By Richard Pollock
Federal Reserve Bank of New York officials secretly conducted real-time exercises during the 2011 and 2013 debt-limit crisis that demonstrated the federal government could function during a temporary shutdown by prioritizing spending, even as Treasury Secretary Jack Lew publicly claimed many times that such efforts were “unworkable,” according to a new report by the House Financial Services Committee obtained by The Daily Caller News Foundation.
The staff report, to be released Tuesday, charges that Lew and other Obama administration officials deliberately misled Congress and the public during the federal budget and debt limit showdowns in both years. The committee will convene a public hearing on the report Feb. 2.
The report also states that the Obama administration crafted actual contingency plans to pay for Social Security and veterans benefits, as well as principal and interest on the national debt if the government was temporarily unable to borrow more money. The Committee concludes that over the last two years the Treasury Department has “obstructed” congressional efforts to get to the bottom of the administration’s real-time policy during the two showdowns.
The Constitution stipulates that only Congress can determine how much money the federal government can borrow. Presidents thus cannot unilaterally spend beyond congressional debt ceiling limits set. The committee — chaired by Republican Rep. Jeb Hensarling of Texas — charged that during both confrontations, the Obama administration held the country’s creditworthiness “hostage” by claiming default was the only possibility if the debit ceiling was not raised.
“These internal documents show the Obama Administration took the nation’s creditworthiness and economy hostage in a cynical attempt to create a crisis so the president could get what he wanted during negotiations over the debt ceiling,” Hensarling said in a statement to be released with the report Tuesday.
The report also revealed that the Treasury Department did not publicly divulge its plans to prioritize payments “for the express purpose of creating market uncertainty in an effort to pressure Congress to acquiesce in the administration’s ‘no negotiation’ posture on the debt ceiling.”
Wisconsin Republican Rep. Sean Duffy, the financial services panel’s oversight subcommittee chairman, said the administration “manufactured a crisis to put politics ahead of economic stability.”
The massive, 322-page report chronicles frank, behind-the-scenes discussions among Federal Reserve Board and Federal Bank of New York officials as Congress debated whether to keep existing debt limits or allow Treasury to borrow more money. The House committee and the Treasury Department have been fighting a bitter, two-year battle over Federal Reserve documents.
The report states that “Treasury apparently directed the New York Fed not to answer valid congressional oversight inquiries because Treasury knew the answers would expose the dishonesty of the administration’s public statements.”
A Treasury Department spokesman told TheDCNF, “Treasury has been committed to working cooperatively with the Committee to provide it with the information it needs,” including providing it with the New York Fed documents. The report is based on 3,878 pages of internal documents the committee eventually acquired despite Treasury’s opposition. The panel finally obtained the documents by subpoena. The report contains 41 separate appendices.
The revelations will likely add new intensity to the long-running public debate on the proper level of federal spending as the 2016 election campaign accelerates with Monday’s Iowa presidential caucus and next week’s New Hampshire presidential primary. Obama administration officials repeatedly declared that a complete government shutdown with no partial or interim payments was the only alternative to congressional approval of an increased debt ceiling.
In testimony Oct. 13, 2013, before the Senate Finance Committee, for example, Lew said the government could not “pick and choose” the funding of individual government programs once the debt limit ceiling was reached.
“I do not believe there is a way to pick and choose on a broad basis. The system was not designed to be turned off selectively,” Lew said.
The Federal Reserve documents revealed in the report show the Obama administration was in fact prepared to pick and choose which payments to make “in order to protect the creditworthiness of the United States.”
An internal e-mail from an official in the New York Fed’s Financial Institution Supervision Group states that regardless of the congressional outcome, “Treasury is adamant they will make [Principal and Interest] payments. Not considering possibility of missing debt payments.” The P&I payments are made to Treasury bond holders.
“At the same time that Treasury was insisting to Congress and the American people that prioritization is unworkable, Treasury and New York Fed officials were working behind the scenes on a prioritization plan,” the report charges.
In private, Federal Reserve Board Federal Reserve Bank of New York officials vigorously denounced the administration’s secrecy over its contingency planning, one calling it “crazy, counter-productive, and add[ing] risk to an already risky situation.”
Federal Reserve Governor Jerome H. Powell, for example, complained that the administration tactics were part of political brinkmanship. “Treasury wants to maximize pressure on Congress by limiting communications on contingency planning,” he said in an email.
The report noted that both the Federal Reserve Board of Governors and the Federal Bank of New York had “grave concerns with Treasury’s political decision not to inform the public of the administration’s debt ceiling contingency plans.”
The Federal Reserve Board staff “strongly encouraged Treasury to reveal its plan in advance” so that the private sector could prepare properly for a debt ceiling event but Treasury officials were “very reluctant to do so,” according to the report.
The Federal Reserve documents also depict officials at the Federal Bank of New York twice engaging in intense “tabletop exercises” about how government agencies could operate under a spending limit.
A March 16, 2011, table-top exercise included an hour-by-hour simulation of how 29 governmental agencies and market players would react when the federal government reached its debt limit.
At the time, the federal government would be within $25 million of its $14.3 trillion budget limit. The Secretary of the Treasury would invoke the Federal Reserve Debt Ceiling Crisis procedures, which provide that the “The President and the Secretary of the Treasury meet with the Fed Chairman at noon and agree that the Federal Reserve should pursue actions to honor and settle SSI, veterans benefits and P&I payments.” SSI refers to Social Security and disability payments.
A similar April 9, 2013, debt ceiling table-top exercise focused on a “scenario” in which “Treasury begins controlling the flow of payments” and in which ”SSI, veterans benefits and P&I payments [would] be prioritized over all other governmental obligations.” The debt ceiling was $16.3 trillion at the time of the second exercise.
The procedures also state that “based on direction from the President, Treasury will pay only selected type of payments and withhold other government payments.”
Both Moody’s and Goldman Sachs publicly suggested during the 2013 crisis that it was possible the government could assure markets by pledging to pay principal and interest, Social Social and veterans benefits.
When contacted by TheDCNF, the Treasury Department did not directly address the issue of prioritizing payments but forwarded an October 16, 2015 blog, which stated in part, “The New York Fed’s system would be technologically capable of continuing to make principal and interest payment,” but added, “this approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets.”
Multiple think tanks, including the Mercatus Center, have released reports suggesting numerous alternatives to default if the debt limit ceiling is not increased.
The national debt limit has tripled under Obama and now stands at $18.9 trillion.
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