LBX

Monetizing the Debt: My Response to Zero Hedge

There is a bit of incongruity to this line of argument that there is "no collusion" between 17 primary brokers and the Federal Reserve.

By American jurisprudence's standard of legal proof, conspiracies are extremely difficult to prove and rarely done so in a court of law in America.

Cases of price fixing are, for the same reason, difficult to prove because it is virtually impossible to prove that a specific meeting occurred with the intent and the act of agreement to set prices.

However, in the real world, outside of legal standards of proof beyond a reasonable doubt, it is widely known that price fixing, collusion, and conspiracies happen regularly.

In fact, it is impossible to be in a senior position of ANY industry or trade group without knowing about the tacit agreements and "codes of conduct" that are, for all practical purposes, collusive behavior.

Look at the cases which are public:

It is standard operating procedures that financial institutions who purchase securities from each other have "repurchase" agreements that are triggered if the securities did not perform to expectation. These agreements are both formal, as well as informal and is standard with virtually any dealer on Wall Street.

Such agreements do not have to be "public" - especially if a party is so big and powerful that the other party cannot be without their business. The very threat of a cut off of future business is sufficient to enforce a "repurchase" when things go sour regardless of whether a formal agreement or conspiracy exist.

While it is a huge leap to go from this to suggest that the Federal Reserve have a "repurchase" agreement with 17 primary dealers --- which Zero Hedge may have claimed, it is not beyond reason or common sense to see that the feds and the 17 primary dealers are mutually dependent on each other --- and on the Treasury. There is every incentive and logic to have these parties "scratch each others' backs".

In fact, given the tightness of linkages between the Feds, Treasury, and the Dealers --- a time honored relationship between the sovereign and its financiers that predate the founding of the United States ---- it would be fantastic to suggest that such closely knit, mutual aid understandings do not exist.

I would go so far as to say that it is the exception, rather than the norm, for a relatively responsible large sovereign to not have such a close and mutually beneficial relationship.

Sure, relations can sour between an irresponsible regime (e.g. Zimbabwe) and its bankers, but between a major OECD nation and its banker? Or between the United States and its bankers? Not likely.

IIf the presumption is that such a close, mutually beneficial and dependent relationship exist, then it is not a far stretch to see the Federal reserve coming in to backstop their primary dealers ---- regardless of whether a formal agreement, a priori, exist.

Indeed, a series of precedents where the Feds have come in and backstopped the primary dealers would have created such an expectation, without the primary dealers and the Feds or Treasury every meeting and discussing such a thing either formally or informally.

The question still becomes: did this occur? And if it did, what was the reasons it did?

That is a question for economic historians, perhaps 50 years in the future when the issues are sufficient remote and the participants willing to break their silence.

Unless a "Mark Feld", or deep throat were to emerge.