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Via JESSE'S CAFÉ AMÉRICAIN who comments that it may be a prelude to selective default.
Fed Weighs Debt Sales of Its Own (WSJ)
By JON HILSENRATH and DAMIAN PALETTA
DECEMBER 10, 2008
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
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.
By JON HILSENRATH and DAMIAN PALETTA
DECEMBER 10, 2008
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
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.
One illuminating comment on naked capitalism, introducing the idea that the Fed is attempting to maturity match and interest-rate match to limit its risks:
ndk said...
does anyone have a good/authoritative/correct link/page that talks about what is fed's "balance sheet constraint?" and why the fed would want to pay interest on the reserves?
If you can stand getting a little technical, and you're probably going to have to given the subject matter, Sims has a good paper.
dont quite understand. Why do they need to issue debt to finance asset purschases in this day and age of quantitative easing? Whatever happened to the good old printing press.
There is no such thing as "just" a printing press. There are assets and liabilities. The Fed is like any other bank. When it wants to create cash, it has to buy or repo something in return. Usually it did this with Treasuries, but that's basically pointless right now and doesn't further policy goals much. You can see the excess reserves just sitting there in the sewers of the banking system.
So, to meet their policy goals, they need to buy something else. Anything else exposes them to a variety of risks, and as Sims' paper points out, the central bank's balance sheet certainly does matter.
Issuing CD's instead of dollars actually significantly reduces the Fed's risk here. The dollars are a liability of the Fed with zero maturity and a floating interest rate. Buying back those dollars isn't free: it has to sell off one of its own assets. Usually it sells Treasuries, but it can't, because it doesn't have many left. If all it holds is bad paper, it can't get enough of those zero-maturity dollars back in an inflationary environment. The bad paper would probably be worth less than when the Fed bought it, so the Fed would show a significant capital loss.
Again, I feel Sims lays this out very well. I encourage everyone to take a look at his "Bad luck: Inflationary spiral" scenario to get a feel for the issues here. This action would make that spiral slightly less scary, because the Fed's balance sheet would be a lot less likely to go negative, while the purchasers of the CD's would be in more trouble.
Still think this is all madness, but this is better madness. Sorry for posting so much. It's just really interesting.
does anyone have a good/authoritative/correct link/page that talks about what is fed's "balance sheet constraint?" and why the fed would want to pay interest on the reserves?
If you can stand getting a little technical, and you're probably going to have to given the subject matter, Sims has a good paper.
dont quite understand. Why do they need to issue debt to finance asset purschases in this day and age of quantitative easing? Whatever happened to the good old printing press.
There is no such thing as "just" a printing press. There are assets and liabilities. The Fed is like any other bank. When it wants to create cash, it has to buy or repo something in return. Usually it did this with Treasuries, but that's basically pointless right now and doesn't further policy goals much. You can see the excess reserves just sitting there in the sewers of the banking system.
So, to meet their policy goals, they need to buy something else. Anything else exposes them to a variety of risks, and as Sims' paper points out, the central bank's balance sheet certainly does matter.
Issuing CD's instead of dollars actually significantly reduces the Fed's risk here. The dollars are a liability of the Fed with zero maturity and a floating interest rate. Buying back those dollars isn't free: it has to sell off one of its own assets. Usually it sells Treasuries, but it can't, because it doesn't have many left. If all it holds is bad paper, it can't get enough of those zero-maturity dollars back in an inflationary environment. The bad paper would probably be worth less than when the Fed bought it, so the Fed would show a significant capital loss.
Again, I feel Sims lays this out very well. I encourage everyone to take a look at his "Bad luck: Inflationary spiral" scenario to get a feel for the issues here. This action would make that spiral slightly less scary, because the Fed's balance sheet would be a lot less likely to go negative, while the purchasers of the CD's would be in more trouble.
Still think this is all madness, but this is better madness. Sorry for posting so much. It's just really interesting.
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