Monday, September 29, 2014

Kenneth D. Garbade — Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks

From time to time, and most recently in the April 2014 meeting of the Treasury Borrowing Advisory Committee, U.S. Treasury officials have questioned whether the Treasury should have a safety net that would allow it to continue to meet its obligations even in the event of an unforeseen depletion of its cash balances. (Cash balances can be depleted by an unanticipated shortfall in revenues or a spike in disbursements, an inability to access credit markets on a timely basis, or an auction failure.) The original version of the Federal Reserve Act provided a robust safety net because the act implicitly allowed Reserve Banks to buy securities directly from the Treasury. This post reviews the history of the Fed’s direct purchase authority. (A more extensive version of the post appears in this New York Fed staff report.) 
FRBNY Liberty Street Economics
Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks
Kenneth D. Garbade | senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group

1 comment:

Jose Guilherme said...

In 1935 Congress acted to prohibit direct purchases of Treasury securities by Federal Reserve Banks (...) In June 1979, Congress renewed (for two years) the $5 billion exemption to the prohibition on direct purchases...

So, it´s up for Congress to decide whether direct financing of the Treasury at the Fed is admissible.

This is unfortunately not an option in the eurozone, where a (virtually unchangeable) Treaty prohibits direct financing of governments by the ECB.

Here we can see the key Constitutional difference between the U.S. and the countries using the euro.

Whereas in the first case money is formally under the control of a representative body, in the second one the Sovereigns are left at the mercy of "the markets" - meaning, in practice, the commercial banks.

Notice that not only the ECB does not make direct purchases: as a general rule, it does not even buy government securities in open market transactions. Instead, it "advances" money to the commercial banks, that the banks may use - at their whim - to purchase government securities.

The concept of "bankocracy" thus seems to apply as a neat description of the power structure of the eurozone - at both the formal/constitutional and material levels.