Monday, November 9, 2009

WSJ Catches On to Why Treasury Rates Are Low

Jon Hilsenrath at WSJ reports:
You know an economy isn’t healthy when banks are using as much of their money to buy government debt as they are to make loans to businesses. That’s just what’s happening right now. According to the Federal Reserve’s latest weekly measure of bank assets and liabilities, released every Friday, banks held 1.37 trillion of Treasury and Fannie Mae or Freddie Mac debt securities at the end of October and $1.37 trillion of commercial and industrial loans...What’s stark about the latest version is that business lending is falling so fast and Treasury purchases are rising so fast. At the end of October, business loans were down 17% from a year earlier, while Treasury and agency debt holdings were up 8%. Total bank loans and leases are down 8%.

These trends are important for several reasons. First, this helps explain why yields on Treasury bonds are so low even with mammoth U.S. budget deficits...

Great analysis, of course, if you are a regular EPJ reader, you would have known this last week:

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


  1. This is great stuff. Just to clarify: Are you saying that this is just a spontaneous outcome because of the weird situation, or are you saying that the Fed is quite consciously letting banks know that they need to use their bailouts to buy Treasurys?

    Because if the latter, that would be pretty "awesome." Instead of Bernanke directly monetizing the debt and scaring everybody, he tells Geithner, "Watch and learn, Timmy. I'm going to give the banks $1.5 trillion in exchange for all their crap, but keep it short term and tell them if they put it in anything besides Treasurys, I yank it right back. Welcome to the NBA."

  2. Great observation. The FED creates money and gives it to the banks and then "Nudges" the banks to give it to the government so they can send it to their favorite special interest group. A stealth tax on the american citizen that will show up over the next months and years as inflation, and requires no pesky taxpayer approval.

    Regarding Mr. Murphy's inquiry, I have no direct evidence that Bernanke intended this outcome, however, the changes in the relationship between M2 and the monetary base during the past 12 to 24 months is suspiciously similar to what happened in the early 1930's. It also shows a big increase in monetary base but little inflation. A student of this period like Bernanke could certainly have picked up some tricks on manipulating the system.

    Unfortunately this action resulted in funding large increases in government spending to the detriment of the private sector which didn't return to growth until after WWII. We may be looking at 10 to 15 years of no growth.

  3. @Bob and eFinancial

    I have been saying for some time that the gvt could use changes in bank capital requirements as a means to drive more buying towards Treasury securities. However, it wasn't until Bloomberg reported on the Q3 numbers that it became obvious as to how much the banks are being pushed to absorb Treasurys.

    I think Bernanke knows what he is doing. I just don't see what kind of encore he can pull in Q1 of 2010, when a quarter trillion needs to be raised.

  4. Wenzel - It won't take an encore, just a continuation of the current performance.

    As a banker during the 1980's I was confronted by the power of the regulators. They simply used the power of the government to force the liquidation of whole portfolios. Banks throughout the US were subject to this. When it was showed that the loans were performing and in compliance with their terms the regulators let us know they didn't care. Their command was "...we gave you this franchise and we can take it away..." There was no further discussion. Just submission to force and coercion.

    The cash generated was used to support the bureaucrats liquidity needs including govt. bonds.

    The only difference now is the scale and the fact that the Federal Reserve is implementing this policy rather than the Office of the Comptroller of the Currency. The power comes from the federal government and no technical detail can stop them. The top ten banks have about $4.4 trillion in total assets, more than enough to handle $500 billion in government debt.