Sunday, September 9, 2012

Timmy Geithner: “Suppose we have a [Treasury] auction and no one shows up?”

commentary by Roger Erickson

Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis
By Bob Woodward, Published: September 8

Notable quotes from the G-Man, advising President Obama. (There are more, but these are sufficient to prove he has little feet.  Otherwise, how could he stuff so many in his mouth at once?)

“Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?” Tim Geithner, to Pres. Obama

Another possible outcome, Geithner said, was perhaps worse. “Suppose we have an auction and no one shows up?” Tim Geithner, to Pres. Obama


Timmy Geithner is either a complete buffoon, or an outright traitor to his nation. He may be both.

He's being paid a lot to be that wrong, in public, on the record.

24 comments:

Anonymous said...

Great post Roger.Thank´s.Here you have some links with useful facts that hits hard.
http://www.epi.org/blog/romney-ryan-budget-americans/
http://www2.ucsc.edu/whorulesamerica/power/wealth.html
http://www.faireconomy.org/
http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99
http://www.epi.org/
http://www.cbpp.org/reports/?fa=results

Roger Erickson said...

Anyone have a link to the rules/laws requiring Primary Dealer banks to purchase any & all offered Treasury Securities?

Beowulf?

Apparently, Geithner's never read those. Can someone get him a copy?

y said...

A Primary Dealers can choose to stop taking part in treasury auctions, but that would mean losing their position as a primary dealer and all the benefits that come with it.

y said...

"Primary dealers should participate similarly in support of Treasury auctions: the New York Fed will expect a primary dealer to bid in every auction, for, at a minimum, an amount of securities representing its pro rata share, based on the number of primary dealers at the time of the auction, of the offered amount. Its bid prices should be reasonable when compared to the range of rates trading in the when-issued market, taking into account market volatility and other risk factors.

Primary dealers that do little business with the New York Fed over a period of time, that repeatedly provide bids and offers in the New York Fed operations or Treasury auctions that are not reasonably competitive, or that fail to provide useful market information and commentary, are not meeting the New York Fed's expectations of a primary dealer. In those situations, the New York Fed may limit a primary dealer’s access to any or all of the primary dealer facilities or operations, and may suspend or terminate a primary dealer if it continues to fail to meet these business standards."

http://www.newyorkfed.org/markets/pridealers_policies.html

Clonal said...

Roger,

From the New York Fed website -
Administration of Relationships with Primary Dealers

Quote:
The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

This policy sets the standards for primary dealers (Standards). Each primary dealer must meet the Standards, initially and on an on-going basis. All primary dealers will be expected to engage in the traditional primary dealer functions listed above. All primary dealers will also be eligible to: (i) participate in the New York Fed's overnight securities lending facility; and (ii) participate in such other operations or facilities, pursuant to their terms and as set forth in this policy, as may be available to primary dealers from time to time

y said...

I don't think Geithner's comments are so stupid. The US's "authority" to pay its debts is granted by Congress. Congress could potentially choose to default voluntarily. All this business over the debt ceiling makes that look like more of a possibility.

Joe said...

What are some of the benefits of being a primary dealer?

And just for the sake of argument (and I know it's crazy), what if all primary dealers quit, who would buy the bonds then? Since I believe the fed is legally restricted from buying "debt" directly from the treasury and the treasury isn't allowed to overdraft at the fed. So a highly unlikely scenario, but just humor me, what would then happen?

Anonymous said...

They can borrow directly from the Fed. A lot of the time primary dealers simply borrow the money to buy govt securities from the Fed at a lower interest rate.

Free profits.

If they decided they weren't interested in free profits anymore and all stopped buying treasuries, then the treasury would get an overdraft from the fed or some other such arrangement.

Anonymous said...

I don't believe the Treasury can borrow directly form the Fed or that the Fed can grant Treasury an overdraft.

Joe said...

I know the scenario I outlined is absurd(of course the banks would buy the treasuries, lest they lose interest income,but still play along), but it's a common question, and for MMT's sake, does need an answer. Even if the answer is "Self-imposed constraints would prevent spending in that situation" or "the treasury could issue currency itself" (something like the platinum coin idea, which afaik, is fully legal presently)

Tom Hickey said...

The answer is that we don't know what would happen, but the president can always play the platinum coin gambit if Congress chooses to default and he doesn't want to go along. Alternatively, Congress could just change some of the rules it made in the first place. There is no operational reason for the US government to run out money in terms of the monetary system. It's imposed rules that can be changed rather quickly if there's a will to do so.

paul meli said...

Anyone know where the money went for the nearly $5 Trillion in bonds held by the Fed?

geerussell said...

Joe,

The reason your scenario is so hard to answer is it's a hypothetical about a symptom without specifying the underlying problem.

Sort of like asking what I'd do if I started spitting up blood and exploring hypothetical answers like get a napkin and change my shirt when the far more pressing question would be a diagnosis of what led to that point.

Roger Erickson said...

"Since I believe the fed is legally restricted from buying "debt" directly from the treasury and the treasury isn't allowed to overdraft at the fed. So a highly unlikely scenario, but just humor me, what would then happen?"

It was once legal for the Fed to directly buy Treasury bonds, then it was outlawed by Congress.

So, Congress could simply allow it again.

Or, Congress could also simply forgo Treasury bonds forever, and invent some other way to allow real growth to trigger creation of real assets in a double-entry accounting system.

Oh, the things that we could do ... if we only had a group brain!

y said...

Dan/Roger,

Where does it actually say that it is "illegal" for the Fed to lend directly to the Treasury?

In the UK it isn't.


As far as I'm aware it's illegal for the government not to pay its debts or make payments it has already committed itself to.

As such, if everyone decided (for some illogical reason) not to buy govt bonds anymore, the govt would still be obliged to make its payments.

As such, the Treasury would simply continue to send out its checks, and the Fed would simply clear them. It can't not clear them.

Treasury checks can't bounce.

Mosler discusses this on page 23 of the 7 deadly innocent frauds.

y said...

Has any bank ever decided to stop being a primary dealer, or been kicked out by the Fed?

John Zelnicker said...

y (@2:15 pm) -- The US "requirement" to pay its debts is in the 14th Amendment to the Constitution, where it says that the debts of the United
States may not be questioned. Refusal by Congress to "authorize" payment for maturing T-securities (or any other legitimate debt) would be a violation of the Constitutional duties of Congress. Unfortunately, it seems there are a lot of lawyers, and others, in Congress who have never read the Constitution or have forgotten it.

Roger Erickson said...

@ Zelnicker & Y

Yes, the debt ceiling seems unconstitutional.

"Where does it actually say that it is "illegal" for the Fed to [directly buy] Treasury [securities]?"

That's what I was asking. If I recall, that rule was re-introduced way back around 1950, towards the end of Marriner Eccles term. Haven't found the exact Fed or Congressional rule reference.

Tom Hickey said...

Tschäff Reisberg said...
Found this while looking for the actual law that forbids the Treasury from running an overdraft at the Fed. Came across one bit of testimony with a senator calling the arcane method the Fed finances government "absurd" but I lost it, if anyone finds it please let me know. 

Anyways the law is Section 14(b) of the Federal Reserve Act: 

"To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States."

The key word there is open market.
June 25, 2012 10:24 AM

y said...

Tom, that doesn't say anything about overdrafts. Does "open market" exclude buying directly at Treasury auctions?

In the UK it is legal for the Treasury to borrow from the Bank of England. The Bank has an account especially for this called the "Ways and Means Account".

geerussell said...
This comment has been removed by the author.
geerussell said...

Is this a potential loophole in that law?

A footnote from this paper:

The Scope of Monetary Policy Actions Authorized under the Federal Reserve Act

states the following:

46
The Federal Open Market Committee has concluded that the restriction that such purchases must be in the open market does not prohibit the exchange of maturing Government securities for an equal amount of new securities carrying the conversion privilege ..." See Twenty-Fourth Annual Report of the Federal Reserve Board: Covering Operations for the Year 1937 (1938), p. 211.


Following it back to the source document the full passage is as follows:

1. Exchange Directly with Treasury Department of Maturing Government Securities Held in System Open Market Account for New Securities.

It was voted unanimously that, whenever such action appeared to be desirable in the proper administration of the System open market account, maturing Government securities held in the account might be exchanged directly with the Treasury for securities of an issue being offered to the public under terms which permit the tender of the maturing securities in exchange.

The Committee was of the opinion that the provision contained in section 14 (b) of the Federal Reserve Act that bonds, notes and other direct obligations of the United States may be bought or sold without regard to maturities but only in the open market does not prohibit the exchange of maturing Government securities for an equal amount of new securities carrying the conversion privilege, and that, inasmuch as such exchanges would result in saving a substantial amount previously paid as commissions in connection with the purchase and sale of securities which otherwise might be exchanged without such expense and it would be possible thereby to eliminate the accounting problem of the treatment to be given to profits on securities sold and premiums paid on securities purchased in the market, such direct exchanges should be made.


The bolded portion, at first glance, seems to say that the Fed sees its way clear to deal directly with the Treasury to fund newly issued bonds using maturing bonds from its own balance sheet. A resource it has a great deal of these days. With the caveat of course that I might not know at all what the heck I'm talking about and should probably just head straight to the roof to activate the Beowulf signal.

Tom Hickey said...

Marriner Eccles, Chairman of the Board of Governors of the Federal Reserve System 1947:

There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.

Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.


Posted at MNE why-cant-treasury-borrow-directly-from-Fed?

y said...

yep the idea that PDs will interupt the flow from Fed to Treasury is really nothing more than a superstition.

CR at pragcap has built a whole "theory" around this, by supposing that PDs might refuse to buy Treasuries once inflation gets too high.

Even if they did, it would be irrelevant. But they won't anyway so it's just wrong. But the idea has become some sort of lynchpin anyway within "monetary realism".