Wednesday, December 10, 2008

Now the Fed wants credit not just to extend it

TOPIC: Fed issuing its own debt


It’s kind of like my young daughter getting ‘her own’ credit card…
her credit card helps me, yes, and she is responsible but it's a black hole in my debt outstanding...

Conclusion preview: I don’t like it.

Issues:
Apart from the issues mentioned in the WSJ article I wonder what would happen if the Fed issued debt and it began to trade at an increasing spread to treasury paper? Do we really want the market to put an additional risk rating on our central bank? This is a VERY BAD idea. Better for the Fed to ‘live off of’ the treasury’s own debt rating than to slot a new one into the mix – especially given what is going on with ITS balance sheet lately. Once bond ratings go south they go south fast.


Risks
Does the Fed really want private sector analysts looking at its balance sheet and assessing the value of its bonds and other assets? Or does the Fed assume 100% backing by treasury to keep its rate equal to that of T-bonds and notes?


Its not nice to fool CONGRESS...
If so, the move is a literal end-run around the debt ceiling. Congress WOULD NOT LIKE THAT. The debt ceiling is crap but it is law and Congress uses it for its owe (tawdry) political purposes. Congress would not want the Fed to circumvent it.


Possible or just fantasy?
A second order of business is does the Fed have the authority? Whatever the answer to this question – I do not like the prospect.


Other steps could work better
I Agree with Wrightson’s Crandall (see WSJ story) that the Fed would do better to stimulate the economy using vehicles that essentially dis -intermediate if banks continue to refuse to lend.


CONCLUSION:
I do not like this at all



Seuss Meets Joyce to make a point…



I do not like it
Ben I don’t
I do not like it
… and I won’t


I do not like it on a boat
I do not like your bonds to float

I do not like it no not me
Not bond issues or equity

I do not like the Fed to leverage
Private sectors’ bloody hemorrhage

I do not like it here or there
I do not like it anywhere

Only God can make a tree
And debt was meant for Treasury


ONLY!

STORY:
Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
See link below for full WSJ story…

http://online.wsj.com/article/SB122888021757894023.html?mod=testMod