Fed May Purchase Treasuries In Days To Ease Credit

[Ted]

Welcome to the pleasure dome.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Jan. 16 (Bloomberg) -- The Federal Reserve may purchase Treasuries within the next few days or weeks as it broadens its policy beyond interest rate cuts to ease credit conditions amid the worst recession in 25 years, according to UBS AG.

“Fed officials use every chance they get to highlight Treasury purchases as an important arrow in their quiver,” William O’Donnell, U.S. government bond strategist at UBS Securities LLC in Stamford, Connecticut, wrote in a research report today. “It now appears as if the Fed may use Treasury purchases as a blunt tool to bring loan rates down further. This makes it more likely that Treasury purchases come sooner.”

Fed Chairman Ben S. Bernanke reiterated Jan. 13 that he’s considering buying long-term Treasuries as a way to bring down borrowing rates and unfreeze private credit markets as U.S. economic data and government reports continue to show the recession is deepening.

Edited January 16, 2009 by Ted

[bogbrush]

You have to laugh. Well, it's that or you'd cry.

[Bloo Loo]

This is still loan backed money... not printing.

[Ted]

This is still loan backed money... not printing.

Serious?

Who are the fed loaning from, China?

[Bloo Loo]

Serious?

Who are the fed loaning from, China?

when the Fed takes a treasury as collateral from a bank they send them money in exchange.

In this case, they are bypassing the bank and providing the money to the government instead, at interest.

[Ted]

when the Fed takes a treasury as collateral from a bank they send them money in exchange.

In this case, they are bypassing the bank and providing the money to the government instead, at interest.

Yes but how are they providing the money?

It's like me loaning myself £20,000 at 2%.

Crazy, huh?

[cht]

Was watching treasuries today and they collapsed in early trading. My first thought was 'the FED will start buying now'. This will propably delay the bursting of the treasuries bubble for a few weeks.

[Bloo Loo]

Yes but how are they providing the money?

It's like me loaning myself £20,000 at 2%.

Crazy, huh?

The government issues the treasury, ie a pledge to pay back x in x years time and to pay interest at y%

The bank simply monetizes this treasury pledge.

Its how all FIAT money is created. this is M0, or narrow money. Banks use this money to settle commitments on their M4 money (credit they have created).

So when you see that inflation has been caused by something, you can see that it is your government that is the true culprit.

The problem with selling the treasury directly to the FED is that the market value of the treasury is not set by the market. I gather this causes problems with currency values.

Edited January 16, 2009 by Bloo Loo

[Ted]

The government issues the treasury, ie a pledge to pay back x in x years time and to pay interest at y%

The bank simply monetizes this treasury pledge.

Its how all FIAT money is created. this is M0, or narrow money. Banks use this money to settle commitments on their M4 money (credit they have created).

So when you see that inflation has been caused by something, you can see that it is your government that is the true culprit.

The problem with selling the treasury directly to the FED is that the market value of the treasury is not set by the market. I gather this causes problems with currency values.

Yes but under normal circumstances, during a bond auction, there will be a number of competing bidders((?) it's been a long day)) , many from overseas.

Now we are talking about the fed maybe buying all newly issued debt at an auction (and maybe not re-issuing it for profit?). It might be the case that if they don't do this, there will be a flight from treasuries, a lowering of their prices and a huge rise in yield.

I'm not sure that in normal periods the fed would by treasuries, this seems like an extraordinary event. Because in the past there has always been a market and so there has been no need for the fed to.

Also, as an Edit, you say this is not printing.

Where exactly does the Fed get the funds from to buy these "Government issued bonds". Personally I think they are one in the same.

Edited January 16, 2009 by Ted

[Bloo Loo]

Yes but under normal circumstances, during a bond auction, there will be a number of competing bidders((?) it's been a long day)) , many from overseas.

Now we are talking about the fed maybe buying all newly issued debt at an auction (and maybe not re-issuing it for profit?). It might be the case that if they don't do this, there will be a flight from treasuries, a lowering of their prices and a huge rise in yield.

I'm not sure that in normal periods the fed would by treasuries, this seems like an extraordinary event. Because in the past there has always been a market and so there has been no need for the fed to.

I think I read that there was a shortage of buyers at a german treasury auction.

Maybe they feel that no-one is going to buy new issues.

The hyperinflation in the southern states of the US was caused by a lack of buyers of their cotton bonds. They printed their own requirements and lost the war, the confederate dollar worthless.

[crash2006]

Serious?

Who are the fed loaning from, China?

themselves.

[bricor mortis]

My right hand didnt want to spend any of its money on tins of beer, but my left hand lent it a tenner and now im in Stella heaven....I think thats how it works.

[Wad]

I am pretty sure the UK is going to do the same thing as the Fed.

The BoE will buy Gilts at the long end. I dont know why long Gilts prices dropped a bit today but it seemed illogical to sell long Gilts when the Govt on both side of the Atlantic are telling everyone they intend to do quantitative easing. As the 3 Month T Bill rates in the UK are already down at sub 1% and cannot go much lower it only makes sense for BoE to buy long Gilts as part of the quantitative easing process.

In addition the Telegraph is suggesting that Govt may also swap long Gilts for toxic debt on bank balance sheets. Not sure what rate of exchange they would choose but the banks would then get good liquid Gilts on their balance sheet and the toxic debt would be shuffled off the market until things recover. A decade from now the Gilts would be swapped back again and the toxic debt put back on the bank balance sheets when it has recovered in price or perhaps just sold off and the losses dribbled back on to the bank balance sheets via a P&L hit.

As long as the hit was not too big no one would notice. A sort of nationalisation but not as we know it but needs to be done so the banks accounts can be signed off at 31 March 2009.

The detail of this plan is all going to be completed and ready to go by next Monday.

http://www.telegraph.co.uk/finance/newsbys...ank-scheme.html

Edited January 16, 2009 by Wad

[huw]

In this case, they are bypassing the bank and providing the money to the government instead, at interest.

Allowing for the fact that the printing press is no longer needed for these transactions, this is exactly the same mechanism that was used in the Weimar Republic, if I understand correctly.

[crash2006]

The toxic debt were swap for securities etc.. now the fed is using cash to buy securities back, keeping the toxic crap on the feds books. money laundering FEd style,So banks make instant profit

Edited January 16, 2009 by crash2006

[thirdwave]

This is still loan backed money... not printing.

This is monetisation of treasury debt through QE (creation of monopoly money)

[the_austrian]

Yes but how are they providing the money?

It's like me loaning myself £20,000 at 2%.

Crazy, huh?

The printing happened when the loan was issued by the Government, a while ago... Monetisation is only the fait accompli, so to speak.

Allowing for the fact that the printing press is no longer needed for these transactions, this is exactly the same mechanism that was used in theWeimar Republic, if I understand correctly.

We've been using this mechanism for quite a while... They have no choice but to monetise the debt, or keep rolling it over.

[Bloo Loo]

This is monetisation of treasury debt through QE (creation of monopoly money)

yes...as you say, treasury DEBT backed money.

printing is not backed by debt.

[the_austrian]

yes...as you say, treasury DEBT backed money.

printing is not backed by debt.

Do you still think velocity causes inflation?

[Bloo Loo]

Do you still think velocity causes inflation?

Still? didnt know Id ever really thought about it in those terms.

money supply causes inflation of money value, slow velocity would make it look like a shortage of money and force prices down as people compete to sell their goods to the limited supply of money, so yes, velocity would be a factor in prices.

[the_austrian]

Still? didnt know Id ever really thought about it in those terms.

money supply causes inflation of money value, slow velocity would make it look like a shortage of money and force prices down as people compete to sell their goods to the limited supply of money, so yes, velocity would be a factor in prices.

Slower velocity doesn't mean a shortage of money... I'm trying to understand why you would say Treasuries are debt backed money, what does this mean?