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NYFed

Posted by WARREN MOSLER on June 22nd, 2010

Good find!

I recommended this years ago when Karim first introduced me to his Treasury contacts.
It moved forward and was passed around for discussion, but the dealers quashed it.

An unlimited lending program could replace much of the generic libor swap market.

Wish they would revisit it.

Why Is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?

“A backstop lending facility turns this understanding on its head: the Treasury would be issuing securities not because it needs cash, but because market participants need securities.”

They don’t notice a difference between gold standard and “modern money”, actually they draw a parallel:

“… the markets for borrowing and lending Treasury securities in the 21st century are broadly analogous to the 19th century market for borrowing and lending money. Dealers and other market participants today have short-term liabilities denominated in Treasury notes; 19th century banks had deposit liabilities. Additionally, there is limited elasticity in the supply of individual Treasury securities today, just as there was limited elasticity in the supply of base money in the 19th century. A backstop securities lending facility would enhance the elasticity of supply of Treasury securities in the same way that the Federal Reserve Banks enhanced the elasticity of currency a century ago. It would mitigate chronic settlement fails, just as the Federal Reserve System mitigated suspensions of convertibility of bank deposits.”

They don’t discuss interest on reserves (and they should, these being functionally equivalent to Tsy securities).

8 Responses to “NYFed”

  1. beowulf Says:

    There is limited elasticity in the supply of individual Treasury securities today, just as there was limited elasticity in the supply of base money in the 19th century. A backstop securities lending facility would enhance the elasticity of supply of Treasury securities in the same way that the Federal Reserve Banks enhanced the elasticity of currency a century ago.

    A century ago would be the 20th century. As for how Tsy dealt with “limited elasticity of in the supply of base money in the 19th century”, well let’s just say its something the dealers REALLY wouldn’t like. :o)

    http://en.wikipedia.org/wiki/United_States_Note

    Reply

  2. Tom Hickey Says:

    “the Treasury would be issuing securities not because it needs cash, but because market participants need securities.”

    The truth is out. It’s like when Australia was running a budget surplus for some time. The market was begging them to issue “debt” anyway.

    So much for the “borrowing” meme. It’s clear that that’s not the issue. It’s the parking place.

    Reply

    Tom Hickey Reply:

    Bill Mitchell is out with a dynamite post on this, blowing up the myth.

    http://bilbo.economicoutlook.net/blog/?p=10404

    Reply

  3. Conal Says:

    (I think) this is explained by BIS (Bank of International Settlements) in BIS Working Papers No 292, Unconventional monetary policies: an appraisal. http://www.bis.org/publ/work292.pdf?noframes=1

    It was pointed to here (probably not your politics but still debunking fears of inflation).
    http://globaleconomicanalysis.blogspot.com/2009/12/fictional-reserve-lending-and-myth-of.html

    I really struggled with it and couldn’t understand it clearly but the gist I got was that the government ‘borrows’ to maintain interest rates, not because it ‘needs cash’ (obviously).

    It would be great if someone could put this paper into plain English!

    Reply

    Tom Hickey Reply:

    Mirabile dictu! Mish gets it (thanks to Steve Keen).

    Former Ed Harrison saw the MMT light. Maybe Mish will finally get it too. He seems well on the way. At least we have something in common to talk about now.

    Reply

    Tom Hickey Reply:

    Oops. I should have written “former AUSTRIAN Ed Harrison” Apologies to Ed.

    Reply

    Tom Hickey Reply:

    Hey, Ed, if you are listening in, why don’t you have a heart to heart with Mish if you haven’t already. Steve seems to have softened him up. Maybe he’d be open to hearing about MMT from a former Austrian school guy like himself. He hasn’t listened to the others that have tried. But you have a leg up. Mish probably already reads you anyway.

    beowulf Reply:

    Yup, and you don’t have to convince anyone that MMT is the perfect system, only that its preferable to what we have now.

    Reply

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