Mosler seminar/treasuries/zero bid

["Gregoire de Nowell (ci-devant)" <GN842@xxxxxxxxxxxxxxxxx>]

Mosler reiterated recently that the govt "must" offer T-bills
to support the interest rate.  We had a very interesting off-line
discussion in which he clarified to me--I don't know if this is
still his position--that the "must" is a judgment based on his
empirical watching of what the Fed does.  I asked him about
why the "zero bid" should be avoided at all costs.

To my surprise, he answered that it might be preferable to
allow zero bid to occur.  This led to a very intersting discussion
about the Fed's management role which I can't repeat today.  But
I think it is useful to point out that the "must" in this sentence
is more reflective of a notion that "this is deeply rooted
practice" rather than "a necessity without which the banking
system would collapse."  Warren--I'm sure he'll correct me if
I'm wrong--appeared to think that a zero bid might force a
lowering of interest rates (and a change in cash holding preference)
and that this might not be a bad thing.  I.e., that it wouldn't
be the end of the world (at least for consumers) if the Fed
Reserve allowed occasional zero bids (we never really discussed
the desirable theoretical level of frequency of zero bids).

It may seem pedantic, but in the heat of making an argument
I think it is helpful to remember that in Warren's complex
argument about the functioning of the central banking system,
the notion that a reserve surplus "must" be offset by a T-bill
offer has a different impact on our understanding of his
argument.  To me, the "must" is easily interpreted as a
sine qua non condition; and from it I incorrectly inferred
that the government "must" support the Fed funds rate.  It
is empirically the case that that is what the government
*does*, but in our off-line discussions Mosler has made mention
of zero bid occurring in other central banking systems,
indicating that there is a policy preference issue to the
whole notion of supporting the interbank lending rate.

greg nowell