THE BLOG
10/07/2013 01:47 pm ET

Prevent Debt Ceiling Catastrophe: Bondholders Sue Jack Lew

Global credit markets will freeze, interest rates will skyrocket, and equity markets will plunge. If Congress fails to timely raise the statutory debt ceiling limit, the resulting damage will be nothing less than "catastrophic" for the U.S. economy.

Tea Party ideologues have brought our nation to the brink of debt default again, just as they did in 2011. Even as the government remains in shutdown for lack of future appropriations, the House GOP majority blocks America from honoring its obligations to pay for its past spending.

Sounding more like a Tea Party hostage than House Speaker, John Boehner most recently stated: "We are not going to pass a clean debt limit. I told the president there's no way we're going to pass one. The votes are not in the House to pass a clean debt limit."

Halloween 2013: Nightmare on Wall Street and Main Street?

Beginning on October 17, 2013, Uncle Sam's accounts will be bust and lack sufficient revenues to cover debts as they come due. Treasury Secretary Jack Lew warns that debt default is imminent: "I'm telling you that on the 17th, we run out of our ability to borrow, and Congress is playing with fire."

The nightmarish economic consequences of such an event are most accurately predicted by those commentators who downplay the likelihood of an actual Treasury bond default. Consider a recent Forbes' excerpt: "If there were an actual default then banks would illegally be holding a defaulted instrument as part of their primary capital. Pension funds and other institutions are by charter often not allowed to hold defaulted bonds. Runs on banks would soon follow and a massive recession would result. It is a nightmare scenario too horrible to contemplate."

In fact, Treasury already hit the debt ceiling in May and Secretary Lew has run out of "extraordinary measures" to continue paying debts. The full faith and credit of the United States of America is now at risk.

Lew explains that it is impossible to "prioritize" (differentiate) payments due to public debt holders versus entitlement holders versus other government creditors who present billions in invoices. Treasury processes nearly 100 million different debt payments each month. Even if prioritization was possible, America should never choose between honoring its equally solemn obligations to bondholders and Social Security recipients.

President Obama has resisted varied counsel to trump, circumvent, or repudiate the debt ceiling law. Secretary Lew recently repeated the Administration's position that it has no "magic" solution and it will mint no platinum coins: "There is no option that prevents us from being in default if we don't have enough cash to pay our bills."

Fortunately, an alternative method to preserve America's full faith and credit lies in individual creditor litigation preemptively challenging the debt ceiling's enforcement, as I argued here in 2011.

The debt ceiling statute is in direct conflict with the 14th Amendment to the U.S. Constitution: "The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions... shall not be questioned." With rock-paper-scissors simplicity, the Constitution always trumps an agency's enforcement of a mere statute.

Grandma Vendor-Bondholder Sues Jack Lew, Citing Perry v. U.S

An individual with standing to claim concrete, "particularized" harm from a default could file an emergency federal lawsuit. The perfect trifecta plaintiff is an individual who is a Social Security pensioner, long-term government vendor, and Treasury bondholder.

Grandma Vendor-Bondholder would ask the court for a declaratory judgment to invalidate the debt ceiling statute as unconstitutional and for an injunction against the Treasury's enforcement of the unconstitutional law. Emergency appellate certification could follow, fast tracking the case to the Supreme Court. Contrary to her reputation, Lady Justice can be lightning fast when she needs to be.

Strong precedent to support such an individual bondholder lawsuit exists. When Congress attempted to renege on a national bond obligation during the Great Depression, the Supreme Court struck down the congressional act as contrary to the 14th Amendment's Public Debt Clause.

In Perry v. United States, the Supreme Court ruled that Section 4 of the 14th Amendment confirms a "fundamental principle" applicable to all manner of public debt and government obligation. In the 1935 opinion, Chief Justice Charles Evans Hughes stated that "the validity of the public debt" language of the 14th Amendment embraces "whatever concerns the integrity of the public obligations." Hughes wrote:

By virtue of the power to borrow money 'on the credit of the United States,' the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our government.

We now have days not weeks to avoid a debt default. If Congress dishonors its "plighted faith," individual litigants will have no choice but to sue. Justice Anthony Kennedy is right when he says: "Any society that relies on nine unelected judges to resolve the most serious issues of the day is not a functioning democracy." It will be up to the voters in 2014 to clean House of the Tea Party extremists.

Victor Williams is an attorney in Washington D.C. and a clinical assistant professor at Catholic University of America's School of Law.