Uncle Sam Needs a Taste of His Own Medicine

Once upon a time, when banks were run by bankers that had their net worth at risk, the cardinal rule was: "don't borrow short and lend long." The Savings and Loan industry never learned that maxim and it has since disappeared. Regulators, in response to the S&L crisis, put renewed emphasis on Asset/Liability Management and hoped to prevent timing mismatches in bank funding and investments. To some degree that has worked and bankers have found other ways to roll the dice and risk stockholder money.

But the regulators, Fed, OCC, and FDIC know better. Since they are the government, you would think the Treasury would consult their experts. If bank examiners are knowledgeable enough to advise and punish banks, then you would assume that they should be consulted regarding the U.S. government's funding. But, alas, Treasury doesn't seem to be asking for advice.

The recent bailout programs and upcoming stimulus will result in huge borrowings on top of our built-in deficit. Short rates are near zero and 10 year Treasuries in the 2s. The politician's best choice for tallying government deficit spending is to fund everything with short money, even if the proceeds have been invested in bank preferred stocks, mortgage backed securities, and other, various illiquid assets. The stimulus spending will also be on longer term projects like road building. The funding should be longer term. Ten year bonds would be appropriate and a return to 30 year funding would make even more sense given the low interest environment we currently enjoy.

If the government is going to take riskless return away from savers and force them to take more risk to find yield, then they should at least minimize the expense to the taxpayer as taxes are sure to increase at some point with the government's short term funding strategy. Selling long term treasuries to fund the deficit is the prudent thing to do. The government's bank regulators would require it because it makes prudent business sense. Our governmental leaders should take their own advise and sell long term treasuries while the buyers are still present at todays low rates.

Comments

[prudentinve...:]

Good point. Return of the 30-yr treasury would be welcome. Perhaps the treasury fears it won't find many takers at ultra-low rates?

Jan 12 09:03 AM

[William Kab...:]

They might as well try. Fear is prevalent and the flight to safety has been immense. Sooner or later the fear will lessen and bond investors will demand more yield. If the U.S. persists in rolling over short paper for the massive amounts it is now committed to borrow, it will meet much higher rates down the road. Treasury needs to try and push as much of the borrowings out on the long end as is possible.I hope it is under consideration.


On Jan 12 09:03 AM prudentinvestor wrote:

> Good point. Return of the 30-yr treasury would be welcome. Perhaps
> the treasury fears it won't find many takers at ultra-low rates?

Jan 12 11:58 AM

[Dave Wrixon:]

If you can find some mug to buy them. Who want to be locked into zero percent for 30 years. War Bonds were bad enough!

Jan 12 01:03 PM

[Ferdinand E...:]

I agree where the selling of 30 year bonds is concerned. If a dummy like President Reagan and his crew used those assets, and borrowed more than any previous government, they should work now.

Jan 13 08:28 AM