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fomc | 2,001 | Sure! It's shooting a mouse with a cannon. | 10 |
fomc | 2,001 | I ask the Secretariat not to make that alteration! [Laughter] You got it right the first time. | 22 |
fomc | 2,001 | Meanwhile, back at the ranch! There's also a point Don raised early in his comments that I think is important, which is that we have a dwindling supply of Treasury securities and what is the social value of that? Is it better to have that dwindling supply of securities in the System portfolio or is it better to have th... | 439 |
fomc | 2,001 | President Minehan. | 4 |
fomc | 2,001 | Thank you, Mr. Chairman. It's good to have heard such diverse opinions in this discussion because I, like several other people, have read this material and re-read it and have had different thoughts at different points in time. So it's really a plus to have a wide-ranging discussion about some of these issues. I also w... | 1,284 |
fomc | 2,001 | President Guynn. | 4 |
fomc | 2,001 | Thank you, Mr. Chairman. As Mike Kelley often says, at this point of the go-around everything has been said. So I'll try not to repeat it all just for the sake of adding weight to the argument. Before I proceed, I also would like to commend the staff for these terrific papers. First, I want to associate myself with tho... | 596 |
fomc | 2,001 | Incidentally, on the endgame point, I think it's well worthwhile to stipulate that Treasuries are not gone forever--that this is an interim period, as President Poole mentioned. There is a critical point when we will be running very substantial unified budget deficits and Treasury issues are going to be coming back in ... | 227 |
fomc | 2,001 | Thank you, Mr. Chairman. First, let me add my congratulations to the people who wrote the papers. I thought it was a fine job. Mr. Chairman, I think this last point you made is very important. We should keep this in perspective as we make our comments and as we plan what we're going to do. I don't have firm views on ma... | 1,030 |
fomc | 2,001 | Thank you. President Parry. | 7 |
fomc | 2,001 | Thank you, Mr. Chairman. Many of the points that Michael Moskow made are similar to those I'd like to make. I'd start by saying that the material certainly provides a lot for us to digest and I would assume that we're just beginning the dialogue on a lot of these issues. Also, I feel as though we probably would benefit... | 400 |
fomc | 2,001 | Governor Kelley. | 3 |
fomc | 2,001 | Thank you, Mr. Chairman. I've learned an enormous amount from the papers, and I appreciate that. I also want to say that I've learned an enormous amount from the comments that have been made around the table here today by so many different people. I have to confess that I'm still having trouble getting over an acute st... | 728 |
fomc | 2,001 | Thank you. Any further comment on this round? | 10 |
fomc | 2,001 | I wanted to make an additional comment because I found very interesting the point that you, Governor Kelley and Bill Poole raised about an interim period of 8 to 10 years, or however long it might be. I'm thinking of that in combination with the greater potential now than, say, this time last year, that some Social Sec... | 162 |
fomc | 2,001 | I think it's best in this context to think of the Social Security Trust Fund as nonexistent. It's an intra-governmental transfer. | 25 |
fomc | 2,001 | Yes, I realize that. | 6 |
fomc | 2,001 | That's the best way to look at it in terms of Al Broaddus' suggestion. Let's take just two examples of RPs on the asset side: RPs limited to private RP securities or RPs involving only government securities. What we'd really be doing, if we leave fiscal policy alone, is shifting the assets from one government sector to... | 134 |
fomc | 2,001 | Right. | 2 |
fomc | 2,001 | In my view it's useful to think of these alternatives not in a flow sense but in a balance sheet sense and the swapping of assets. Most of what we have discussed around the table today is best judged in that manner. I think the strong point in Al Broaddus' argument is that it's better for the Treasury Department than f... | 104 |
fomc | 2,001 | Could I pose another question on this point? I don't recall the numbers but, even though this is an interim problem, it's my impression that it is a huge interim problem. | 35 |
fomc | 2,001 | It is. | 3 |
fomc | 2,001 | That is, the asset accumulation would be something on the order of $2 trillion as I remember the numbers. Isn't that right? | 26 |
fomc | 2,001 | It will depend, obviously, on how quickly and to what extent the surplus is frittered away. And there are physical limits to spending it or refunding it in taxes if only because we're going to get congressional gridlock that will prevent that. But at the moment, if we take our structural productivity numbers even remot... | 99 |
fomc | 2,001 | Right. And aren't we talking about assets rising, even under moderate assumptions, to something like $2 trillion? | 22 |
fomc | 2,001 | If we think in terms of the problem starting in 2007, the government is going to start to accumulate assets then even though there is still some debt on the books. If we talk about a unified budget surplus in current services of about $500 to $600 billion annually, then depending on how many years beyond that we want t... | 87 |
fomc | 2,001 | No. | 2 |
fomc | 2,001 | That will be taken off the table. But you're quite right that the potential amount is quite substantial. MR.GRAMLICH. So, it's not like one of these interim problems that we deal with from May to July, is it? [Laughter] This is a very significant problem. While we ought to recognize that it may be over some day, we nee... | 92 |
fomc | 2,001 | Yes. And Jerry Jordan's view that just going through this exercise is of extraordinary value in and of itself is not beside the point either. We may never implement any of these options, but I bet we will find that this discussion and the work involved in it has been quite valuable to our understanding of the way the s... | 75 |
fomc | 2,001 | Mr. Chairman, I have a couple of quick comments. First, Mike Kelley summarized my main concern about this a lot more eloquently than I did, and I want to associate myself with his remarks. Second, one other point occurred to me during the discussion. While this may be an interim problem--and we don't know the magnitude... | 128 |
fomc | 2,001 | That's a very good point and one we should think about. | 12 |
fomc | 2,001 | That goes to the issue of the endgame. In my view the endgame needs to be a position where we somehow maintain our independence. That's really what this is all about to me. As for the argument that we need to share the burden with the rest of the government, I think there's a lot of public support for the Fed to be as ... | 111 |
fomc | 2,001 | Just one point: Our strategy needs to take into account the strategy of the Federal government because the government itself is going to be developing an asset allocation strategy as part of this process. | 36 |
fomc | 2,001 | I think that's a very important point. We can not be making our judgments independently of what the Congress and the Administration are doing. President Poole. | 30 |
fomc | 2,001 | I have one comment and one request. My comment is that if we have a portfolio of private securities, there may be aspects of managing the credit risks that would differ for us relative to a private portfolio. When we've looked at the issue of managing those risks, it has been discussed primarily as if we were a large m... | 148 |
fomc | 2,001 | I thought you were raising the issue of whether we would foreclose on home mortgages! [Laughter] | 21 |
fomc | 2,001 | We may not have a choice if there is a default. In any event, there may be some differences. What would we do if we ended up in bankruptcy court as a claimant? That's a more realistic example, if we have debentures in the portfolio other than home mortgages. Secondly, my request. Can we at least downgrade the security ... | 102 |
fomc | 2,001 | Well, why don't we turn that question over to the power-that-be! [Laughter] | 19 |
fomc | 2,001 | Who would that be? | 5 |
fomc | 2,001 | Coffee is available. I think we've had a quite extraordinary discussion so far. Peter Fisher will have the floor when we return. | 25 |
fomc | 2,001 | Let me make a correction or clarification of my earlier statement regarding my general estimate of when the unified budget surplus will go to zero and then turn negative. I said the period of surplus is likely to be 10 years or more. Let me just tell you what we know because I forgot to raise an issue related to this. ... | 429 |
fomc | 2,001 | Thank you, Mr. Chairman. Effectively, I'll just be recapping the discussion and recommendations on possible near-term approaches presented on pages 3 through 5 of the memo that Don and I sent to the Committee. I have some prepared remarks and I'm going to try to respond to a few of the issues members raised that relate... | 1,737 |
fomc | 2,001 | Question: How will you determine which foreign securities will be accepted as RP collateral? What is going to be the criterion for that? | 26 |
fomc | 2,001 | Let me make a couple of points. First, that's something we would explore in our feasibility study, and that's why we're not really asking you to authorize it yet. Second, I would remind the Committee that last fall we offered--and you agreed and the Treasury has agreed--to change our investment pattern in foreign curre... | 255 |
fomc | 2,001 | Similarly, what about the criteria for municipals? | 10 |
fomc | 2,001 | The category of municipals that we are able to purchase under statute is rather narrow, as the papers have made clear. It involves issues of very short maturity. I think we could also choose to set credit criteria or perhaps limit ourselves to state sovereigns, so we would not be opening ourselves up to the whole marke... | 96 |
fomc | 2,001 | Would you look at the liquidity of individual state markets? | 11 |
fomc | 2,001 | In this case we're talking about RPs, so we know the underlying instruments themselves may be illiquid. The question is whether we can get the clearing banks and the dealers to make them part of the pool of collateral that goes into the assets they pledge in an RP with us. What is modestly promising about both foreign ... | 152 |
fomc | 2,001 | Relative to its size? | 5 |
fomc | 2,001 | Relative to its size. But we wouldn't take much comfort from thinking that some segments of that market are liquid. None of those securities is liquid. | 29 |
fomc | 2,001 | Would the lights have to work in that state? [Laughter] | 14 |
fomc | 2,001 | I guess that depends on whether you're from Texas or California! | 12 |
fomc | 2,001 | Historically, how much have we seen in failed RPs? Have we ever run into a failed RP ourselves where the counterparty defaulted? | 29 |
fomc | 2,001 | I don't believe so. I'm sure that at the time of Drexel it crossed our collective minds and we worried about it. But I don't recall a failed RP in my time. | 36 |
fomc | 2,001 | Sandy was here at the time of Drexel. | 11 |
fomc | 2,001 | I don't think we've ever had a failed repo. | 10 |
fomc | 2,001 | Has anybody had a failure? | 6 |
fomc | 2,001 | Back in the '70s and '80s there were problems in the RP market--such as people pledging the same securities several times--but none involved the Federal Reserve. A few laws were changed and people went to jail. | 47 |
fomc | 2,001 | That's serious, but it has nothing to do with the RP market. That's more the felonious market. | 22 |
fomc | 2,001 | Right. | 2 |
fomc | 2,001 | Governor Meyer. | 3 |
fomc | 2,001 | Peter, a question: Part of the rationale for bringing in the municipal and the foreign sovereign securities was that the authority to operate in those instruments was available under existing law. That would give us the added flexibility to make it through a reasonable period as we entertain more challenging options. B... | 108 |
fomc | 2,001 | I don't agree that it does just the opposite. To make a correction, I believe the deposit accounts we hold for the GSEs are authorized by statute. So that's not a very useful break point. I know there are all kinds of legal issues surrounding the GSEs that we don't really want to get into. But signaling to the markets ... | 183 |
fomc | 2,001 | I will simply reiterate that it seems to me to reinforce the status of those entities as a government related-- | 22 |
fomc | 2,001 | Governor Meyer, I want to be clear. I certainly share the views you expressed in your earlier remarks about the preferability of a clean sheet of paper as well as the longer-term hypothesis that President Poole offered that if we are in Freddie and Fannie obligations, why not commercial paper and corporate bonds. I'm l... | 83 |
fomc | 2,001 | President Hoenig. | 4 |
fomc | 2,001 | Peter and Don, I understand why you want to diversify into the foreign sovereigns and why you dislike Fannie Mae becoming the benchmark and so forth, but let me ask you to speculate a bit further. The market would be informed as to why we were doing this and I wonder if there would be a political backlash in the sense ... | 118 |
fomc | 2,001 | Don and I both may want to comment on that. I certainly would agree with you that it's a risk. I think that our eyes would be closed if we didn't see that as a risk. We are in a rather awkward position. If we are too stern in the view that we should only be monetizing our own government's debt, I think that poses quest... | 297 |
fomc | 2,001 | And it certainly explains why we want to study state and municipals at the same time. | 18 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | That was one reason why we suggested that this simply be explored, to test a bit and see what the reaction might be and whether we could explain it in a way that would be fully understood. | 39 |
fomc | 2,001 | We certainly wouldn't go forward if we ran into significant negative responses. But it depends on how it's explained. | 21 |
fomc | 2,001 | It does point out how carefully it has to be explained not only to our most severe critics but also to those who immediately grasp it and understand it. | 30 |
fomc | 2,001 | Indeed. It's an issue we're getting into with full awareness of the implications of the central bank treading in areas where we have not been before. President Jordan. | 32 |
fomc | 2,001 | Peter, I'm probably going to need to ask a follow-up question to my first question because I think I can guess the answer to the first one. Suppose the Committee accepted part or all of your "B" proposal of pouring RP dollars into foreign debt, with or without municipals, but did not accept the first part of the propos... | 88 |
fomc | 2,001 | We would stop taking mortgage-backed securities, including those guaranteed by Ginnie Mae, and we would then be including in our repo book Freddie and Fannie straight debt. There is an aspect of that which may look as if we're giving an even greater preference to Freddie and Fannie debt than we are to issues backed by ... | 128 |
fomc | 2,001 | Now consider the possibility that you will find the notion of operating in foreign sovereign RPs politically acceptable. Suppose it's a good enough market to be able to do substantial amounts and it is working to meet all of your needs and the Committee's intent down the road is not only to seek authority to operate in... | 77 |
fomc | 2,001 | That's a difficult political issue on which I would prefer that others--perhaps those who live in this District--comment. As a market matter, I don't view it as a major challenge, given a reasonable time period to work it all out. | 48 |
fomc | 2,001 | Okay. Well, from a Committee process standpoint, often on issues like this we have found that once we start doing something, the burden of proof on those who think it is not a good idea and want to stop doing it is quite formidable. It sometimes serves our purpose, if we can get a consensus on our objectives down the r... | 91 |
fomc | 2,001 | Let me see if I read you clearly. I don't want to put words in your mouth, but I want to be sure I understand. You're envisioning going forward with foreign sovereign and municipal securities as a part of the RP book--putting aside the issue of volume--and setting a forward date for getting out of Fannie and Freddie st... | 81 |
fomc | 2,001 | Yes, that's conditioned on your finding the foreign sovereigns satisfactory for your purposes. | 16 |
fomc | 2,001 | I think that's in the feasible set. That would be an option to consider. I'm not sure we know enough now to determine whether it is feasible and, therefore, whether we would want to set that forward date now. That's part of the exploratory nature of the authority we're looking for in "B." | 60 |
fomc | 2,001 | Let's always emphasize when we're talking about foreign collateral that it's still a dollar RP. There is no exchange rate risk involved. If we were to run an exchange rate risk, that's a wholly different ball game. Governor Ferguson. | 44 |
fomc | 2,001 | I have a couple of questions, Peter. My first may be similar to what President Hoenig was asking. Just this morning we had a discussion about the long term. By doing this exploration of options for the short term, do you see risks that in some sense you might be front-running the Committee and creating a market expecta... | 159 |
fomc | 2,001 | I don't like the metaphor of either a cat's paw or front-running very much, Governor Ferguson. I don't think we're doing either one. Clearly, as Don and I have both said, it is our preference and intent to have the initial discussion of this be put forward through the Chairman's testimony and the Committee's minutes, i... | 125 |
fomc | 2,001 | Let me ask you two factual questions. The Chairman just said that there is no effective exchange rate risk involved. On page 5 of your memo, one of the things you say is that the margin needed to protect against both the price risk and the exchange rate risk, even for dollar RPs against foreign governments, is uncertai... | 94 |
fomc | 2,001 | It could be made almost zero. | 7 |
fomc | 2,001 | It can be made effectively zero with daily adjustment of the margins, which is how we would do it. The way I have thought of it is that we would in all likelihood be accepting a rather low rate of return on our RPs of foreign sovereigns because dealing with the System will be relatively unattractive from the perspectiv... | 127 |
fomc | 2,001 | One sense I would like to convey is that if we do this and the issue of exchange rate risk comes up, I would prefer to give up some return in order to minimize the exchange rate risk. | 40 |
fomc | 2,001 | That's how we've thought of it. | 7 |
fomc | 2,001 | Okay. My other concern is somewhat of an operational question. In terms of the short-term aspects of this, if there are clearing issues, settlement issues, and custody issues, is it your perception that those who run those kinds of infrastructure operations could easily get through the clearing, settlement, and custody... | 89 |
fomc | 2,001 | I think it's in the feasible set. I don't know how much software engineering would have to go into it, but it's something that several central banks have set up. We might have to use a broader set of custodians. We currently are relying on Chase and Bank of New York. We might well end up using Euroclear and some of the... | 133 |
fomc | 2,001 | Okay. | 2 |
fomc | 2,001 | President Santomero. | 5 |
fomc | 2,001 | I support your recommendation in "B" and I would even support a proposal to expand the set of instruments available to the Desk because I think it's important that you have the flexibility to operate as necessary in markets as they evolve. In practice, however, I believe we need to be careful about moving into sovereig... | 206 |
fomc | 2,001 | President Minehan. | 4 |
fomc | 2,001 | Thank you, Mr. Chairman. I, too, support Peter's proposal to explore the possibility of transactions in municipal and foreign government securities, recognizing that supporting his proposal is not saying that we're ultimately going to approve them for our portfolio. I say that because there are policy as well as operat... | 328 |
fomc | 2,001 | Amen! | 2 |
fomc | 2,001 | President Broaddus. | 5 |
fomc | 2,001 | Peter, if we were to go into foreign sovereign debt in a substantial way--to build on Tony's point that it would involve such a big change--do you worry at all about the possibility of political pressures being brought to bear with respect to the allocation of our holdings across countries? Might we in some circumstanc... | 85 |
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