I am not sure where to begin here. A blogger named Chris Martenson wrote a story which alleges that the Federal Reserve System is secretly monetizing the debt. The Zero Hedge Blog links to the story and describes it as a phenomenal piece of investigative reporting. The story also received coverage at the high profile left wing/progressive blog the DailyKos. The author there was nearly apoplectic.
The story is that the Federal Reserve in its Open Market Desk intervention today purchased $4,750,000 of the recently issued 7 year note.
The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.
So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.
I guess I am not so good at marketing myself as I wrote about this on April 2, 2009. So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.
The reporting and discussions on the topic at some of the other blogs contain factual errors which should make one suspect the bona fides of the authors on this topic.
Here is the entire piece posted at Zero Hedge:
In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace.
The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.
Some will counter that the distinction is one without a difference but in discussing such an esoteric topic and in presenting oneself as expert on that topic one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.
At that point I would stop reading the story.
The Zero Hedge story also suggests (I think though I am not 100 per cent sure on this point) that the Open Market Desk bought the bonds from one primary dealer. I do not know how that information was derived and it is certainly possible but the more likely case is that the Open Desk bought the bonds from multiple dealers.
Enough on Zero Hedge and now some comments on the Chris Martenson blog story.
As I noted at the outset he is very late in unearthing the story.
Mr Martenson asserts that the Federal Reserve has quietly bought the bonds and secreted them away on its balance sheet. (That is nearly verbatim.) Well it does not appear that they did it so quietly or so secretly as he was busily posting the results of that transaction and discussing it in the blogosphere not very long after the transaction took place.
Mr Martenson also avers that a more honest and direct approach would have been for the Federal Reserve to buy these bonds directly in the auction.
Let me say that I am not entirely certain on the next point but at 1120PM I feel confident enough to write it: I believe that the Federal Reserve can only buy securities from the Treasury when it rolls over maturing holdings. The Treasury only resurrected the 7 year note in March and consequently the Federal Reserve would have no bonds to roll in the auction. Ergo there lack of participation.
I will make certain of that point in daylight hours tomorrow.
The internet is a wonderful tool for the dissemination of information. Sometimes, though, authors can publish information and bend the facts to suit some sensational purpose and in so doing distort reality and the truth.