Reserve Banks, appears in 12 U.S.C. § 342: “Any Federal Reserve bank may receive from any of its member banks, or other depository institutions, and from the Unites States, deposits of current funds in lawful money…”  Assuming the $1T Coin is lawful money, the Federal Reserve Banks are clearly authorized to take it in deposit.  

Some may note the repeated use of the word “may” in each of these statutes, which posits some sort of discretion is reserved to the actors involved.  Is it the Secretary alone who has discretion or do the Federal Reserve Banks as well?  I think there are enough references to the "direction of" and "required by" the Secretary to suggest that the  Federal Reserve Banks are obligated to take the $1T Coin in deposit.  However, note that a semicolon separates the parts of 342 that contain those phrases and the final text which refers to disbursements by check.  The semicolon certainly quashes any implication that the references to the Secretary directing and requiring the Fed carry into the statement about honoring disbursements by check.  (I'm not going to bother with case citations; this is a blog post not a brief or law review article and there is enough law on this kind of close reading of statutes that any trained lawyer knows the statement I just made is as supportable as any legal argument in support of the $1T Coin gambit).

3.  Since the creation of the Federal Reserve System in 1913, the creation of money for purposes of circulation has been principally within the control of the Fed.  The physical currency that people have in their wallets or mattresses and call "cash" is what Federal law refers to as Federal Reserve notes.  Given the denominations that have been used heretofore, the vast bulk of money in circulation in the US is in the form of Federal Reserve notes, not coins. 

The process by which the Fed money is creates money is too detailed for this post; for these purposes, only two points needs to be understood:  1) The Fed, not the Treasury creates money in the form of Federal Reserve notes, and 2) the Fed is indisputably intended to be an independent decision-maker when it comes to creating money. 

Title 12, Chapter 3, subchapter XII of the US Code governs the creation of Federal Reserve Notes and makes these points very clear:  first, Section 411 provides: “Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized...."

 Second, Section 412 defines the process leading to any such issuance: “Any Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes hereinbefore provided for as it may require .…” 

Finally, Section 414 provides: “The Board of Governors of the Federal Reserve System shall have the right, acting through the Federal Reserve agent, to grant in whole or in part, or to reject entirely the application of any Federal Reserve bank for Federal Reserve notes….”

The italics in those quotes are, of course, mine to show the discretion of the Fed in creating money.  But don't just note (1) the discretion of the Board of Governors to reject any application from one of the Federal Reserve Banks for the issuance of Federal Reserve Notes, or (2) the discretion of the individual Federal Reserve Banks not to apply for $1T in Federal Reserve Notes in the first place, but the complete absence of the Treasury from the process. The Treasury has no power to compel any Federal Reserve Bank to create Federal Reserve notes, and thus no power to break the $1T coin into smaller, usable amounts over the objection of the Fed.  It may have a deposit at a Federal Reserve Bank in the amount of $1T but it has no power to make that bank issue money in smaller amounts on account thereof.  The deposit of the $1T Coin and the transformation of that sum into $1T of usable denominations are legally two different things and the latter is completely controlled by the Fed, beyond Treasury’s fiat. 

4.  The last sentence of 12 U.S.C. § 355(1) provides a clear statement of policy prohibiting the Fed from monetizing Federal debts except through open market purchases.  Section 355 lists the “Powers and Duties of Federal Reserve Banks”.  The last sentence of 355(1) however contains a limitation on one type of transaction: 

"Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market."

That prohibits non-open market transactions between the Fed and a counterparty in obligations of the US. That counterparty could be a member bank, getting a sweetheart price, but it equally bans the Fed from buying new Treasuries directly from the government.  Treasury and the Fed are not allowed to get together and collusively monetize Federal debt, each of them has to go to the capital markets and take market prices.  This is an important form of discipline on them both and on the ability of the political branches to control the Fed and the money supply for political purposes.

While the $1T Coin is not itself a Treasury instrument, it is obviously the functional substitute for one in this context.  This is one of the basic tenets of monetary theory regarding a fiat currency -- the sovereign's currency is just the same as a demand note on the sovereign.  There is no basis to distinguish between a coin issued by the Treasury denominated in X dollars and a demand note issued by the Treasury in the same amount.  In a fiat currency, they are identical. 

If there were no debt ceiling, Treasury would raise cash to deposit in its accounts at a Federal Reserve Bank by issuing debt instruments at market prices.  In the proposal, it simply substitutes the $1T coin for the Treasury issuance as a matter of form, then goes to the Fed -- with something for which there is no evidence of any market price, of any transaction with any third party – and says “this is worth $1T”.  It’s completely collusive if the Fed accepts that at face value and functionally and substantively what the last section of section 355 is meant to prohibit.

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Why should the Fed say no?  I will offer two reasons, one institutional, the other economic. 

Institutionally, the Fed has historically presented itself as independent of the political branches in the management of the money supply.  Such a perception is considered vital to a sound currency, i.e., one that retains its purchasing power reasonably well against other currencies and against domestic assets and liabilities, and a sound currency is generally considered vital to a sound economy. There are ample instances throughout history of a currency controlled by the sovereign being debased for political ends, and high inflation and economic peril resulting shortly thereupon.  Keynes wrote in "The Economic Consequences of the Peace" that "Lenin was surely right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency".  And, proving the accuracy of Keynes's statement, within a decade after he  wrote that, Germany had its hyper-inflation and the Nazis began their rise.

By cooperating with the $1T Coin strategy, the Fed would be surrendering its institutional independence concerning the creation of money to Treasury (and, given that Treasury Secretaries serve at the will of the President, to the President).  In succeeding years, President Obama and his Treasury Secretary could repeat the practice; succeeding administrations could do so as well. There is no reason future resorts to the gambit would be limited to just the amount necessary to cover a deficit; it could be used in any amount.  (Already, one of the blogger proponents on firedoglake says $1T is "small ball" and the coin should be $16T, the size of all federal debt, or even $100T). The Fed’s role in creating money would be reduced to a largely mechanical, passive, subordinate agent of the executive branch, like a dog waiting for its master to come and take it for a walk on a leash.  One would expect the individuals who would make the decision to cooperate or not to feel strongly about this radical diminution of the role of their institution.

Economically, look at two things:  the money supply and the Fed balance sheet. There are several competing and overlapping concepts of what a nation’s “money supply“ is. For this purpose, I will refer to the “monetary base” of the United States, which the St Louis Fed tells usis the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks” and with a reasonable degree of accuracy captures the money everyone in the economy owns at a given time; presently it’s approximately $2.6T, according again to the St Louis Fed.  So the injection of $1T in new money into the economy through Treasury spending over the course of the year, without some action to offset that, would increase the monetary base by about 38%, which is a dramatic increase likely to produce inflation in some amount. 

Now the response to this is obvious: It doesn’t go into the monetary base and the economy all at once, but only as it is disbursed over a year and Treasury is supposed to disburse that money over the year anyway, because it’s Federal spending in the normal course, so it’s not per se inflationary. It’s just a question of how you manage its injection over the course of the year and what steps you take to withdraw a more or less comparable amount of money from the economy over the same time; and, since the supply of new Treasuries will be far below the demand that is customarily present, the Fed can sell old Treasuries from its balance sheet to meet that demand and you wind up in the same place.

So we turn to the Fed’s balance sheet to see how this is so.

The Fed published its consolidated balance sheet weekly and you can see the latest one at Item 8 on this webpage.  It shows the Fed has $2.9T in total assets, of which $1.68T are Treasuries.  So it is true – for one year and some portion of a second – that the Fed could offset the monetization of the $1T Coin.  But the strategy would either become outright inflationary in the second year or have to be abandoned, with the political process reverting to the standoff / technical default risk that exists today. However, I think it is reasonable to predict that, as the market realized the Fed’s supply of Treasuries would be exhausted in the second year, rates would rise and the value of Treasuries would fall on account of the expectations of either default from an end to the gambit or inflation on account of continued use of the gambit without any means to offset the monetization of the deficit. 

So based on these reasons, I think the Fed would have a sound basis to decline to cooperate with Treasury in the $1T Coin gambit.  The Fed would say in effect, it can’t work for more than a year; we’ll all be back here in a worse position; we’re not going to compromise our independence and if we did it would have detrimental long term effects on the soundness of our currency; and we are legally within our rights to decline to do so and in deed we may be prohibited from doing this.  In recall that in 2011 when the debt ceiling was then at issue, Ron Paul called on the Fed to solve it by destroying the Treasuries it held, thereby reducing the amount outstanding by the amount destroyed.  I don't recall anyone thinking the Fed would take his advice, which isn't that much different in principle than the $1T Coin gambit.  

I am inclined to think a sensible administration would take this into account and not go down such a road in the first place, notwithstanding the way its allies in the blogosphere are pounding the drum for it.








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