Treasury Finance Policy

Just a quick thought. Ben Bernanke suggested today that the Fed might start buying longer maturity Treasury securities now that it has done about all it can at the short end of the yield curve. Sounds like a good idea, but here's my question: If reducing yields on longer-term Treasuries is a desirable policy objective (and I think it is), then why is the Treasury still selling the damn things?

Granted, the Fed may ultimately need to buy even more than the Treasury is currently issuing, but wouldn't the first step, before having the Fed do something unconventional, be for the Treasury to shift its financing dramatically toward the shorter maturities? That would put downward pressure on longer-term yields and upward pressure on short-term yields, which the Fed could then relieve by buying more of them and bringing the yield back down to zero. (In other words, the Fed would do what it normally does but would have the chance to do more of it.)

From the public's point of view, it should be exactly equivalent. Under the policy Chairman Bernanke is suggesting, the Fed buys longer-term Treasuries, and it is just as if they had never been issued, while the additional short-term T-bills don't get issued in the first place. Under the policy I'm suggesting, the longer-term Treasuries don't get issued in the first place, and the Fed buys the additional short-term T-bills, so it is just as if they had never been issued.

I'll anticipate the answer and say that the availability of a certain amount of on-the-run Treasuries is important to the proper functioning of markets, so the Treasury doesn't want to stop selling them altogether. But it could reduce the size of its issues. And it could buy back some of its own securities on the open market. If the Fed confines itself to buying short-term T-bills, that would leave it more flexibility in the future if it should become necessary to withdraw some of the base money it is now creating.


UPDATE: People don't seem to be getting the point that these policies are equivalent. A shift to shorter-term financing by the Treasury would not put the Treasury at any greater risk (with respect to the need to refinance at possibly higher future interest rates) than would the Fed's contemplated policy of buying longer-term Treasuries. If the Fed buys the new T-bills (which it would, unless the economy starts to recover, in which case the Treasury could shift back to longer-term financing), the Treasury may never have to pay back or refinance the money at all. Possibly it would have to refinance, if the Fed ends up selling the T-bills (instead of rolling them over) to slow down the economy later on. But in that case, it's just a question of where the government takes the loss: if the original strategy was for the Fed to buy longer-term bonds, then the Fed would be liquidating those bonds at a loss, the loss would pass through into the Treasury, and the Treasury would have to borrow the money to make up the loss; if the original strategy was for the Treasury to shorten its financing term, then the Treasury would have to borrow the same money to refinance the expiring T-bills.

You might say that either one is bad policy for the same reason. I can appreciate the logic of that argument, but then what would you do to revive the economy? You can try a fiscal stimulus, but then the government has to "borrow" that money, so it's potentially on the hook for that repayment. (Again, though, it may not ever have to pay the money back, if the Fed finances it.) You can have the Fed buy some other kind of asset, such as agency securities, but if the securities are fully guaranteed, that's pretty much the same as buying longer-term Treasuries, and if they aren't fully guaranteed, then the Fed is taking a risk that passes through to the Treasury. You could argue that the Fed should take that risk anyhow, but that is similarly equivalent to having the Treasury take the risk (for example, by fully guaranteeing the assets). There's just no way that the government can both revive the economy and get complete assurance of not having to refinance for 30 years. That's the bad news. The good news is that there's a pretty good chance that the government would never have to refinance.