Sshhh ! The $14,000,000,000 Secret .. .. .. .. .. .. .. .. ....
by Charles Mackay, Tuesday March 08 2005
The Treasury Department with the help of the secretive Federal Financing Bank created $14 billion out of thin air last November 15 to make a critical bond interest payment.
As you may remember last fall, the nation smacked up against its federal debt limit on October 14. Congress then refused to enact an expanded debt limit bill in the run up to the November elections. Lacking legal authority to borrow additional funds, the Treasury faced a significant problem on November 15 when it needed to make a substantial interest payment. Having no alternatives left, the Treasury turned to the secretive Federal Financing Bank (FFB).
Established in 1973, the FFB basically is direct agency of the US government whose purpose is to arrange financing for other government agencies not funded by the Treasury. (Not to be confused with another type of agency - Fannie Mae and Freddie Mac - which are technically called agencies but are not part of the US government and not funded by the FFB). The FFB is so secretive it issues its financial reports only with a two year delay, and press releases months after the fact.
The FFB first got attention in the 1994 to 1996 period, but in recent years has settled back into virtual obscurity. In 1994, when the 'peso crisis' erupted south of the border in Mexico, then Treasury Secretary Rubin engineered a novel approach to bailing Mexico out of a debt payment problem. The somewhat mysterious Exchange Stabilization Fund (a joint Fed-Treasury operation) was called on by Rubin to provide $20 billion to Mexico. Although the Federal Reserve gave itself the authority to lend Mexico its share, the Treasury could legally only contribute its half through Congressional authorization. Congress balked. Rubin turned to the off-budget FFB for those funds. The FFB had been authorized since its inception to borrow up to $15 billion for general purposes. The ESF money was lent to Mexico and this defused the peso crisis, but Congress continued to question whether Rubin and the FFB had the authority to lend money for a non-agency purpose.
Because of those problems, by 1996 Treasury Department lawyers formulated more specific opinions about what the FFB is authorized to do. One important decision was that the FFB could lend money to the federal Civil Service retirement plan and the huge Thrift Savings Plan (a 401k type plan for federal employees). Conversely, those retirement plans were allowed to hold FFB bonds and treat them essentially like Treasury bills and notes.
Fast forwarding to the present, the FFB can and still does use its unlimited off-budget borrowing authority when it deems necessary. Other than supporting routine financing of the US Post Office and regional power authorities, the FFB has borrowed money in recent years to help get the Treasury through repeated debt limit problems. When the debt limit bills were eventually passed, the FFB was paid back by the Treasury in short order - until in the latest fiscal year.
Last November, in a spinning wheel of transactions, the FFB issued its debt to the federal retirement funds. The funds transferred $14 billion of non-public Treasury debt they held back to the FFB in exchange for the FFB debt. The FFB then deposited the Treasury debt with the Treasury itself in exchange for an IOU. Lastly the Treasury used its own debt as collateral to make $14 billion in interest payments to finish the circle game. The net effect here is that the Treasury has issued $14 billion in new money - which is off-budget and not counted as part of debt subject to the debt limit. (Please note the $14 billion was counted in budgetary spending, just that the debt was not included with 'public debt' totals).
So the Fed isn't the only one issuing US dollars. Electronic dollars issued by the Treasury are virtually the same as those coming from the Fed. The process which the Treasury/FFB created money is ostensibly legal but seems to be making an end run around all budget financing rules.
The federal government plans to fund and retire the FFB debt in the fiscal year starting October 1, 2005. The Treasury will have to raise $14 billion in real money to pay off the funny money debt of the FFB. When that happens that spinning wheel goes into reverse and that funny fiat money disappears.
The $14 billion of fiat money created last November 15 affects the markets in the much same way that the Fed's repo operations affect them. Not surprisingly, the $14 billion in new money had a positive effect on markets around that time.
Maybe in about two or three years the FFB will release more information about the $14 billion transaction. Until then, let's keep this a secret.
posted Tuesday March 08, 12 59 AM ET
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