Money Question--Open Market SALES

Maybe this link will help you to understand the operation. Reverse operation.

quote:

---

It is important to remember that the FED does not issue government bonds, government bonds are issued by the US Treasury department. If the FED were holding a mature government bond the Treasury would be obligated to pay off the face value to the FED, just as if it were a private business or bank.)

---

LINK

Thanks for the help, Blakely. I'm still a bit confused.

In this money creation process, the Fed is buying securities by "creating money out of thin air" i.e. crediting the seller's account and thereby increasing the amount of reserves in the system. But when it sells them back, what is it getting in return? Federal Reserve Notes? Where does that shite go? If it goes back to the treasury, the money supply doesn't decrease. If it stays on the Fed's books, I don't see how they can ever permanently subtract from the monetary base.

I'll try to mull it over a bit more

quote:

---

But when it sells them back, what is it getting in return? Federal Reserve Notes?

---

The transactions are digital.

Don't think you are the only one mulling this over. A lot of really smart people have a lot of questions about how the FED is going to shrink their balance sheet. THE MBS purchases will be worked off over time. The ugly secret about the balance sheet is that these securities are probably not worth their booked value.

If the FED were to start selling into a bond market of thin buyers, it would cause bonds to suffer price losses and interest a rise in interest rates that would blow their balance sheet. As a country, the USA cannot afford to pay much higher interest rates on our debt. Banks buying back bonds in this environment would experience same kind of losses.

Some feel the FED is boxed in. It's really more complicated than this, but trying to keep it simple.

JMO, but I think that Bernanke will be trying to keep the balance sheet pretty steady for quite a while. I think that the .gov is trying to find something (i.e. Green Energy) that would create a true economic expansion like the tech expansion to try and get out of this mess. So far, most of the money has gone to create a bubble in student loan debt and commodities.

quote:

---

The ugly secret about the balance sheet is that these securities are probably not worth their booked value.

---

Agency MBS =/= Private Label MBS. They aren't even close to the same thing, and the Fed only holds one of these. It's far from an "ugly secret" about private label mbs, unless you consider a global credit crisis, halving of major capital market indicies, and a ~2 year whipsaw recession to be secrets.

quote:

---

It doesn't "sell them back." The Fed sells securities on the market, usually to banks or other institutional investors. The fed debits the buyer's account (at the fed) and credits cash.

---

So its basically a balance sheet switch. In an OMP, the Fed picks up an asset (say, Treasuries) and an offsetting liability (cash). Conversely, in an OMSale, the Fed picks up cash and loses the treasury. Am I correct?

And I understand Cash on the Fed's account can't be loaned out by other banks and so isn't part of the MB technically. But I just was under the impression the Fed had to remit that (seignorage) profit to the treasury.

quote:

---

But I just was under the impression the Fed had to remit that (seignorage) profit to the treasury.

---

Profits must be remitted to the treasury. Cash received for selling a security is NOT profit.

Its bizarre from an accounting standpoint because, like gov accounting, there isn't any equity, because there isn't any owners, and there isn't any retained earnings.

Perhaps a better word rather than "destroy" money is to say the Fed retires the FEDERAL RESERVE NOTES that return to it via, say, Open Market sales?

meant to say net worth.

For anyone else who might be interested, I found this link and it really helped answer my initial question:

LINK