The Treasury Dept. sells bonds and notes to raise money to pay the deficit.
No, not quite. The Treasury conducts a regular weekly auction at which the government's debt is either sold at issue or is rolled over from previous issuance. The Congress and FED decide what percentage of the money coming in from these auctions is used to retire existing Treasury debt, if any. Maybe, as is the case now, there is a need for new issuance. If the country is in surplus as it has been for several years until 911, the surplus has been used to retire outstanding debt. This is a choice of Congress.
The fed releases funds to member banks to inject liquidity.
The FED buys and sells both government and non-government debt which has the instantaneous effect of increasing or decreasing federal reserve bank's reserves. These reserves represent federal reserve credit upon which commercial banks and other institutions may base their own money creation activities. These institutions may or may not borrow what the FED makes available, and this is at the heart of the matter of why interest rates are so low.
FED makes plentiful reserves available, but banks don't want to borrow, because they don't want to make loans. They don't want to make loans because they don't trust that anyone including the world's greatest corporations will be able to pay them back. Thus, FED pushes on a string.
To tighten, it declines to lend member banks the funds they request.
If FED loaned them all they wanted, that doesn't mean there wouldn't be de facto tight money. That's what we have now. The banks think the environment is too risky to make loans. So they have a default tight money position while they're drowning in reserves.
The discount rate is the rate of interest that member banks pay to borrow from the Federal Reserve.
The discount rate has become a victim of AG's scheme to gain complete control over the free market in money. The discount rate no longer functions like it once did. It's the proverbial fifth wheel on the money wagon. The inter bank market which determines the fed funds rate marks its own rate to FED's posting rather than either to the constraints of supply and demand for money or to some ethereal disciplining rate that members would get by going to the discount window. The result is that there is no free market in money and the lending rate of reserve banks has been rendered superfluous.
The FED's price fixers have the once mighty and very free market for money under their incompetent control. They have already precipitated the greatest stock market downside in history by their pretense, and right now they are putting in place the ingredients to make sure the whole rotten US economic mess goes out in a bang.
I guess what's amazing though is that so many applaud AG as a great hero when actually he's been the worst chairman since Burns. Not to trash him too much, he has been very successful at what he considers important: keeping the FED independent of Congressional meddling, and nominally keeping inflation from developing into inflation. |
