For years, it has been a point of tension between the Obama Treasury Department and Republicans on Capitol Hill: If the nation hits the debt ceiling, can the U.S. government plan to avoid a technical default on its debt by using incoming funds to pay U.S. debtholders while slashing spending on nearly everything else the government does?
Republicans have argued that the government can do exactly that, and that the brinkmanship rhetoric of the Obama administration is overwrought and an attempt to force them to cut a debt deal they don't like.
The Obama administration, by contrast, has been vague about what exactly it would do if the debt ceiling were finally breached while publicly urging Republicans not to push the nation into uncharted financial waters.
Now comes a trove of new documentation unearthed by congressional Republicans that seems to suggest that some staff of the New York Federal Reserve were deeply skeptical about the administration's "close hold" tactics as far back as 2013.
The oversight subcommittee of the House Financial Services Committee released the new report, entitled "The Obama Administration's Debt Ceiling Subterfuge," on Monday, alleging that "Treasury has sought to withhold from Congress and the American people information about the Administration's contingency plans, for the purpose of pressuring Congress to acquiesce to the Administration's position that any increase in the debt ceiling not be accompanied by spending constraints."
What's more, the subcommittee says, the U.S. government is fully capable of prioritizing payments to debtholders and in fact the New York Federal Reserve has been running tabletop debt exercises on those contingencies since March 2011.
The subcommittee also released newly obtained internal emails and documents from inside the New York Fed that indicate that the Treasury had, indeed, planned on prioritizing payments in the event of a debt ceiling impasse.
The dispute is both technical and hypothetical, but it goes to a fundamental vision of the financial future of the United States: Whether or not the U.S. government and global markets could withstand the shock of the U.S. government failing to make planned payments for the first time, and whether or not the government was honest about the plans it was contemplating for such a scenario.
Ultimately, supporters of the Treasury Department have argued that it is a pointless argument: The financial system would receive a large shock if the U.S. government failed to make bond payments or planned expenditures, and any strategy to pick one over the other would miss the point that it's a very bad idea to do either one.
Plus, the politics of the U.S. government deciding to pay bondholders — read Wall Street — at a time it could not pay, say, the salaries of American soldiers in arms, or Social Security recipients, would be disastrous for Washington.
In a statement, a Treasury spokesman responded to the subcommittee's report, insisting that the administration had not been hiding its capabilities or intent. "As the Treasury Department has explained on numerous occasions, due to the brinkmanship that led our country to the edge of default in 2011 and 2013, Treasury has been forced to consider a range of options with respect to how it would operate in the unthinkable event that Congress fails to raise the debt limit," the spokesman said. "While Treasury has viewed the option of delaying payments as the least harmful option in this catastrophic scenario, make no mistake — this would still be default."
The new documents give the public a first look at the extent of the government's detailed planning for a debt crisis. "At the same time that Treasury was insisting to Congress and the American people that prioritization is unworkable, Treasury and New York Fed officials were working behind the scenes on a prioritization plan," the subcommittee concluded.
The subcommittee cited several tabletop exercises conducted by the Treasury since 2011 that contemplated prioritization of Social Security, veterans benefits, and principal and interest payments as more important than all other federal spending.
The emails from inside the New York Fed paint a picture of the Treasury as withholding information in order to gain leverage in the ongoing negotiations.
"Treasury wants to maximize pressure on Congress by limiting communications about contingency planning," wrote a New York Fed counsel in an internal email in September 2013. Officials there seemed to be concerned with sending a public message to financial markets that there was a contingency plan in place, in order to minimize any sense of incipient panic on Wall Street.
Not everyone inside the New York Fed was happy with the Treasury's "close hold" approach to the planning information. "Agree the close hold here is crazy, counter-productive, and adds risk to an already risky situation," wrote a New York Fed employee on Sept. 24, 2013.
A spokesperson for the New York Fed referred all questions to the Treasury.
It its report, the subcommittee argued that the Treasury had effectively already decided that it would prioritize payments in the course of its scenario planning. The subcommittee cited a Sept. 20, 2013, internal New York Fed email saying "Treasury continues to be adamant that they will make principal and interest payments on the debt. This is a slightly different position than prior exercises where prioritization of debt payments was not specified."
The subcommittee will hold a hearing Tuesday looking at the debt limit, and members of the panel are likely to voice fresh concerns based on the contents of the new report.