Monday, November 2, 2009

So Just Who Is Buying All the New Treasury Debt?

The Treasury has been announcing record debt auctions, and yet we see little in the form of increasing interest rates to attract buyers to these securities that are still somehow gobbled up. The Fed's balance sheet, of late, doesn't seem to account for it, as any buying they are doing seems to be sterilized. Are the Chinese so insane that they are buying up anything the Treasury throws up in the air? It appears not.

The securities purchases are to a large degree forced purchases. They are muscled purchases. It's as if a 6' 5" mugger in the middle of the night has set up a toll road that you can't pass unless you empty the contents of your wallet.

So who is doing the muscling? The U.S. government? Who are they muscling? The banking sector.

The four largest U.S. banks by assets -- Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. -- have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, reports Bloomberg.

Liquidity includes cash, deposits at other banks and debt securities that can be pledged as collateral in exchange for overnight borrowings from the Federal Reserve or other banks. Do you want to guess what is at the top of the Fed's list of acceptable collateral? Whoever said Treasury securities, step to the head of the class.

As I pointed out sometime ago, more regulation and reclassification of what is a risky security, and what is not, and what banks should hold in reserve, can lead to reclassification that directs banks to purchase and hold more Treasury securities.

Indeed, that appears to be happening. Here's Bloomberg again:
Regulators say banks got too aggressive in the years leading up to last year’s credit-market seizure, operating with too little equity capital and putting too much money into illiquid investments such as loans and complex, hard-to-trade securities and derivatives.

A lack of funds “can contribute as much or more to the firm’s failure as insufficient capital,” the Treasury Department said in a Sept. 3 statement of “core principles” on financial regulation....Banks should “hold a pool of unencumbered, liquid assets sufficient to cover likely funding shortfalls in the event of an acute liquidity stress scenario,” the Treasury said.
Citigroup alone holds $244.4 in liquid assets.

“In my 44 years in the business, I have never seen a company with remotely as much cash as this,” said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida.

And get ready for more global muscling:
The Basel Committee on Banking Supervision, a 35-year-old panel that sets international capital guidelines, plans to propose a “new minimum global liquidity standard” by the end of this year, according to a Sept. 15 statement from the Financial Stability Board, which is coordinating financial regulatory reform on behalf of the Group of 20 nations.
Of course, a debate could be added about how banks should operate in a non-fractional reserve banking system. But we are talking about realeconomik here, and what is going on in realeconomik is the government muscling banks into holding more Treasury securities.

But, as any street mugger will tell you, night after night you can only mug the same person so lomg before he runs out of cash. When the bank muggings drain the banks, then we will have much higher interest rates.

In the mean time, the muscling is resulting in even less funds available for the private sector. Not good.


  1. Wouldn't this get the money supply flowing. After all, banks are beginning to lend again converting some of those reserves to loans, except the first pig at the trough is the government. Once the government spends the money, the fractional reserve process should start right, as banks buy more Treasuries or make loans to others? How is this different, the Fed buys "assets" from the banks who inturn buy Treasuries. That could explain the recent spike in the monetary base.

  2. "The Fed's balance sheet, of late, doesn't seem to account for it..."

    I think it is safe to assume that the Fed would categorize 'extraordinary' debt purchases from the Treasury as 'off-balance-sheet' transactions which must be hidden from public scrutiny or Congressional oversight.

  3. Isn't the FED loaning banks funds (at 1/2%) to purchase treasuries at 4%? Sounds like the Gov't can keep running up debt indefinitely - just keep creating money and loaning it to the banks. If it doesn't keep working then 'WE THE PEOPLE' can bail them out again.