Debt Ceiling

This message was edited 2 times. Last update was at August 06, 2011 21:00:50 UTC

Finally, I'd like to add that the bill wasn't just controversial here on this forum:

In a Constitutional Republic of the sort that we thought we had, the process by which laws are made is at least as important as the laws that are enacted. Our Constitution prescribes that law-making process in some detail, but those who voted for the "Budget Control Act of 2011" ("BCA 2011") were wholly unconcerned about trampling upon required constitutional processes on the way to the nirvana of "bi-partisan consensus "to avert a supposed crisis. At least two titles of the bill now being rushed through Congress are unconstitutional.

First, the "Debt Ceiling Disapproval Process" in BCA 2011 Title III unconstitutionally upends the legislative process.

The Constitution's Article I, Section 8, Clause 2 vests in Congress the power "to borrow Money on the credit of the United States." As two of America's leading constitutionalists, St. George Tucker and Joseph Story, observed, the power to borrow money is "inseparably connected" with that of "raising a revenue." Thus, from the founding of the American republic through 1917, Congress -- vested with the power "to lay and collect taxes, duties and imposts," -- kept a tight rein on borrowing, and authorized each individual debt issuance separately.

To provide more flexibility to finance the United States involvement in World War I, Congress established an aggregate limit, or ceiling, on the total amount of bonds that could be issued. This gave birth to the congressional practice of setting a limit on all federal debt. While Congress no longer approved each individual debt issuance, it determined the upper limit above which borrowing was not permitted. Thus, on February 12, 2010, Congress set a debt ceiling of $14.294 trillion, which President Obama signed into law.

However, a different approach was used when BCA 2011 was signed into law on August 2, 2011. Title III of the Act reads the "Debt Ceiling Disapproval Process." Under this title Congress has transferred to the President the power to "determine" that the debt ceiling is too low, and that further borrowing is required to meet existing commitments," subject only to congressional "disapproval." For the first time in American history the power to borrow money on the credit of the United States has been disconnected from the power to raise revenue. What St. George Tucker and Joseph Story stated were inseparable powers have now by statute been separated.

Under the new process established by this bill, if the President determines, no later than December 31, 2011, that the nation's debt is within $100 billion of the existing debt limit and that further borrowing is required to meet existing commitments, the debt limit automatically increases. The President need only to certify to Congress that he has made the required determination. Once the President acts, the Secretary of the Treasury may borrow $900 billion "subject to the enactment of a joint resolution of disapproval enacted" by Congress.

But this is not all. Title III also provides that if Congress fails to disapprove the debt ceiling increase in the amount of $900 billion, the President may again certify to Congress that he has determined that the debt subject to the new ceiling is within $100 billion and that further borrowing is required to meet existing commitments. So the Secretary of Treasury is authorized to borrow another $1.2 trillion.Indeed, the Secretary may borrow even more -- up to $1.5 trillion if a proposed balanced budget amendment has been submitted to the states for ratification. As was true of the first round of ceiling raising and borrowing, the President and Secretary of the Treasury are constrained only by the possibility of a congressional resolution of disapproval which, itself, is subject to veto by the President.

By giving the President the authority to increase the debt ceiling and to determine that borrowing is necessary to meet the nation's commitments, this bill turns the legislative process on its head. According to Article I, Section 7, before an act can become a law, it must first be passed as a bill by the House of Representatives and the Senate. Thus, any action taken to authorize the borrowing of money on the credit of the United States - whether such action is a formal bill or a vote or resolution -- must be initiated by Congress and, then, presented to the President for his veto or signature. This bill creates what it calls a "Debt Ceiling Disapproval Process" whereby the constitutional process is reversed. Instead of Congress's initiating the decision to borrow money, the President has the initiative. Congress is relegated to the role of having to disapprove the President's decision to lift the debt ceiling and authorize the Secretary of Treasury to do what the Constitution says only Congress may do -- borrow money on the credit of the United States.

Instead of constitutional order, in which Congress presents a law authorizing the borrowing of money to the President to sign or veto, the President presents to the Congress his determination that more money is to be borrowed, subject to the acquiescence or veto of Congress...

http://www.americanthinker.com/2011/08/the_budget_control_act_of_2011_violates_constitutional_order.html

Chris,
Thanks for your reply to my comment.

I think the only thing that I disagree with in your post is the implication that

"...I contacted Intrade. As did numerous other people. Intrade provided a cogent clarification that was in line with our literal reading of the contract, namely that something less than a clean bill would not cause this to expire at 100. To make sure that everybody was on the same page, I posted this clarification on the forum. Others also made similar posts. In my posts, I repeatedly pointed out the implication of the McConnell plan on the outcome of the contract according to the clarification.

Interestingly, not a single person disagreed with the clarification - no one. Various people seemingly wrote to Intrade asking for clarification and apparently they were all satisfied with the answer they were provided. There was no controversy whatsoever. It wasn't an issue...

I have long since taken the view that I will request clarifications from Intrade when I notice an ambiguity, but I will not attempt to influence their interpretation. You seem fine with the idea that, in addition to buying contracts, members are obliged to aggressively lobby Intrade to support their interpretation of a contract wording. Congratulations on your effective lobbying. Perhaps there's a future for you in DC.

My view is that this lobbying is fundamentally at odds with the purpose of Intrade. It is no longer enough to buy contracts and wait to see if your "prediction" is right. It is now necessary to re-check the contract wording and the forums daily, to pre-emptively email Intrade with your preferred interpretation and to immediately complain if a contrary interpretation is put forth. As far as I know, Intrade still has not even implemented a system to notify members when the wording of a contract they own changes.

It is true in this case that my initial assumption was exactly the opposite of yours. Of course Congress wouldn't pass a "clean" debt ceiling increase. When was the last time Congress did anything cleanly? The issue was when and by how much the debt ceiling would be raised by any bill approved by Congress. It also happens that I was in Mozambique during the period that the contract was revised and...funny thing...I forgot to check the Intrade forums.

My gripe here is not about the trivial amount of money I had invested. I just feel that the system of resolving contract ambiguities is broken. That the politics of this system seem to favor long-time members with loud voices and (presumably) large accounts just adds insult to injury.

I'm not sure what the resolution is, but almost anything would be better. Here are my suggestions:

First , there needs to be a system to notify members of contract changes. Whether this should go to all members or only to those with positions in the market is debatable. Second, any contract that has been revised at any time since its creation should be clearly highlighted as such. Third, I think there needs to be a clearer warning about potential ambiguities in certain types of contracts. New members cannot reasonably be expected to anticipate this kind of nonsense, and the present failure to give them fair warning that the likelihood of a controversial ambiguity is vastly greater for some contract series than others amounts to a handout to more seasoned members.

Finally, and most importantly, the politics of resolving ambiguities needs to be addressed. How to do this is not obvious, but either a completely public or a totally closed approach would be an improvement over the current situation. An open approach would be to create a response period after each contract wording change to allow members to disagree. (This assumes that an effective notification method is already in place.) If there is a "significant" objection (which would need to be defined explicitly), then the contracts would simply be unwound. In the closed approach, Intrade would simply ignore any requests for clarification, and their staff would decide internally how each contract should be expired. Presumably the open approach will appeal to most members.

Some of these suggestions have been mentioned repeatedly before, but Intrade seems not to care. That leaves members like me the option of voting with our feet.

This message was edited 7 times. Last update was at August 07, 2011 22:57:56 UTC

McPundit, I hope you had a good time in Moz! Beautiful country. Somewhat off the beaten track...

I'm not sure, how you think I lobbied Intrade. I wrote an e-mail to Carl in which I asked my question and posted his answer on the forum. Meanwhile, Intrade had also sent clarifications to other traders that corresponded to what they had written to me.

I had no further communication whatsoever with Intrade until they expired the market (mistakenly in my opinion). But the reversal took place at the same time as my e-mail was sent so it could not have been a factor. And, of course, the ultimate decision was in line with the previous clarifications. It would have been weird if it was otherwise.

This message was edited 1 time. Last update was at August 07, 2011 22:47:02 UTC

MC_Pundit, I agree with a lot of what you say. But you will be happy to know that Intrade has indeed, as of last week, already instituted a new policy regarding contract clarification, and say they will implement the technical side this week. See Comments & Suggestion | Suggested procedure for clarifying contracts.

As I understand it, the new procedure will include these improvements:
1. Eliminate any personal communication to individual traders. All Contract clarifications will be very public, e.g., appended to the Rules page.
2. Contact anyone with a position or order on the contract.
3. Pause trading during clarification.
4. Cancel all outstanding orders before resuming the market.

From The Blog Zero Hedge:

"Ok, someone please explain this one to us because we must be a little slow. Wasn't the whole thing with the debt ceiling hike such that no more Congressional melodramas would have to be inflicted upon the population until after Obama [won|lost] the 2012 elections? Because according to the one again exponentially increasing debt balance of the US Treasury (there is another $51 billion in debt/cash coming in next week), the total US treasury balance (subject to the ceiling) is $14.54 trillion (and $14.58 trillion for total), an increase of $20 billion overnight, the Treasury will hit its latest ceiling no later than the end of September. As the latest DTS statement indicates, the debt ceiling now is $14.694 trillion: a number which Tim Geithner will hit in about a month. So if this is due to a planned expansion as part of the two step plan, we would like to understand how it works, because the $400 billion additional ceiling is barely sufficient to cover the catch up in funding for the SSN and the various governmental trust funds. And the far bigger concern is that tax receipts are about to plunge courtesy of the imminent double dip. So we wonder just based on what assumptions does the Treasury believe that its issuance needs will be met by this paltry debt ceiling."

I sent this email to Dan Laffan at help@intrade.com on 04 Aug 2011:

Dear Dan Laffan,

According to the rules of this market (DEBT.CEILING.AUG11>$15.1T), it should now be settled at 100 ($10.00).

The contract rules state:
This contract will settle (expire) at 100 ($10.00) if the US Congress approves an increase in the federal debt ceiling to $15.1 trillion or more before midnight ET on the date specified in the contract.
Expiry will be based on the approval of any increase in the debt ceiling passed by Congress, as reported in three independent and reliable media sources.

Here are examples of independent reliable media sources all reporting the approval of an increase in the debt ceiling of at least $900 billion:

Bloomberg (03 Aug 2011): Debt Accord Means Lawmakers Must Debate Medicare, Taxes as Elections Loom
http://www.bloomberg.com/news/2011-08-03/debt-accord-means-lawmakers-must-debate-medicare-taxes-as-elections-loom.html
"The new law cuts $917 billion in spending over the next decade and raises the $14.3 trillion debt limit by $900 billion, .."

New York Times (03 Aug 2011): Can the Debt Ceiling Genie Be Put Back in the Bottle?
http://thecaucus.blogs.nytimes.com/2011/08/03/can-the-debt-ceiling-genie-be-put-back-in-the-bottle/?scp=40&sq=debt+ceiling&st=nyt
".. Mr. McConnell said moments before the Senate vote on the deal he worked out to raise the debt ceiling by $2.1 trillion."
..
"The $2.1 trillion boost in the debt ceiling should make another increase unnecessary until March of 2013, officials said."

Associated Press (02 Aug 2011): Debt is a done deal, but peace truce already fades
http://hosted2.ap.org/APDefault/*/Article_2011-08-02-Debt%20Showdown/id-2c3125a9beb243b795b37c665a9dc455
"The bill allows a quick $900 billion increase in borrowing authority .."

Wall Street Journal (02 Aug 2011): Moody’s Affirms US AAA Rating
http://blogs.wsj.com/marketbeat/2011/08/02/moodys-affirms-us-aaa-rating/
Financial Times (02 Aug 2011): Moody’s assigns negative outlook to the USAAA
http://ftalphaville.ft.com/blog/2011/08/02/641391/moodys-assigns-negative-outlook-to-the-usaaa/
(both quoting Moody's)
"Moody’s Investors Service has confirmed the Aaa government bond rating of the United States following the raising of the statutory debt limit on August 2."
..
"The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, .."

I appreciate that you have posted comments arguing for settlement first at $10, then at $0, based on your interpretation of the bill.
But the contract rules specifically state that expiry is based on reports of the approval by the media. They are the sole authority in determining settlement.
I bring this crucial element of the rules to your attention as it appears in your recent communications that you have overlooked it.
I read the rules and checked media reports before trading this contract in good faith that intrade would honour those rules, as you are legally bound to do.

Please verify the above sources for yourself and then confirm when you will be settling at 10 ($100).

Dan Laffan replied to my email (see my last post) on 04 Aug 2011:

Thank you for getting in touch with us.

This is an interesting point that you have raised. Our contract does refer to media reporting, but media reporting of the debt limit increase has almost universally ignored the reality of the details of the Bill, which state that the limit is only initially lifted by $400B, and will be lifted in early September by a further $500B unless a resolution of disapproval is passed in the meantime.

This means that the media reportage of the limit increase has been over-simplified, and the correct limit increase by Aug 31 is only $400B. If you would like to verify this, I refer you to s301 of the Bill.

I hope this clarifies things to your satisfaction.

Very best regards,

Dan Laffan

Interim CEO

I replied to Dan Laffan's email (see my last post) on 05 Aug 2011:

Dear Dan,

I understand that you have formed a different opinion to the media regarding approval of the debt ceiling increase.
Nevertheless, any opinion other than those of reliable independent media do not affect the expiry of this contract.

Your current position of expiry of 0 could be argued if this contract rule:

Expiry will be based on the approval of any increase in the debt ceiling passed by Congress, as reported in three independent and reliable media sources.

had originally been written with this rule instead:

Expiry will be based on the approval of any increase in the debt ceiling passed by Congress, as determined by Intrade's interpretation of the related bill passed by Congress.

However, the first rule is the one that you have published and that we have agreed to.
The second rule relates to a hypothetical contract which does not exist and which I have not traded. Nor would I have traded if it had existed with that wording.

As you correctly stated in your forum on 25/07/2006 in relation to a ruling on a previous contract, North Korea Missile Launch:
"This strict and correct adherence to the stated Contract rules ensures the integrity of the Exchanges markets, and our members ability to rely on what is written in our rules."

Upon creation of the debt ceiling markets, you decided that the only parties that could determine whether approval has occured are the media.
By removing Intrade itself from the decision, this ensured that there can be no perception of bias or conflict of interest.
On 01 Aug 2011 you decided that you would ignore the contract rules and overrule the authority (media) that you had delegated to.
That is not only unethical, it is a breach of contract.

I trust that you will reflect fully on this and come to the right decision, namely to settle at 100.

bss, 3 media reports have already been posted that support Intrade's interpretation.

This includes Slate, ABC News, and Forbes. There are probably a few others.

Domer, I think you are missing his point. It is about the changing of the rules; not which press outlets did or not support intrades view that according the above posted argument to Mr. Dan should never have been made given the language of the contract.

Domer,

Intrade have conceded that media reports support my argument but that they are they are ignoring those and basing their decision on their interpretation of the Budget Control Act instead.

You may have noticed that Intrade have not referenced any press reports that support their position in any of their communications on the forum or in their emails to me.

Dan Laffan's email to all on 01 Aug 2011:

Having reviewed the legislation in detail and reviewed the comments from our members, we have decided to cancel our previous advice on the interpretation of the US Debt Ceiling markets.

Dan Laffan in his email to me on 04 Aug 2011:

Our contract does refer to media reporting, but media reporting of the debt limit increase has almost universally ignored the reality of the details of the Bill, ..

Intrade are effectively saying that they can ignore their contract rules at will, without providing any justification for doing so.
This should be of great concern to all intrade members, including those with no position or a short position in this contract.
In any future contract expiries you can no longer rely on the contract rules.

Dan Laffan believes that the key rule that determines expiry of this contract is merely "an interesting point" and not binding.
I think that is unacceptable.

Via Goldman Sachs:

"September 21: Symbolic debt limit vote. The President activated the first $900 billion installment of new borrowing capacity with a submission to Congress on August 2, the day he signed the BCA into law. $400bn of that increased capacity takes effect immediately. Congress has 50 days from the date of that announcement (August 2) to pass a resolution of disapproval to rescind the $500bn in borrowing authority remaining in the first installment. However, if Congress passed such a resolution, the president would surely veto it, in our view. Since it is very likely that Congress would not have the two-thirds support in both chambers to override a veto, the entire exercise would be symbolic."

Note: The key word rescind in this paragraph, sugessting again that the debt ceiling was raised by 900 billion not 400 billion on August second.

Bss, did you ever get an answer back from Intrade regarding your last email?? I am in shock that Intrade still havn´t done something about this market, it is a scandal!

> Expiry will be based on the approval of any increase in the debt
> ceiling passed by Congress, as reported in three independent
> and reliable media sources.

they meant :
... _correctly_ reported ... ?

newspaper write so much and there are so many

gsgs wrote:
> Expiry will be based on the approval of any increase in the debt
> ceiling passed by Congress, as reported in three independent
> and reliable media sources.

they meant :
... _correctly_ reported ... ?

newspaper write so much and there are so many

If they are saying that Congress has approved a debt ceiling increase of $900 billion, then those newspaper reports are in fact correct. Trine is right.