Right, but the issue is they may not have $250k on hand for everyone who is insured. (Essentially no different than the banks needing enough reserves to cover withdrawal amounts.) The "implicit" part essentially means Congress will act on their behalf if needed. Which means the mechanism is to sell Treasuries to the Fed, who pays for it by printing money. I don't know if that's great option in the context of the highest inflationary period in 40 years.
Because they are pocketing the difference by arbitraging between the government (who issue the treasuries) and the Fed (who is the ultimate buyer) since the Fed cannot buy treasuries directly from the government. It's just a complicated way for the government to print money and hand it out and in this case banks are able to act as the middleman and earn money on the spread.
It's a disgraceful system that is extremely morally questionable.
Oh, yeah, I forgot that individuals can buy Treasuries directly from the government, I was thinking they only could on the secondary market which would not have been responsive to the query.
Treasury rates are set by a market auction, the Fed can't drive them down just by printing money. If investors anticipate inflation, they will factor it into their bids.
I guess whether you think the negative effect of the bailout on savings and such were worth it depends on whether you think the entire insurance market almost collapsed.
If they bought the bonds from the treasury instead of the market, the newly printed money would be in the hands of the treasury. They want it in the hands of the private sector - which makes sense.
Maybe a dumb question, but why not buy short term treasuries instead of putting it in the bank? Any amount of money in treasuries has a strong implicit guarantee from Uncle Sam.
"The problem is that there is a limit to how much treasuries you can sell to the market."
Why is there? Given that Federal spending puts the reserves in place with which Treasuries are purchased, how can there be a limit?
It's just an asset exchange.
"No one wants to buy those treasuries at the proposed rates and volumes anymore."
(i) What is the bid cover on the latest auctions
(ii) Why do you think that matters anyway? The Fed can just leave the bank reserves in place - as it is doing by QE.
Why can't they just pay the interest with newly-created money?
I mean, that might not be how things are set up right now, and it would make their position even more negative since newly-created cash is a liability on their balance sheet and they didn't get an asset for it. So maybe at the moment it's on the treasury to make up the difference. But I don't see a fundamental reason why that needs to be the case, it seems incidental to the current setup.
And yeah, even under the current system the treasury could sell bonds to fund the shortfall, and then the Fed could just buy those bonds (via the market) and keep them on their balance sheet, rolling over forever and so effectively loaning the money to the treasury at zero interest forever. So that's just the same thing but with extra steps.
So if banks are super desperate for Fed funds, but actually have Treasuries to put up as collateral to borrow those funds in the overnight market, why don't they just sell their Treasuries instead, or let them mature, and hold more cash?
Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
sold by the same people who are selling you "sun goes nova" insurance
US treasuries can be paid out with created accounts. this is US law. inside the US, treasuries essentially cannot default by definition while the government and banking system is intact. if the government and banking system dissolve, who is going to pay out these claims and how? nonsensical
So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.
But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.
I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.
Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation of the actual present value of that capital at that time).
Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.
But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.
That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.
My open question is whether the current system is the only way, yet alone the best way, to practically achieve this goal?
> include ordering the Fed to honor Treasury overdrafts
The Treasury hasn't come close to proposing over drafting. It would sell Treasuries and then have cash. If that became problematic, it would mint. The Fed cannot, by law, lend money to the Treasury. It can't even purchase Treasuries from them directly.
The Fed already announced their solution. They are making loans available to those banks based on the acquisition cost, not mark-to-market value, of those treasuries.
I’m afraid you’re the one who doesn’t understand how it works. The banks are buying treasuries from the US Govt with customer deposits, which are then being devalued as bond yields rise. They are then being forced to liquidate those devalued bonds before maturity to cover withdrawals. There isn’t a hedge fund on the other side.
Or am I wrong on that understanding?
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