Puerto Rico, the Fed & the Book of Leviticus

by Michael Sean Winters

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Religious leaders in Puerto Rico, led by Archbishop Roberto Gonzalez of San Juan, have called for the Federal Reserve to interest itself in that island’s debt crisis in the absence of any prospect of Congress passing legislation that would address the issue. My colleague Joshua McElwee reported on the story yesterday, noting how rare it is that the island’s religious leaders, from the Pentecostals to the Evangelicals to the Methodists to the Catholic bishops, are all united on this – or any – issue. 

That unity is, in part, the result of desperation. For a variety of reasons, Puerto Rico’s economy is a shambles and the government debt cannot be serviced. Thousands of Puerto Ricans, especially members of the professional class, have fled to the States in search of opportunity. The manufacturing sector of the economy has been hit very hard. Governments of both political parties have kicked the deficit can down the road. Unemployment has soared and the last thing Puerto Rico needs is a round of austerity measures that would make life intolerable for hundreds of thousands of already poor Puerto Ricans.

For a variety of different reasons, the normal mechanisms used in such crises do not apply to Puerto Rico. It is not an independent country so it cannot appeal to the International Monetary Fund for help. It is not a city or a state, so it cannot access bankruptcy laws as Detroit recently did. Puerto Rico’s anomalous legal status as a U.S. possession leaves it without the kind of avenues for redress and assistance other political entities enjoy.

I will note one area of commonality between the situation in Puerto Rico and, for example, the sovereign debt crisis in Argentina in 2001. In both cases, part of the difficulty in solving the crisis is the resistence of hedge funds, more properly called vulture funds, which buy bonds for penny on the dollar, knowing they are junk, and then demand repayment at face value. In the event, as this chart from the Centro de Periodismo Investigativo demonstrates, some of the exact same vulture funds that ruined the economy in Argentina are trying to do the same in Puerto Rico. I am sure Pope Francis will recognize some of the names: Aurelius Capital, Monarch Alternative Capital, Canyon Capital, &c. More reputable firms like UBS are also embroiled in the fiscal mess in Puerto Rico as that company is the subject of lawsuits claiming they peddled bonds they knew were worthless to older clients whose portfolios should have been conservative. Here is a link to the Facebook page with information about those lawsuits. 

Through the good offices of JubileeUSA, the island’s religious leaders have asked the Federal Reserve to interest itself in the matter and use its extensive toolkit to help Puerto Rico restructure its debt in such a way that austerity measures are avoided. The Fed has wide jurisdiction. And, at a time when expecting the U.S. Congress to agree on what day of the week it is seems unlikely, the Fed may be the best, indeed the only way, to proceed. JubileeUSA issued this press release about the Puerto Rico situation yesterday. The proposal to get the Fed involved was first floated in June by former Fed economist Arturo Estrella who is now a professor at Rensselaer Polytechnic Institute. In addition to the religious leaders on the island, Eric LeCompte, executive director of JubileeUSA, is the hero of the hour, bringing Estrella’s proposal to the attention of Puerto Rican religious, political and civic authorities. At a time when no one could see the light at the end of the tunnel, or was even very sure if the tunnel was still there, LeCompte held a series of meetings that helped galvanize support for the proposal. He knows more about the legal and financial complexities of the sovereign debt issue than anyone living, and he matches that knowledge with a commitment to helping the world’s poor that is truly remarkable.

I do not pretend to any expertise in how the Fed can address the situation. But, Section 14(2) of the Federal Reserve Act states, in part, that the Fed can purchase:

bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts,

The phrase “in the continental United States” reflects the fact that, in 1913, when this language was included in the original Act, the authors of the bill were not thinking in terms of Puerto Rico, or for that matter, Alaska or Hawaii. More importantly, Puerto Rico is included in the New York District of the Fed which is the relevant location for these purposes. The Puerto Rican debt stands at $72 billion, which is a lot of money, but less than was lost, then re-gained, last week in the stock markets. If the Fed were to purchase some of that debt and restructure it, and write some of it off, it could help keep the situation on the island from getting worse and put Puerto Rico on a sustainable path.

During the 1970s, the U.S. government stepped in to help New York City and Chrysler. During the administration of George H. W. Bush, the federal government adopted the Brady plan to help countries struggling to stay afloat. The U.S. was part of the 2000 efforts to write-off the debt of poor nations. And, of course, during the meltdowns in 2008, the Fed was very active in trying to stave of a fiscal collapse. Helping Puerto Rico now is completely in line with that proud history of collective action on behalf of the common good.

The situation in Puerto Rico is a perfect test case of Pope Francis’ critique of the global economy. Will the economy be made to work for people, or are people to be pawns in a game played by hedge fund managers seeking nothing but top dollar profit? If the Obama administration is looking for something it can do to properly welcome Pope Francis, it can give the green light to the Fed to help Puerto Rico. This ancient economic principle, Jubilee, drawn from the book of Leviticus, speaks to a basic human necessity not to make subsequent generations pay for the failures of previous generations. Any economic system will produce inequities that, if left untouched by mercy, will only corrupt the body politic. At a time when Washington is gridlocked on every issue, perhaps the author of the Book of Leviticus, with a little help from the Fed, can point the way forward for the people of Puerto Rico.


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