SOMA’s Been Talking For Over A Year: Jay’s Got Some Explaining To Do (Bills)

This goes back to the earliest days of the Federal Reserve. In 1912 and even before, in order to sell the public on a central bank – the nation’s third, and first in three-quarters of a century – in what was already going to be an uphill battle, Congress demanded that this thing be called something other than a central bank before then supporting itself without becoming even the smallest burden on taxpayers.

This requirement meant some level of “investment” on the part of the new monetary authority. It would need to acquire low-risk “earning assets”, of which US federal government debt easily qualified.

There would arise any number of other reasons for the Fed to buy and own Treasury securities, too. One quick way to raise or lower the level of bank reserves is to either buy or sell UST assets, or what are known as Open Market Operations. These predated QE by a very long time, and to conduct any “tightening” OMOs assets must already be on hand in the System Open Market Account (SOMA) for them to be sold to depository banks.

In other words, for reasons having nothing to do with “monetizing” the government’s reckless spending ways the Federal Reserve has held an enormous portfolio of securities including federal government debt. In fact, you hardly ever heard much about this in the pre-crisis era even though, during the first quarter of 2003, for example, Alan Greenspan’s FOMC had given FRBNY’s Open Market Desk the authority to buy and hold $633 billion in UST’s of all kinds.

Yes, 2003. Six hundred billion back when a hundred billion meant something.

At the time, as spendthrift, as the Bush 43 administration had already been, total public (federal) debt outstanding was a reported (by Treasury) $6.46 trillion. This had meant that in Q1 ’03 the Federal Reserve’s SOMA portfolio contained 9.8% of outstanding government debt.

Just short of ten percent.

This wouldn’t become a topic of keen mainstream interest until later in 2009 into the era of QE, “money printing”, and debt “monetization.” The inflationary guarantee was often, if not almost always, underwritten by sensationalizing SOMA balances along with the bank reserves (the “money printing” part) created to elevate them.

In fact, believe it or not, it wasn’t until the end of QE2 in 2011 that the Fed’s holdings of UST’s equaled in proportion what it had been eight years before.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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