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THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT
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.gov
User ID: 569913
 United States
12/10/2008 8:16 PM
Report abusive post | THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT
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* DECEMBER 10, 2008, 12:00 A.M. ET
Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
By JON HILSENRATH and DAMIAN PALETTA
The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.
Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
The Federal Reserve drained $25 billion in temporary reserves from the banking system when it arranged overnight reverse repurchase agreements.
Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.
It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.
Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.
At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.
The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don't want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs.
The Fed also has turned to the Treasury Department for cash. Treasury has issued debt, leaving the proceeds on deposit with the Fed for the central bank to use as it chose. But the Treasury said in November it was scaling back that effort. The Treasury is undertaking its own massive borrowing program and faces legal limits on how much it can borrow.
More recently, the Fed has funded programs by flooding the financial system with money it created itself -- known in central-banking circles as bank reserves -- and has used the money to make loans and purchase assets.
Some economists worry about the consequences of this approach. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.
Moreover, the flood of additional cash makes it harder for Fed officials to maintain interest rates at their desired level. The fed-funds rate, an overnight borrowing rate between banks, has fallen consistently below the Fed's 1% target. It is expected to reduce that target next week.
Louis Crandall, an economist with Wrightson ICAP LLC, a Wall Street money-market broker, says the Fed's interventions also have the potential to clog up the balance sheets of banks, its main intermediaries.
"Finding alternative funding vehicles that bypass the banking system would be a more effective way to support the U.S. credit system," he says.
Some private economists worry that Fed-issued bonds could create new problems. Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself.
"It creates problems in coordinating the issuance of government debt," Mr. Goodfriend said. "These would be very close cousins to existing Treasury bills. They would be competing in the same market to federal debt."
With Treasury-bill rates now near zero, it seems unlikely that Fed debt would push Treasury rates much higher, but it could some day become an issue.
There are also questions about the Fed's authority.
"I had always worked under the assumption that the Federal Reserve couldn't issue debt," said Vincent Reinhart, a former senior Fed staffer who is now an economist at the American Enterprise Institute. He says it is an action better suited to the Treasury Department, which has clear congressional authority to borrow on behalf of the government.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Damian Paletta at damian.paletta@wsj.com |
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Anonymous Coward
User ID: 569840
United States
12/10/2008 8:19 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
Why don't they try selling hot dogs? |
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.gov
User ID: 569913
United States
12/10/2008 8:21 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
Why don't they try selling hot dogs? Quoting: Anonymous Coward 569840
Because those have actual value. |
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Rick56
User ID: 568263
United States
12/10/2008 8:25 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
.gov
If this happens I am sure you know this will be the final nail in the coffin of the United States economy. We won't see depression; In the 30's depression was that times were very lean. Not much money, not much food, not much of anything.
In the scnerio mentioned above, the economy will die completly.
I think you .gov can expound on this a bit! |
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.gov
User ID: 569913
United States
12/10/2008 8:26 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
Interesting comments on this curious development at TF:
Genesis
Posts: 43269
Incept: 2007-06-26
A True American Patriot!
Chief Bottlewasher
Crowding out Treasury Debt will destroy The United States.
This is an attempt at a coup d'etat.
Period.
[link to www.tickerforum.org] |
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WalkerTalker
User ID: 544311
United States
12/10/2008 8:28 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
How can I say this without being cynical--who cares what the law says about what the Fed can do and cant do? The crisis is going to a new phase, and by the way, dont believe we have hit bottom!! The Fed will do what ever it wants--they have already crossed the line, crossed it again and again. So has the Treasury and the Congress. We are being backed into a corner...keep in mind as we go to the next phase: THE MONEY SYSTEM IS DYING AND CANT BE REVIVED. All they can do is create more and more debt until no one will buy the debt. Plan on a real long deep depression. Save every dime you can. |
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Freethinker
User ID: 567533
United States
12/10/2008 8:28 PM
 | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
When you are in a hole, first rule is always "stop digging". These sob's are buying more shovels.
History will judge these fools harshly. So will the patriots.
and it does no harm to the beauty of the sunset to understand the mysteries of the sun
americanbullfrog@gmail.com |
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Anonymous Coward
User ID: 533607
United States
12/10/2008 8:28 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
Buy a piece of your own slavery! |
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.gov
User ID: 569913
United States
12/10/2008 8:30 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
.gov
If this happens I am sure you know this will be the final nail in the coffin of the United States economy. We won't see depression; In the 30's depression was that times were very lean. Not much money, not much food, not much of anything.
In the scnerio mentioned above, the economy will die completly.
I think you .gov can expound on this a bit! Quoting: Rick56
Yes.
We might be seeing the initial preparations for a bond default.
Please read:
We have been looking for an out-of-the-box move from the Fed, but this was not it.
The big kahuna move would have been for the Treasury and the Fed to make an arrangement in which the Fed is able to purchase Treasury debt directly without subjecting it to an auction in the public market first. This is known as 'a money machine' and is prohibited by statute.
But as usual the Fed surprises us all with their lack of transparency. They are asking Congress about permission to issue their own debt directly, not tied to Treasuries.
This is known in central banking circles as 'cutting out the middleman.' Not only does the Treasury no longer issue the currency, but they also no longer have any control over how much debt backed currency the Fed can now issue directly.
If the Fed were able to issue its own debt, which is currently limited to Federal Reserve Notes backed by Treasuries under the Federal Reserve Act, it would provide Bernanke the ability to present a different class of debt to the investing public and foreign central banks.
The question is whether it would be backed with the same force as Treasuries, or is subordinated, or superior.
There will not be any lack of new Treasury debt issuance upon which to base new Fed balance sheet expansion. The notion that there might be a debt generation lag out of Washington in comparison with what the Fed issues as currency is almost frightening in its hyperinflationary implications.
This makes little sense unless the Fed wishes to be able to set different rates for their debt, and make it a different class, and ***** out our currency, the Federal Reserve notes, without impacting the sovereign Treasury debt itself, leaving the door open for the issuance of a New Dollar.
What an image. The NY Fed as a GSE, the new and improved Fannie and Freddie. Zimbabwe Ben can simply print a new class of Federal Reserve Notes with no backing from Treasuries. BenBucks. Federal Reserve Thingies.
Perhaps we're missing something, but this looks like a step in anticipation of an eventual partial default or devaluation of US debt and the dollar.
You know what they say: When the going gets tough, the debt holders get screwed.
We are going to have to tie Andrew Jackson down in his grave.
[link to jessescrossroadscafe.blogspot.com] |
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.gov
User ID: 569913
United States
12/10/2008 8:35 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
When you are in a hole, first rule is always "stop digging". These sob's are buying more shovels.
History will judge these fools harshly. So will the patriots. Quoting: Freethinker
Yes, there is a consensus that this may be an end run around the congressional "debt ceiling". |
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Freethinker
User ID: 567533
United States
12/10/2008 8:46 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
When you are in a hole, first rule is always "stop digging". These sob's are buying more shovels.
History will judge these fools harshly. So will the patriots.
Yes, there is a consensus that this may be an end run around the congressional "debt ceiling". Quoting: .gov
May be. I don't want my government in the banking business anymore than I want the banking business in my government. Ain't a one of them damn wall street investment bankers worth a bucket of cold piss.
and it does no harm to the beauty of the sunset to understand the mysteries of the sun
americanbullfrog@gmail.com |
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.gov
User ID: 569913
United States
12/10/2008 8:55 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
When you are in a hole, first rule is always "stop digging". These sob's are buying more shovels.
History will judge these fools harshly. So will the patriots.
Yes, there is a consensus that this may be an end run around the congressional "debt ceiling".
May be. I don't want my government in the banking business anymore than I want the banking business in my government. Ain't a one of them damn wall street investment bankers worth a bucket of cold piss. Quoting: Freethinker
Well, you won't have to worry about it for very long. The Fed. issuing debt will destroy treasuries.
All fall down. |
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.gov
User ID: 569913
United States
12/10/2008 9:23 PM
| | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
Here is a very interesting theory from a poster at TF:
(This also dovetails with Failed To Deliver notes that the Treasury is having problems with)
The Fed is basically short selling treasuries and uses at least part of the cash to buy other securities (probably mortgage backed paper and other forms of debt that is pretty illiquid).
This is a method to feed the hunger for treasuries without creating more treasury debt. Think of it like the Fed is naked short selling treasuries.
When the treasury bubble is pricked the process can be reversed on a dime and the Fed will sell that mortgage paper which will become very attractive (due to the glut of treasuries) and cover it's positions.
It seems to me that someone at the Fed believes the T-bubble will be pricked quite soon and uses this short selling mechanism as a deflationary back stop to prevent a future total collapse of the T-paper market.
If they had relied on just issuing more debt directly by the Treasury Department, after pricking the T-bubble it would be pretty difficult to stop inflation dead in it's tracks at will.
I suspect this is also the reason they allow for $2T worth of treasuries FTDs to be rolled over month after month. At the right time after the T-bubble is pricked they will fall in love with enforcing a strict T+3 delivery rule and those and a result there will be a $2t buy-to-covers which is pretty substantial by any measure. |
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Anonymous Coward
User ID: 566419
United States
12/10/2008 9:25 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
That's your debt. The federal Reserve doesn't do debt. |
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Francesco Castillo
User ID: 569807
 Canada
12/10/2008 9:51 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
That's your debt. The federal Reserve doesn't do debt. Quoting: Anonymous Coward 566419
Correct.
The Fed just prints and pockets.
The PPT = print & pocket team. |
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Anonymous Coward
User ID: 515251
United States
12/10/2008 11:10 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
LMAO!
TO WHO?
Thats like trying to return worn skivvies to Walmart without a store receipt! |
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Anonymous Coward
User ID: 628039
United States
3/22/2009 3:29 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
It is NOT the Debt of the Federal Reserve. It is the Debt of the UNITED STATES Corporation, it's employees and subsidiaries IN CONTRACT, under JURISDICTION of LAW MERCHANT.
Free your mind. |
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Anonymous Coward
User ID: 639248
United States
3/22/2009 3:33 PM | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
With M3 disquised and not transparant, printing money and the funding of that printing, such as purchase of "debt" or "T-bills" is done surepticiously...and without YOUR knowledge.
All the fed is doing is printing money to fund our Great Recession. Not to worry, as many trillions of bucks are held by foreigners with no intention to redeem...or get paid off on their holdings. |
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AsperGirl
User ID: 637830
United States
3/22/2009 3:45 PM
 | | Re: THE FEDERAL RESERVE MAY SELL IT'S OWN DEBT | Quote |
This is equivalent to what happened in the mortgage bubble. Like when people were taking out 2nd mortgages, cash out refinancing and home equity lines of credit.
The U.S. government is getting way overleveraged in debt.
The credit bubble is only being transferred from the private sector into public debt.
This means that when the liquidity/credit bubble really bursts it will take down the government, not just households.
I'm going to create a whole new phrase here, invented all by myself:
"Transfer of debt"
We see how our gov't misuses taxes and public programs to make "transfers of wealth" from those who work to those who don't.
Now the gov't is using its mismanagment of this debt crisis, and its credit to transfer massive amounts of debt from Wall Street, banks and insurers to the public (us).
We are nationalizing the debt of Wall Street, banking and insurance companies, while leaving the stockholders owning the assets and profits from those businesses. |
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