New Scheme to Avoid Debt Ceiling: Gigantic IOUs! To Everybody!

As we approach the debt ceiling, suggests for workarounds are getting more creative—and more depressing. For those who can't quite stomach the trillion dollar platinum coin but prefer funny money to constitutional crisis, comes this suggestion from Edward Kleinbard, former chief counsel at the Joint Committee on Taxation and a law professor at USC: 

There is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — "registered warrants" — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.'s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. 

Sounds crazy and fiscally irresponsible? Well, California did it, so….it's probably crazy and fiscally irresponsible, even though it worked out OK for them once in 2009:

California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.

Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the Legislature quickly worked out a budget deal and the scrip was then redeemed for cash.

Throughout the ordeal, California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

As The Washington Post has noted, the scheme has some weak points:

It wasn't exactly popular (one item on the State Controller's FAQ on the program is "Who can I call to complain about this?"), and big banks such as Bank of America, JPMorgan Chase, Wells Fargo and Citigroup stopped accepting deposits of the warrants after a couple of weeks, but credit unions accepted them throughout, and the program kept the state in business for two months.

And unlike California, the feds probably couldn't pay interest in those IOUs, which might result in more significant unrest.

But hey, anything to avoid actually cutting spending and reforming entitlements, I guess!