Wednesday, July 27, 2011

Time runs out for Obama and the constitution

The irresistible march of economic and financial events undermines legal and constitutional structures, weakens bureaucratic constraints, exposes weak and divided political leadership and transforms long-established relations between people and states.

Generations have stood before the Stars and Stripes and sworn allegiance to the Constitution of the United States. Adopted in 1787, and subjected to 27 amendments – the latest in 1992 – it is the oldest written constitution still in use by any nation in the world.

This is according to Wikipedia, which was itself set up as part of a global movement to undermine the property rights which are of the essence of the capitalist system. They argue rightly that private property in knowledge and software impedes human progress.

But world-shattering events are now shaking the foundations of the United States. The 14th was particularly important in establishing the legal authority of the Federal government in Washington during the reconstruction in the wake of the civil war and the ending of slavery.

Section 4 of the amendment reads: “The validity of the public debt of the United States, authorised by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Some have suggested that President Obama could invoke this section to raise the government’s $14.3 trillion debt ceiling which is fast being approached. The Republicans are playing hard-ball and declining to reach an agreement with the White House to raise the ceiling before next Tuesday’s deadline. Raising the ceiling is required so that the United States can go on borrowing on international markets and service its debts.

Such a move by Obama would be a constitutional declaration of war with echoes of Abraham Lincoln’s military campaign to bring the south into line. Whether he’s up for this is debatable. But while Obama ponders his next move, what, according to the constitution, “shall not be questioned” is in reality being challenged by the money markets, as well as the obdurate Republicans.

The credit rating agencies which were effectively given power over companies and states by the Basel 2 international agreement on banking laws and regulation first published only in 2004, are threatening to downgrade US debt. That would force up borrowing costs and add billions to the total debt. The “validity” of the US public debt is definitely being questioned.

In any case, would invoking the constitution to raise the ceiling unilaterally do the trick. Not at all, as US commentator Andrew Leonard points out:

“Would taking action under the 14th Amendment make the debt ceiling crisis go away? Highly dubious. Not only would the House GOP [Republicans] immediately start impeachment proceedings, but, as several commentators have observed, there's a real question as to whether investors would continue to buy US Treasuries while the legalities of the president's action were settled. Pretend you are China – do you think it's a wise move to keep buying US government debt while the US goes through a constitutional crisis? Using the 14th Amendment to protect the ability of the US to pay its debts becomes a lot less attractive if as a consequence, borrowing costs for the U.S. government rise sharply.”

Not least among the many problems facing the multitude of politicians, bankers, and civil servants with the hopeless task of holding back the catastrophe is that downgrading a country’s debt to “default”, whether that country is Greece, the United States, Spain or Britain, has dramatic consequences.

During the madness of the last couple of decades, the entire global economy became irretrievably entangled in a seething interdependent mass of credit and debt held together by those fiendish financial instruments known as credit default swaps. The trouble is that if, or rather when one country is declared to be in default, it will trigger a chain reaction throughout the millions of CDS contracts.

No power exists to stop it. And it doesn’t much matter which country is first up. There are no “fixes”, quick or otherwise, as Obama is about to find out.

Gerry Gold

Economics editor

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