Interest rates will skyrocket, instability will roil the financial markets, the federal deficit will soar and the resulting "catastrophic" harm will last years. That is how Treasury Secretary Jacob J. Lew describes a debt-ceiling breach certain to cause a government default. Uncle Sam will be bankrupt. All national government operations will seize-up. All checks for Social Security, Medicare, Medicaid, veterans, contractors and vendors will bounce.
Debt Default Crisis 2015 - Default-Deniers Grow in Strength and Numbers
At the stroke of midnight, March 16, 2015, the debt ceiling was again breached. The Treasury Department has begun "extraordinary measures" to forestall the certain default. Jack Lew must rob Peter to pay Paul. He started by shorting federal employees' TSP (G) retirement fund. Independent experts predict that such measures may push the actual default into October. The near-shutdown of the critically-important Homeland Security Department demonstrates that asymmetric partisan dysfunction has worsened. Indeed many of the new Tea Party members of the 114th Congress ran on a no debt-limit increase, default-denier platform.
In his 2014 Stress Test, Tim Geithner warned about the harmful economic delusion of congressional default-deniers: "Many of them truly seemed to believe that default could cleanse the sins of the U.S. economy, which was insane. Boehner was unwilling ... to correct the delusions of much of his caucus." Geithner described the House majority's partisan use of the debt limit as "a tool of extortion" which "jeopardized the full faith and credit of the United States." As a former Treasury Secretary, Geithner can be direct: "They ... strap a financial bomb to their chests and try to extort a ransom in exchange for agreeing not to blow up the economy."
The Debt Limit Statute is Patently Unconstitutional
The debt limit statute violates the explicit prohibition of the Constitution's Public Debt Clause; it questions the "validity of the public debt of the United States." Legal scholars uniformly acknowledge that the debt-limit statute is unconstitutional. George Washington University's Neil Buchanan, Cornell's Michael Dorf, and Baltimore's Garret Epps have repeatedly explained why and how the statute conflicts with the Constitution. Chicago's Eric Posner and Harvard's Adrian Vermeule have called for President Barack Obama to unilaterally raise the debt limit.
The debt ceiling's unconstitutionality is so patent that Jeffrey Rosen, CEO of the National Constitution Center, analyzed that the Supreme Court would not likely invalidate unilateral Executive action if taken to prevent the nation from defaulting.
As I have argued here and elsewhere, the debt-limit statute should be directly challenged in court. Thus my lawsuit filed in February 2014 -- Williams v. Lew (1:14-cv-00183(RJL) (D.D.C. 2014). I have done so in the spirit of economic patriotism.
Secretary Lew testified to the Senate Finance Committee in 2013 that U.S. bondholders suffer both current harm and future harm by partisan brinkmanship tied to raising the debt limit statute. Even the "prospect" of such brinkmanship occurring causes harm to bondholders. Lew refused to offer bondholders any assurance that they could be protected.
The Treasury investor holds our nation's debt under a constitutional guarantee not only that the debt investments will remain valid, but also that the "validity" of those securities will never be so much as "questioned" by our nation's government. Any Treasury debt holder has a Fourteenth Amendment right of an absolute expectation of security and constitutional worth in their investment. Treasury debt has long been judged and describe by the marketplace as "risk-free."
Bondholders have Article III standing to challenge the unconstitutional statute based on both their current and impending future harm. The debt limit statute facially violates the constitutional guarantee; bondholders suffer current harm - both economic and non-economic. The investments' monetary value and low-risk profile are significantly harmed by the statute's existence. The statute also causes bondholders non-economic current harm; bondholders experience psychic angst resulting from the government's questioning the validity of an investment that was purchased as a constitutionally-guaranteed, ultra-low-risk investment.
Without the ability to prioritize bond payments, redemptions and rollovers, Treasury's threats of arbitrary enforcement of the statute, separately violates all bondholders' due process rights. Finally an as-applied violation occurs when Treasury's required enforcement of the statute results in a certainly-impending "catastrophic" default. The investments' monetary value and ultra-low-risk profile will be devastated.
Debt-Limit Statute Subject to Court Challenge
The three types of bondholder harm described above were the basis of my federal lawsuit to void the debt limit statute; I hold every type and duration of Treasury debt.
In response to the suit's initial pleadings, the Justice Department, representing Lew and Treasury, sought a procedural dismissal by claiming I lack adequate standing. DOJ ignored my current harm allegations and argued that a debt default was highly speculative and based only the hypothetical premise of a default. DOJ's default-denier assertions obviously contrast with the many warnings of their clients (Jacob Lew and Treasury Department).
Part II Coming Soon
In Part II of this post, I detail recent developments in the litigation (they weren't good). The second post discusses why Congress must immediately raise the debt ceiling and why the debt ceiling must ultimately be razed. I invite other bondholders - particularly sovereign states and financial institutions -- to initiate separate litigation to void the debt-limit statute.
Victor Williams is an attorney in Washington D.C. and clinical assistant professor at Catholic University of America, Columbus School of Law. Victor Williams founded the American Institute for Disruptive Innovation in Law and Politics -- DisruptiveJustice.org.