Re: Mosler seminar/treasuries/zero bid

[Warren Mosler <mosler@xxxxxxxx>]

Greg,

Yes.  Note that I always say (I think) that tsy secs support
the rate desired by the Fed.  'Must' is always followed by
the reason, or motivation, such as avoiding a 0 bid, or
supporting a non-0 rate.  If the Fed does vote for a 0
overnight rate, then no tsy secs would be necessary.

Warren

At 03:00 PM 3/7/97 -0500, you wrote:
>
>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
>
>

Warren B. Mosler
Director of Economic Analysis
III Finance

See:

"Soft Currency Economics"
=========================
http://inca.gate.net/~mosler/softecon.html