Treasury Secretary Jack Lew, testifying before the Senate Finance Committee Thursday, didn’t say explicitly that the Treasury would -- or would not -- pay Treasury bondholders first if the government reaches the $16.7 trillion borrowing limit and faces a cash shortage.
Lew has warned that on or about Oct. 17 – next Thursday -- the Treasury will exhaust its authority to borrow and will have only about $30 billion in cash on hand, plus each day’s tax receipts with which to pay its obligations.
The Congressional Budget Office projects that the Treasury will use up its cash balance by the end of October. That might soon lead to a failure to pay interest or principal to investors – including foreign governments – who hold Treasury securities, in other words, a default.
Instead of explicitly saying “defaulting on U.S. Treasury securities,” Lew used the general phrase, “defaulting on obligations.”
He did not say such a juggling of payments was flatly impossible, but that it was difficult: “You cannot go into those systems and easily make them pay some things and not other things. They weren't designed that way because it was never the policy of this government to be in the position that we would have to be in if we couldn't pay all our bills.”
Sen. Pat Toomey, R- Pa., tried the hardest of the senators on the Finance Committee to pin Lew down on paying Treasury bondholders first – so as to calm the world’s financial markets and retain the creditworthiness of the United States government.
Toomey asked Lew, “Are you prepared to assure us, but more importantly, the millions of Americans who are investors in U.S. Treasury securities and the entire American economy, that under no circumstances will you permit a missed payment on a U.S. Treasury security obligation?”
Lew sidestepped the question, arguing that “the only way to make sure we can pay all of our obligations is for Congress to act and raise the debt limit. No president has ever had to decide whether to pay some bills and not others.”
When Toomey pressed him again, Lew said, “The law is complicated, and I am not the one who makes that decision…. It is something that the president would have to decide.”
Asked about the possibility of paying bondholders first, President Barack Obama said Tuesday, “we are exploring all contingencies.” Lew shed only a tiny bit of light on these contingencies in his testimony Thursday, telling Toomey, “We have looked at many options. There has been, you know, reports indicating things that have been looked at over the years. Nobody's ever had to put any of these into effect. They're not tested.”
But Lew stressed again and again that trying to prioritize payments was impractical. “The Treasury payment system is complicated… It would not work smoothly. It would be chaos.”
Toomey said he was “shocked” and “extremely disappointed” that Lew wouldn’t tell assure investors that they “don't have to worry about the security of their Treasuries.”
Toomey and other Republican think Lew does have the authority to pay bondholders first.
But just to settle any doubt, Toomey has sponsored a bill, the Full Faith and Credit Act so, he said, that “it would be abundantly clear to everyone that when they (the Treasury secretary and other administration officials) refuse to reassure markets, markets would have the assurance of knowing that there was a codification of this obligation.”
Toomey added after Lew’s testimony that “I thought he should have made it very clear with an unequivocal statement that under no circumstances will this administration choose to willfully default on our debts. It’s certainly not necessary; they can certainly avoid it and I think rather than trying to scare investors and savers, the president of the United States and the Treasury secretary ought to be re-assuring them.”
As for Lew’s authority– if indeed he has it – to prioritize payment of bondholders, Toomey said, “We don’t know whether or not he’s going to use it. What we know is that they have not been willing to state unequivocally that they intend to use it.” But even assuming Lew has the authority to prioritize debt payments, of course he would not say so. To do so would be to give up the leverage the Obama administration has in trying to persuade Congress to raise the debt limit. The Obama administration’s argument from the start has been: raise the debt limit or else financial pain and chaos will ensue – a theme Lew repeated Thursday.
Sen. Tom Coburn, R- Okla., a co-sponsor of Toomey’s debt prioritization bill, said Thursday after Lew’s testimony that of course Lew would not say he has the power to prioritize: “It’s just a position of leverage….. Why give your opponents more leverage?”
Coburn said prioritization is “not going to happen – there’s going to be a debt limit increase. There always is. So therefore there is no such thing as a debt limit. It has never not been increased – so it’s meaningless.”