6

These animated creatures don't like it, and think the federal reserve is just giving Goldman Sachs money: http://www.youtube.com/watch?v=PTUY16CkS-k

Quora says it is an auction through dealers: http://www.quora.com/Why-does-the-Fed-buy-treasury-bonds-through-Goldman-Sachs-instead-of-from-the-treasury-How-did-this-happen

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    +1 If this is true, the American people would not be too unhappy to find out, I'd imagine. Not only is it not the treasury, but it's one of the most unethical banks in the Western world! – Noldorin Dec 2 '10 at 20:22
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    @Noldorin - With all due respect to the American people, they have no f*ing clue how banks and the Federal reserve work. Their outrage would be shallow and based largely on ignorance and the work of demagogues. "Oh look! Bad people making money! Zomg! Ban the Fed!" Blagh. – user296 Dec 3 '10 at 6:19
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    Also, the talking animals, while absolutely hilarious (and possessed of a few good criticisms of QE2), are apparently willing to gleefully ignore a lot of facts and economic theory that don't fit with their political ends. In particular, the suggestion that "falling prices are good in a depression when no one's hiring (because their profit margins are zero because of the falling prices)" has a few nice obvious counterexamples (think, for instance, of the utter stagnation of Japan in the 1990s). It would be nice to, um, acknowledge this, instead of just spouting populist screed. – user296 Dec 3 '10 at 6:50
5

Treasury bonds (of the same date and maturity) are completely fungible. One is exactly the same as the other. It doesn't matter who the Fed buys it from in the long term: there will be fewer outstanding Treasury bonds and more outstanding US dollars, and the price of a Treasury bond will be higher. If Goldman Sachs owns US treasury bonds, they will benefit from quantitative easing one way or another, simply because the value of those bonds goes up when the Fed is willing to buy them at a good price.

In the short term, banks might do things with money (like make loans and perform other investment activity) a little faster than the Treasury. (The Treasury might skip or reduce the size of future bond sales.) There is also the opportunity for a tiny amount of arbitrage between the market price of a bond and the price the Fed is willing to pay, but everyone with a big chunk of bonds is able to compete for that little bit of profit (which is why these things are called open market operations) so it's not really all that hot.

Really, people! There are far more legitimate criticisms of QE2 than Goldman Sachs participating in the treasury auction process! For starters, consider criticisms of the effects of the policy.

  • Thanks for the answer. 1) Can treasury bonds be bought from Goldman Sachs as cheaply as from the U.S. Treasury itself? That is your claim, but I'm still fuzzy on why. The U.S. Treasury is the direct seller. 2) What is QE2? Quantitative easing round 2? – dfrankow Dec 5 '10 at 1:00
  • The RMS Queen Elizabeth 2 is a famous ocean liner. I mean, um, yes, QE2 is quantitative easing part II. Anyway. Treasury bonds are sold at auction, so the Fed needs to pay incrementally more than the next-most-interested party, one way or another. – user296 Dec 5 '10 at 5:42
  • The point made by the talking animals is not that the Fed buys bonds in open market operations, but that it declares its intent prior to do so. This allows GS to front-run and acquire those bonds for that tiny amount of arbitrage (numbers?). Obviously, any other participant in the open market operations can do the same thing, but this draws attention because it is GS. The point that needs to be made here is that none of the other entities on this list are likely to be seen as any less evil than GS by populists. – tchakravarty Mar 4 '17 at 12:15
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Of course Goldman Sacs sells the bonds to the fed without charging a commission. They are well known for their compassionate altruism. Just kidding! Of course they charge. The Federal Reserve Act specifies that the Federal Reserve buy and sell Treasury securities only in the "open market." The Federal Reserve conducts its purchases through "Primary Dealers" - usually Goldman Sacs-these btw are older securities. The new ones such as the fed has been gobbling up lately are sold at auction. This supposedly supports the central banks independence in conducting monetary policy but still doesn't seem right. But then the fact that we have a central bank at all instead of the U.S. Treasury printing the money, doesn't seem quite right either now does it?

  • Welcome! Can you provide references and citations to support your claims? Just FYI - almost everywhere in the world central banks are the one responsible for the money supply, not just the US. – littleadv Oct 30 '13 at 17:45
  • sure. its in the Federal Reserve act of 1913. – Chey Barnes Oct 30 '13 at 18:13
  • what is? You claimed that Goldman Sachs charges commission for selling the treasuries to the Federal Reserve, I read from that that your opinion is that buying from the Treasury directly would have made the purchase cheaper. Please provided sources for the claim. – littleadv Oct 30 '13 at 18:19
  • @littleadv. Wait a sec....I thought the Fed simply created Federal Reserve Notes that were like money but not really money. Only the US government can create money. So how can the Fed be responsible for the money supply if it can't create money? – Muro Oct 30 '13 at 23:35
  • @Muro treasury is responsible for the creation of the money. Feds are responsible for supplying it to the market. That's the difference between "money creation" and "money supply". I know its hard to wrap your head around words sometime. – littleadv Oct 31 '13 at 0:23

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