long-term rising oil price concern
Tuesday, March 1, 2011
Senator Mark Kirk, R-Illinois
Federal Reserve Chairman Ben Bernanke
Opposition to State bailout? Accelerated borrowing to bail out States? Deferring payment from States on loans made by the Federal government?
It is a Congressional matter.
K: In your testimony on page five, “We are considering providing additional monetary accommodation through further asset purchases. In November, the committee announced that it intended to purchase an additional $600 billion in long-term Treasury securities in the middle of this year.”
In more layman’s terms, you’re talking about lending money to the U.S. government? Correct?
B: Well, not exactly, because we are buying these securities on the secondary market. So, somebody has already lent the money directly. But, yes, we are holding government debt.
K: My point exactly. Sec. 14 of the Federal Reserve Act legally prevents you from buying newly issued securities, which in layman’s terms would be lending directly to the the U.S. government.
B: That’s why we are not doing that.
K: Right, but instead what yu do is others lending to the U.S. government and then you buy their loans.
B: Well, we do that all the time, and even in most normal conditions.
K: Correct. The CRS says in modern times the Fed has always held Treasury securities as part of normal operations. But, now under QE2, it’s a $600 billion commitment? But the CRS goes on to say, “But, none-the-less, the Fed’s purchase of Treasury securities on Federal budget is similar to monetization, whether the Fed buys securities on the secondary market or directly from Treasury. When the Fed holds Treasury securities, Treasury must pay interest to the Fed as it would to any private investor. These interest payments, after expenses, become part of the profits of the Fed. The Fed, in turn, remits 95% of the profits to the Treasury where it is added to the general revenues.” CRS concludes, “In essence, the Fed has made an interest-free loan to the Treasury because almost all of the interest paid by the Treasury to the Fed is subsequently sent back to the Treasury.”
Would you agree with that?
B: Yes, we’ve remitted $125 billion to the Treasury in the last two years. So, it’s important to understand that what we are doing is not fiscal spending; it is in fact purchasing securities which we will then sell back to the market.
K: So, because of Sec. 14 of the Act, maybe the simple way of saying it is, “Others are lending money to the Federal government, you are purchasing those loans, and then the interest payments are being made to you because you are now the holder of … ah … you are the official maker of the loan are then remitted back to the Treasury.” So, maybe in layman’s terms this is one part of the government lending another part of the government money which would not lead to long-term confidence once the American people understood the basics a little bit better?
B: Well, it should be added that we also have a funding cost and as interest rates go up we will have a liability cost as well as an asset cost. So, it may or may not be a return to the Treasury.
B: Monetary policy, even in most normal times, as the CRS says, involves buying and selling Treasury securities. We couldn’t have currency outstanding if we didn’t have securities to back them up.
K: We had a currency for many parts of our history without any Federal debt.
B: When was that?
K: Under the Jackson administration.
B: So this was before the Civil War. This was during the period when individual banks issued currency. We didn’t have a National currency.
K: It’s possible to have currency without a trillion dollar debt?