***>To force the rate downward, it sells securities. To force it upwards, it purchases securities (mostly derivatives like "repos" and "swaps").<*** ----
Actually--that's just backwards. To force the rate down, it purchases. To force it up, it sells. -- --------- Original Message --------- DATE: Tue, 19 Aug 2003 12:25:16 From: [EMAIL PROTECTED] To: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED], "Wray, Randall" <[EMAIL PROTECTED]> Cc: >Date: Tue, 19 Aug 2003 09:18:05 -0500 >From: "Wray, Randall" <[EMAIL PROTECTED]> >Subject: RE: still on Question 2 >To: <[EMAIL PROTECTED]>, ><[EMAIL PROTECTED]>, ><[EMAIL PROTECTED]>, ><[EMAIL PROTECTED]> > >bill >you still are not getting it. >the fed and treas adopt operating procedures to >ensure: >a) treas hits $5b balance at the end of each day >b) fed hits overnight rate target almost moment-by- >moment >c) treas checks never bounce >d) treas can always spend up to amt authorized by >legislature (regardless of tax revenue) > >all else is boring acctg and politics. >randy >------------------------- > >Reply: > >a, b, c, and d are undisputed. What remains open for >discussion is the spin put on them. Nothing about >these facts is inconsistent with the standard spin >that: > >a) treas hits $5b balance at the end of each day >*BECAUSE* Treasury deposits sufficient funds from its >commercial bank accounts daily to maintain the >balance in covering the checks that it writes during >the day. > >b) fed hits overnight rate target almost moment-by- >moment *BECAUSE* it has the monopoly determining >reserves through open market operations. To force >the rate downward, it sells securities. To force it >upwards, it purchases securities (mostly derivatives >like "repos" and "swaps"). It "fine tunes" through >tremendous churning so its target is hit almost >"moment-by-moment." > >c) treas checks never bounce *BECAUSE* just like you >or me, it makes sufficient deposits (from tax >collections and securities auctions) to cover them. > >d) treas can always spend up to amt authorized by >legislature (regardless of tax revenue) *BECAUSE* any >shortfall in tax revenue is covered by selling >securities. > >It is indeed politics, or still was until the >retirement of Wright Patman and Henry Gonzales. It >was the matter of intense conflict during the >nineteenth century. The question is (or was so long >as bona fide politicians still discussed it): Where >is the locus of power; is it with the banking >fraternity, or the elected representatives of the >people? > >You avoid the question by aggregating the balance >sheets of the Treasury with the Fed, and speak as if >the question doesn't matter. > >It can be answered by observing what actually >happens. > >Treasury covers the checks it writes almost dollar- >for-dollar from tax collections and security >auctions. > >Whether it should or shouldn't is an entirely >different question. > >To my knowledge, the only time there was significant >deviation from this practice (at any rate since the >beginning of the last century) was during WWII. > >The Fed announced (privately) that it would support >the war effort and make available any and all funds >needed to further that effort. Treasury delivered >special issue low coupon bonds directly to the Fed in >any amount that Treasury wanted to deliver, and >Treasury's account was correspondingly credited. The >private commercial banks were required to subscribe >to an equivalent quantity of low coupon bonds >directly from Treasury, also bypassing the ordinary >markets. Transactions were continued in the ordinary >markets to "keep up appearances." This technique to >finance the war was kept secret from the nation's >enemies (and also from Patman's committee), which >restricted themselves to orthodox techniques to their >disadvantage. > >In terms of finance, the most orthodox of all the >belligerents was Germany . Britain was possibly >slightly less orthodox than Germany. Japan's was >similar to Germany in that it supplemented orthodox >finance with plunder. (Russia was off the chart >since it was purely a non-market command economy.) > >The effect of requiring the commercial banks to >subscribe to securities equivalent to those >subscribed to by the Fed was to lock up reserves >accumulating from deficit spending during the war >that could have otherwise fueled inflation. As they >"matured" and were redeemed post war, reserves were >thereby gradually released into the system, not only >foreclosing the possibility of post-war depression, >but sustaining continued prosperity and American >dominance for decades. ____________________________________________________________ Get advanced SPAM filtering on Webmail or POP Mail ... 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