Hi John..
I would love to hear your take on this when you have a moment..This is the type of thing that makes me think the well is truly dry.
usatoday.com
Fed may purchase private bonds
By Dina Temple-Raston and Jonathan Weisman, USA TODAY
WASHINGTON — The Federal Reserve could for the first time begin buying corporate bonds within the next several years because the U.S. Treasury bonds it now buys are becoming scarce, senior government officials say.
Such an unprecedented foray into the private market is under study by the nation's central bank and would require congressional approval. Sources familiar with Fed thinking say central bankers could seek legislation from Congress in 2 years and invest in the private bond market by 2005. The bonds are a form of debt that companies issue to raise money.
The move "would be significant," says David Jones, chief economist of Aubrey G. Lanston & Co., a Wall Street bond trading firm.
One reason is that it could open the door for other government agencies to invest their reserves. The Social Security Administration, which now holds only Treasury bonds, could invest in the private market to increase the rate of return and improve the retirement system's long-term solvency.
Advocates of private investment could argue that if the Fed is able to insulate its corporate bond investments from political meddling, the Social Security Administration could, too. That argument could come up today in San Diego, where President Bush's Social Security commission holds its first public hearing on plans for overhauling the program.
If the Fed isn't careful, it could be seen picking corporate winners and losers. Jones says the Fed could roil markets by influencing the interest rates of the "high-quality corporate bonds they are buying and low-quality corporates they aren't buying."
To prevent that, the Fed is considering investing in mutual funds that hold an array of bonds that would eliminate any appearance of corporate favoritism.
The Fed is considering such a dramatic change because as the federal government pays off the national debt with budget surpluses, the Treasury bonds issued to cover the debt are becoming increasingly scarce. Current projections are that the $3.3 trillion debt will be virtually retired by 2010.
"Whether it's the Fed or Social Security, one day there will be cash to be invested outside the government," says Gary Gensler, a former Treasury official who helped develop President Clinton's proposal to invest the Social Security surplus in the stock market. "It just happens that the Fed will be the first one there." The Fed has no plans to purchase stock.
The central bank buys and sells government bonds to influence interest rates. When it buys bonds, it pumps cash into the economy and lowers short-term rates. When it sells bonds, it takes cash out of the system, and interest rates rise. The Fed holds $511 billion in Treasury bonds.
If the Fed adds corporate bonds to its holdings, that could give ammunition to many Democrats who advocate investing Social Security's reserves in the private market instead of just putting the money in Treasury bonds.
Bush argues that only individuals should be allowed to decide whether to invest some of their Social Security taxes in stocks and bonds by setting up private accounts.
"This is becoming what the Social Security debate is boiling down to," says Michael Tanner of the Cato Institute, who favors Bush's approach. The Fed's investment in private bonds could bolster the argument of opponents of private accounts, he adds.
Fed Chairman Alan Greenspan ardently opposed Clinton's plan to invest some Social Security reserves in stocks, but Greenspan hinted in February that the central bank might have to consider buying private bonds as the national debt shrinks.
"It was Greenspan who raised the red flag" on Washington invading Wall Street, says California Rep. Robert Matsui, the senior Democrat on the House Social Security subcommittee. "Now it's the Fed that's going to do it." |
