How Treasury works

The number of primary dealers grew to 46 in 1988 and then declined to 21 in 2007.[4] As the result of credit crisis, the number of U.S. primary dealers has fallen to a record low of just 17 firms — nine of which are foreign financial institutions. For instance, the Treasury quarterly refunding of $55 billion in three- and 10-year notes and 30-year bonds drew mixed demand Nov. 11-13 Nomura Securities International Inc, a unit of Nomura Holdings Inc, (8604.T) plans to apply soon to be reinstated as a primary dealer for U.S. Treasuries, the Nikkei financial daily reported in its Saturday morning edition. Though the Fed no longer implements changes in monetary policy by controlling the growth rate of the money supply, the monetary aggregates are still monitored by economists as an indicator of future economic activity. One measure of the money supply, real or inflation-adjusted M2, is classified as a leading economic indicator. In order from most narrow to most broad, the three nominal monetary aggregates published weekly by the Federal Reserve Board in the H.6 Release, Money Stock Measures are: 2 M1: The most liquid forms of money including currency in the hands of the public, travelers checks, demand deposits, and other deposits against which checks can be written.M2: M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.M3: M2, plus large-denomination ($100,000 or more) time deposits, balances in institutional money market mutual funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada. When the money supply grows, consumers and businesses have relatively more money in their hands with which to purchase goods and services. Therefore, in theory, faster money supply growth should be associated with faster economic growth after a short lag of perhaps two or three quarters. However, many important changes in how financial assets are held by the public have changed over time and the relationship between money supply growth rates and the economy has deteriorated. Why doesn’t the Fed still conduct monetary policy by controlling the size of the monetary aggregates? The Fed’s Purposes and Functions (2005) publication describes the change that has occurred over time in the relationship between monetary aggregates and Gross Domestic Product (GDP): “[T]he relation between the growth in money and the growth in nominal GDP, known as ‘velocity,’ 3 can vary, often unpredictably, and this uncertainty can add to difficulties in using monetary aggregates as a guide to policy. Indeed, in the United States and many other countries with advanced financial systems over recent decades, considerable slippage and greater complexity in the relationship between money and GDP have made it more difficult to use monetary aggregates as guides to policy. In addition, the narrow and broader aggregates often give very different signals about the need to adjust policy. Accordingly, monetary aggregates have taken on less importance in policy making over time.” In 2005 Fed trades with primary dealers averaged $550 million per day. The holdings of Treasury securities maturing in more than 11 years among primary dealers rose to $8.3 billion in the week ended Jan. 14, according to the U.S. central bank. The level is near the $8.7 billion reached at the end of 2008, which was the highest since reaching $9.6 billion in the week ended Sept. 25,
2002.

“The high level of inventory in coupons suggests a very grim backdrop,” UBS Securities LLC strategists led by Chris Ahrens wrote in a note to clients today. “We suspect that counterparties looking to sell positions into this capital-constrained universe are finding that dealers are not willing to bid aggressively to add to already-burgeoning positions.” FOMC minutes: Ready to purchase long term treasury securities. Can also open the term asset backed securities loan facility for small businesses and households. FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. William Dudley, head of markets at the Federal Reserve Bank of New York and an architect of the central bank’s response to the financial crisis. As the chief of the New York Fed, Dudley will become the only one of the 12 regional Fed presidents to have a permanent vote on the policy-making.. His old responsibilities for implementing U.S. monetary and dollar policy, conducting purchases and sales of Treasuries and maintaining relationships with Wall Street’s biggest bond dealers. The Fed’s assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations. U.S. employers slashed 2.6 million jobs last year, the most since 1945, pushing the unemployment rate up to 7.2 percent in December. Home prices in 20 U.S. cities declined by 18.2 percent in November from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Gross domestic product probably contracted at a 5 percent annual rate from October through December, the biggest drop since 1982, The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue. The Department prints and mints all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint. The Department also collects all federal taxes through the Internal Revenue Service, and manages U.S. government debt instruments. The head of the Department is the Secretary of the Treasury. The Secretary is appointed by the President, by and with the advice and consent of the Senate. Managing federal finances; Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.; Producing all postage stamps, currency, and coinage; Managing government accounts and the United States public debt; Supervising national banks and thrift institutions; Advising on domestic and international financial, monetary, economic, trade and tax policy - fiscal policy being the sum of these, and the ultimate responsibility of Congress. Enforcing Federal finance and tax laws; Investigating and prosecuting tax evaders, counterfeiters, forgers, smugglers, illicit spirits distillers, and gun law violators. Policy regarding the dollar is set by the Treasury but executed by the Federal Reserve when it buys or sells foreign currencies in the open market. By law, the Fed must follow the Treasury's instructions even if it disagrees with them. Changes in interest rates, which are the domain of the Federal Reserve, also affect the value of the dollar by making dollar-denominated financial investments more or less attractive to foreign investors. But changes in interest rates have much more of an effect on the domestic economy than operations in foreign exchange markets. (1) What role does the Treasury Department play? - It is the role of the Treasury to make sure that the U.S. government has enough money to fund the obligations of the U.S. government. Whether the government is running a fiscal surplus or deficit, it is their responsibility to determine how much money should be raised and when. It is also their responsibility to determine what the maturities of this debt should be. The amount of each offering is set by the amount of debt maturing (thus requiring refinancing) as well as any additional debt that may be needed above and beyond that (i.e. to fund that year's deficit). If you check, this is done thru weekly Treasury Bill auctions, quarterly refundings and other periodic treasury auctions such as the monthly two year note. These auctions are not conducted by Treasury. They are conducted by the Federal Reserve Bank of New York thru their network of recognized government securities dealers. The important thing to note here - these Treasury financings have absolutely no impact on the money supply. They simply determine how much Treasury debt is outstanding (i.e. the national debt). (2) What role does the Federal Reserve play - Besides facilitating the Treasury's effort to fund the operations of the government, the FED is charged (along with many other things) with determining how much money is in the system. So how does the FED expand or contract the money stock? SIT DOWN AND PAY ATTENTION. All they have to do to create more money is to buy a Treasury bill, note, or bond from one of the recognized government securities dealers (i.e. $1MM treasury security goes to FED, $1MM is released into the system as payment). IT IS JUST THAT SIMPLE. It is from this money stock creation/contraction (that can be raised or lowered at will by the FED simply by buying or selling treasury or GSE agency securities), that then gets circulated throughout the financial system, that is the starting block for determining such things as M1, M2, and M3. POINT TO REMEMBER - only the FED can monetize debt and THIS IS HOW THEY DO IT. (3) With (2) above in mind, The FED right now has a portfolio of around $800B (my numbers are probably off, but the magnitude isn't). That means that they have created $800B of "money" (which gets multiplied many times over as it winds its way thru the banking system thru the mechanism of bank deposits and bank loans (less reserve requirements)). Up until the Bear Stearns bailout, all of this $800B of "money" was backed by a portfolio of U.S. Treasury and Agency securities. With all of these "clever" new financing vehicles that were created by the FED to bailout Bear Stearns and to keep the IB's and money center banks afloat, roughly have of this $800B AAA+ portfolio has been loaned out thru the Discount Window in exchange for toxic waste garbage (sub prime MBS, etc.). [It should be noted here that the FED does not own this garbage. It is simply financing it for the street since no one else will. The hope is that they will be able to get their original securities back (and get the garbage off their books) when the credit markets normalize.] What role does FNM and FRE play? - These two GSE's are the only reason that we have a functioning 30 year fixed rate mortgage market. Reason? As government sponsored enterprises, they have long enjoyed a competitive advantage in terms of how they can fund themselves. They have historically paid only a slight premium over the level of treasury (i.e. risk free) interest rates (for any given maturity) for their money. As a result, they have been in a much better position than any private sector mortgage provider to be able to "lend long" and "borrow short". It should also be noted that FRE/FNM are the bedrock of the secondary mortgage market in the country (since they own roughly half the residential mortgages in the country and process many others in one way or another). I haven't looked in a long time, but it is my guess that the average duration of FRE and FNM's 5T of debt is under 3 years (REMEMBER THIS POINT). List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York BNP Paribas Securities Corp.
Banc of America Securities LLC*
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.*
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.