Ron Paul's debt ceiling solution

http://www.tnr.com/article/politics/91224/ron-paul-debt-ceiling-federal-reserve

Any critics?

Ron Paul is the man.

I think it's ok, although not ALL of the debt as it would make no sense to be left without bonds for open market operations. Some of it would buy some time (which could be precious now) but it seems obvious that the situation will come again in the next years.

Originally posted by Palynka
I think it's ok, although not ALL of the debt as it would make no sense to be left without bonds for open market operations. Some of it would buy some time (which could be precious now) but it seems obvious that the situation will come again in the next years.

How would the Fed balance their books if $1.6 trillion in assets was simply wiped out?

Originally posted by no1marauder
How would the Fed balance their books if $1.6 trillion in assets was simply wiped out?

With an accounting loss of the amount wiped out.

I'm not an accounting expert but at first glance the idea seems to make sense.

Originally posted by Palynka
With an accounting loss of the amount wiped out.

Out of capital?

Wouldn't it basically be asking the Fed to simply make a giant tax donation?

Originally posted by no1marauder
Out of capital?

Yes, I'd also like to get a better explanation for how this is supposed to work

Specifically, break it down on the using the major assets and liabilities of the Fed and then infer what the result would be for the economy. Keep in mind that this would have to occur by Aug. 2nd.

Originally posted by telerion
Yes, I'd also like to get a better explanation for how this is supposed to work

Specifically, break it down on the using the major assets and liabilities of the Fed and then infer what the result would be for the economy. Keep in mind that this would have to occur by Aug. 2nd.

Here's the Fed balance sheet as of December 31, 2010: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2010.pdf

From the figures being bandied about, it appears they have substantially increased their holdings of government securities (that was QE whatever if I'm not mistaken), but still wiping out $1.6 trillion in assets would appear to mean over half their assets would disappear in the blink of an eye. That sounds rather severe to say the least.

Originally posted by no1marauder
Out of capital?

Retained loss, I'd imagine. The semi-private status of the Fed having private shareholders makes this a potential issue, but if it were fully public the gains from the Treasury would be the loss from the Fed. Still, it seems to me an accounting issue only, not a cash flow one. So not sure if the shareholders need to worry, although markets may not be so cool about it.

Originally posted by Palynka
Retained loss, I'd imagine. The semi-private status of the Fed having private shareholders makes this a potential issue, but if it were fully public the gains from the Treasury would be the loss from the Fed. Still, it seems to me an accounting issue only, not a cash flow one. So not sure if the shareholders need to worry, although markets may not be so cool about it.

What about when the Fed wishes to draw down the excess reserves still in the system and does not have nearly enough assets to sell to do so?

Do you agree with Baker that it should use a reserve requirement of like 15% as an alternative?

You're right that the shareholders are not an issue since the they are symbolic only.

Edit: Personally, I think this is a really stupid idea. A much better idea is to simply raise the $()*$ing debt ceiling and then have this battle during the next budget session.

Originally posted by telerion
What about when the Fed wishes to draw down the excess reserves still in the system and does not have nearly enough assets to sell to do so?

Do you agree with Baker that it should use a reserve requirement of like 15% as an alternative?

Well, I already said that selling ALL would be a problem because of that. The Fed should obviously keep a significant amount but I don't see it needing to sell ALL of them either anytime soon. It also has tons of other assets it might use, given the balance sheet expansion although I agree they are far from perfect substitutes.

Increasing the reserve requirement is a bad alternative, IMO. It's contractionary and that's not the idea.

Originally posted by telerion
Edit: Personally, I think this is a really stupid idea. A much better idea is to simply raise the $()*$ing debt ceiling and then have this battle during the next budget session.

Yep. That's the obvious choice. Private bondholders may also start to get fidgety if non-conventional ideas like such selective default are used. It's not them now, but later... Better to show that the ceiling isn't a reason for potential default and get rid of it.

Originally posted by Palynka
Yep. That's the obvious choice. Private bondholders may also start to get fidgety if non-conventional ideas like such selective default are used. It's not them now, but later... Better to show that the ceiling isn't a reason for potential default and get rid of it.

Yes, doing away with the whole debt ceiling would be best.