• Peter Stella

Enabling the US Treasury to address the safe asset shortage and prefund covid 19 related spending

A Short Law to Enhance the Efficiency and Stability of the US Financial System

I propose a short law that would enable the Federal Reserve and US Treasury to remedy problems emanating from the fact that bank reserves are available only to US banks while treasury bills are available to all global financial market participants. The proposed law is similar to arrangements currently in place in Singapore, Mexico and Israel and may be most simply understood as institutionalizing the US Supplementary Financing Program that was successfully employed to assist the Federal Reserve in managing the consequences of the financial interventions associated with the Lehman Brothers insolvency.

A Law to Enhance the Functioning and Stability of the US Financial System

1. Be it defined that “US Treasury Bills issued for monetary regulation purposes” (hereafter MTB) are those bills issued and redeemed solely for the purpose of enabling the Federal Reserve (FR) to regulate the quantity of reserves financial institutions hold with FR Banks.

2. MTB shall be exempt from the Public Debt Limit established in 31 U.S. Code § 3101.

3. Federal Reserve Banks shall not issue own debt instruments so long as they are enabled, as agents of the US Treasury, to issue MTB for the purposes outlined in this Law.

4. Proceeds from the sale of MTB are to be deposited in a segregated account at the FR Bank of New York denoted the “Monetary Regulation Account” (hereafter MRA).

5. US Treasury funds held in the MRA may be used only to redeem MTB.

6. The FRBNY shall accrue and pay interest on balances in the MRA at a rate equal to the equivalent interest rate implied by the discount at which MTB are sold.

7. The US Treasury shall include projections for the issuance and redemption of MTB in the Quarterly Refunding Statement and will separately identify, within each auction announcement, the amount of MTB being offered.

8. Apart from the requirement established in paragraph 7, MTB shall be identical to treasury bills not so identified.

9. Nothing in this Law shall be construed as limiting the ability of the United States Treasury and the Federal Reserve Banks to reach an agreement whereby the Treasury would engage in an early redemption of US Treasury securities currently held in the System Open Market Account so as to reduce the size of the balance sheet of the Consolidated FR System.

10. The US Treasury and FR shall closely coordinate the issuance of treasury bills.

11. Upon the declaration that a state of national emergency exists, the President of the United States may authorize the Secretary of the Treasury to enable the issuance of longer term securities as a supplement to MTB. Funds raised through the issuance of the such longer term supplemental securities would be sequestered at the FR Bank of New York until such time as Congress authorizes supplemental expenditures required to address the national emergency.

The primary objectives of the law are to:

Ø Increase the supply of HQLA to the US and global financial systems

Ø Allow US banks to shrink their lending to FR banks while expanding their lending to the real economy

Ø Reduce the taxpayer’s cost to finance the consolidated US balance sheet

©Peter Stella

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