What if the Fed could say no?

[Elok]

That is, refuse to lend cash to Congress? This came up over the course of discussions with my libertarian-leaning GF after reading Something Awful's Awful Link of the Day (Liberty Dollars, the poorly-thought-out private currency). I reflected that the problem is not that "the Fed is killing us all with inflation to ease its debt," assuming that grim diagnosis of the economy is true. I don't know economics all that well.

But I do know that, no matter what kind of asinine things Congress wants to spend money on, the Fed is obligated to pony up the dough. It then gets to have fun balancing the continual deficit spending against the risk of killing our economy. The plain answer, to my uneducated eye, is to let the Fed say "hell no" if need be. The only risk is that it would give the Fed absolute power. I suppose that could be counterbalanced by allowing Congress to spend whatever currency it could get a loan from...but again, I don't know economics at all well (or even just "at all"). What would happen, do you think?

I should probably add a poll, but I can't guess what the options should be.

[KrazyHorse]

The real question is

lend cash to Congress?

When did they start doing this?

[KrazyHorse]

Congress borrows money through the Treasury department, not through the Federal Reserve.

The Treasury department auctions T-bills to the public at some figure below face value which promise repayment at a specified future time. The effective interest rate (yield) on those t-bills is determined by the sale price. The Treasury department issues t-bills in the amount determined by Congress, and the proceeds from the sales are deposited for use by the federal government. As a department of the federal government the Treasury Department can't say no. The debt policy of the US is not determined by the Treasury Dept but by Congress, as in the US constitution. The Treasury dept can only try to implement Congress' requests in the most efficient and effective way possible.

[KrazyHorse]

The federal reserve, on the other hand, is a system of 12 regional federal reserve banks which loan money to each other and to private banks at a federally-targeted rate (the fed rate/interest rate you see quoted in the news). These loans are for periods of between overnight and 2 months, and must be backed with deposited collateral in the form of T-bills. When the term of the loan expires and repayment plus interest is made the T-bills are returned to the owner.

[KrazyHorse]

http://en.wikipedia.org/wiki/Treasury_Department

http://en.wikipedia.org/wiki/Federal_reserve

http://en.wikipedia.org/wiki/Treasury_bill

[Elok]

Whoops. Well, I guess I know even less about this than I thought. Should I just delete this thread, or should my ignorance be left up for posterity?

[Eroberer]

No, lets leave it here. Can anyone give a concise definition and economic meaning of the so-called "yield curve," which is apparently inverted these days? I have a feeling that it has something to do with these two concepts. Wikipedia's page was a tough read last time I tried it.

[KrazyHorse]

The yield curve which is generally talked about is the annualized yield of treasury securities (of which there are 4 types; treasury bills are for the shortest time periods of one month to 6 months, while treasury bonds go for up to 30 years) versus their time to maturity. Generally speaking the yield should go up as the term increases (since longer time periods imply higher risk). If a 1 month t-bill yields an annualized rate of 5% it would be normal to see a 6 month t-bill yield an annualized rate of 6% and a 30 year t-bond yield an annualized rate of 7%, say.

An inverted yield curve would be the other way around (7% for one month, 6% for 6 months and 5% for 30 years)

If there is an inverted yield curve it generally implies that the market as a whole is pricing in an anticipated fall in interest rates (if interest rates fall then people who have locked their money in for a longer time period are doing better, so more people today want to lock their money in for longer, so the price of t-bonds (on the secondary market) will rise, decreasing their yield).

[chequita guevara]

Yet again, Canadaians prove their innate superiority by knowing more about the American government than Americans know themselves.

[KrazyHorse]

What can I say

[Dinner]

Originally posted by chegitz guevara
Yet again, Canadaians prove their innate superiority by knowing more about the American government than Americans know themselves.

I don't hink Elok is an American.

[KrazyHorse]

I think he's from around here (MD)

[Dinner]

All these years I thought he was Belgian.

[KrazyHorse]

That's Colon

[Eroberer]

Funny, I thought Colon was English, but then again I haven't been here for a while. I might've been thinking of Provost Harrison

That's a good explanation of the yield curve that I can understand. I've really been trying to increase my understanding of economics lately, so I could probably come up with a few more good questions. Like, what do you all use to trade stocks (assuming you do)? How does one go about taking up a short position on a stock? I think I understand the method, but I don't know the actual institutions that you have to go through to do these things. Anyone feel like answering this?