Posted on 08/10/2010 11:49:47 AM PDT by John W
Acknowledging that the recovery has slowed, the Federal Reserve announced Tuesday that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities, The New York Times’s Sewell Chan reports from Washington.
By buying government debt, the Fed is taking an unmistakable step to maintain the large amount of money that it pumped into the economy, starting in 2007, to prop up the financial and housing markets.
(Excerpt) Read more at dealbook.blogs.nytimes.com ...
Maybe the state shouldn't hold those assets if they have huge budget deficits?
If those were privatized and sold, people are estimating the state could earn hundreds of millions of dollars.
They should be sold.
we could use it as the deposit basis for a state bank that makes loans to the state for infrastructure
Say they sold the stores and got $1 billion. If they put that in the state bank, what would that allow them to do? Walk me through the steps.
Our FRNs only appear to circulate permanently because the government bonds backing them never get repaid and continue to be rolled into new loans.
And if the Treasury issued bills directly, how does that fix the $13 trillion deficit? Would government bonds suddenly stop being rolled over?
Its a pittance and an illusion, and only comes at the expense of a multi-trillion dollar, unpayable national debt.
The Fed doesn't force the Congress to waste our money.
On top of? Don't you mean they can loan $900 million?
All outstanding bonds could be purchased with U.S. Notes, thus eliminating the national debt.
The total supply of FRNs is less than $900 billion. That's not enough to close this years budget gap, let alone the national debt.
then the Fed is like their shady dealer.
LOL! The Fed holds the same amount of Treasury debt that it held 3 years ago. Sorry to break it to you, the Congress has another crack dealer.
Credit card is run by the Congress and Obama administration, not by the Fed. Quantitative easing doesn't add a dollar to national debt. In fact, QE1 provided the excess capital at the Fed that they can use now to add some liquidity and remove some uncertainty (capital reserves against loan portfolios) from the financial market. Monetary policy by the Fed is never a panacea against the destructive Keynesian "spend it and forget it" fiscal policy.
More like investing bond interest (mortgages) into new bonds (Treasuries).
Exactly. Fed has a surplus due to TARP principal and interest repayments and the higher interest on MBS portfolio from QE1 that Fed ended in March of 2010. The case for QE2 (whether one agrees or disagrees) is pretty well stated in this FR thread - Ben at the controls [Bernanke, the Fed] - FR / NYP, 2010 August 10
You think a $1 billion deposit means they can loan out $1.9 billion?
Of course, they do not really pay out loans from the money they receive as deposits.
But of course they do. Every loan is fully funded.
If they did this, no additional money would be created.
OMG! Whoever wrote that should have been fired.
You deposit $1000 in twenties in the bank, your statement says $1000.
I borrow $900, I now have $900 in my hand. The money supply is $1900 and my loan was paid out of the money they received as deposits.
All bondholders would be repaid with U.S. Notes.
You want to increase the money supply another 600%? LOL!
Excellent! So how does the state benefit by putting $1 billion in the bank and only getting to use $900 million?
It is straight out of the Fed's own documents
And yet, still wrong.
Where did the $900 come from then?
From your deposit.
It sure wasn't my deposits, as they are still at the bank.
Your deposit is still at the bank, your statement says $1000 yet the cash in my hand says $900. See how the money supply grew?
What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.
They make credits to the borrowers account? Kinda like they credited your account when you made the deposit. LOL!
You might want to look into what makes up the various parts of M1. You might learn something.
Its called fraud . We have been defrauded and ebezzled by the Fed, and our own government encouraged it (republican and democrat)
“” but putting this in my terms sounds like using a credit card to pay off a credit card.”
They’re not. When the Fed purchases securities they are exchanging cash for illiquid paper that is held by a bank. Their goal is to encourage banks to make loans. Giving them cash in exchange for the securities on their books is designed to push them into making loans.
The Treasury sells bonds. The Bureau of Printing and Engraving prints Federal Reserve Notes. The Fed monetizes Treasuries. Congress spends the FRNs that the Fed creates out of Treasury notes.
The Treasury doesn’t own any of our debt. It sells U.S. debt to investors to raise the money that Congress instructs it to.
The Fed owns a large portion of Treasury debt that it uses to manage the money supply.
“The Treasury will instruct the Fed to create a long-term bond obligating the US Treasury to the Fed...”
Nonsense. Congress sets the debt limit and instructs the Treasury to sell bonds to raise the money it authorizes. The Fed isn’t involved in that process, and the Fed can’t “obligate” anyone.
“Mortgage-backed securities; what if nobody is paying back the mortgage?”
Then the asset, the mortgage, becomes worthless. This is deflationary and dangerous to the banking system. The Fed is fighting that deflation by purchasing mortgage backed securities from banks.
That’s a description of a ‘funded public debt’. Ours was designed by Alexander Hamilton a few years before Woodrow Wilson.
The Fed certainly cannot create a Treasury bond without authorization of the US Treasury and the Treasury is certainly subject to a debt ceiling set by Congress. However, with a few minor excpetions like savings bonds, the US Treasury no longer prints bonds, notes, or bills. Rather, they are issued in book-entry form at Federal Reserve Banks. The Fed manages the book-entry program; so they are indeed very actively involved in the process. The Fed also conducts the auctions of Treasury securities, manages the TreasuryDirect service, and the Fedwire transfer system for Treasury securities. These are important roles of the Federal Reserve System, particularly the New York Fed.
See http://www.ny.frb.org/aboutthefed/fedpoint/fed05.html.
It’s quite possible for the Fed to create a book-entry for a long-term bond if instructed by the US Treasury and then credit the Treasury’s current account.
Historically the Fed has conducted open market operations involving vast amounts of short-term Treasury bills. That’s what monetary policy was all about from 1913-2008. Since then, the Fed has stuffed its balance sheet with all sorts of assets.
Sure, they will probably purchase long-term Treasury bonds through open market transactions. The effect is almost the same as just creating the bond directly. However, with open market transactions, the Treasury and the Fed cover up the fact that they are monetizing the national deficit and Goldman Sachs et al get a few basis points for their services.
And so it begins...
The Fed is literally, just “creating” it's own funds in the “Treasury” by simply adding more zeros to the balance without actual securities or assets backing it. They then hand the “money” over to CONgress to spend, spend, spend, and spend.
Historically, when a government monetizes it's currency, hard times are guaranteed. It's money being spent with money we don't have and nobody is giving (borrowing) us the money to back up the money we are spending that does not really exist.
It's pure and simple INSANITY!
It doesn't sound to me as if you know what you are talking about. What I wrote is a pretty accurate description of what is going on. (Except that most of the time the Fed buys the Bonds/Bills on the open market rather than brazenly and directly from Treasury, but the effect is the same.) Congress actually spends relatively little by itself. They authorize spending by the Executive branch and disbursements are made by the Treasury Department.
ML/NJ
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