The Broader Market

by Jordan Eizenga

Some commentators have argued that the 14^th Amendment of the US Constitution makes the debt ceiling unconstitutional. Section Four of the 14^th Amendment states that:

the validity of the public debt of the United States, authorized by law, including debt incurrent for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Constitutional scholars, such as Garrett Epps (the gentleman in the video), interpret this to mean that that it is unconstitutional for the federal government to renege or default on its financial obligations. According to Epps, the President could simply claim that the debt ceiling is unconstitutional and order the Treasury Secretary to issue more debt in order to pay its obligations. Yet, even if there is a legal argument for overriding the debt limit, the political argument for doing so is complicated. It is far from clear that the public would either comprehend or agree with the President’s interpretation of the Constitution. But, it is equally unclear if the public would side with obstinate Republicans who seemed willing to allow the federal government to default on its obligations.

Financial Analyst Meredith Whitney: The Relentless Pessimist

by Jordan Eizenga

In this video clip, the folks from Wall Street Journals’ Markets Hub discuss analyst Meredith Whitney’s ongoing prediction of widespread default of American municipalities. To recall, she claimed - on 60 Minutes, no less - that “hundreds of billions of dollars” of defaults would take place. When that prediction didn’t materialize, Whitney backpedaled, claiming that she did not give “precise estimates or a specific period of time” in which defaults would occur. Now she is saying that once new state budgets take effect on July 1st, local governments are going to feel the pain as states start cutting back on aid to their municipalities.

It is far from clear that widespread disaster is about to happen in the muni bond market. In fact, there has been some reason to be optimistic. Tax revenues have increased for state and local governments, which should provide a little extra cash to be able to fund much needed infrastructure projects - projects that create jobs.

Yet, you have to credit Meredith for sticking to her guns. Despite all evidence to the contrary, she continues to argue that the muni market is about to fall off the cliff.

Niall Ferguson of Harvard University argues against former Treasury Secretary Larry Summers’ point that the United States needs more stimulus. I clearly don’t agree with Ferguson on the need to enact immediate deficit reduction, nor his beliefs about what caused the Great Depression and the lost decade in Japan.

Yet, he does make a compelling - and clearly controversial - case for Greece to default, abandon the Euro, and adopt the drachma. On this point, he is correct that Greece stands to gain little from meeting its debt obligations, but a lot from failing to do so. Today, Greek monetary policy is explicitly outsourced to the European Central Bank, while fiscal policy decisions have been implicitly outsourced to the IMF, Germany, France and other EU members that have bailed the country out. Defaulting and starting anew, says Ferguson, will give Greece the ability to take control of economic policy decision making once again.

This is all good and well, but what about the rest of us? A Greek default will most likely cause a global financial crisis that will hurt economies worldwide. Clearly, there is a misalignment of incentives between the Greek people and the rest of the world.