Academic journal article Federal Reserve Bulletin , Vol. 78, No. 6
Statement by David W. Muffins, Jr., Vice Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, April 28, 1992
Thank you for this opportunity to communicate the Board of Governors' views on proposed legislation concerning the government securities market. The Joint Report on the Government Securities Market suggested comprehensive administrative changes, some already made and others proposed, that will significantly increase openness in this market and sharply limit the possibility of a replay of recent events.| The Board supports these changes, which are targeted to the problems and to the opportunities identified to foster fair and efficient markets. In the Board's view, this progress makes it inadvisable to enact either H.R.4450 or H.R.3927.
This decision was made after having carefully weighed the costs and benefits of further change, as we see them at this time, in accordance with our legislated role in the oversight of financial markets. In 1789, President Washington and the first Congress charged the Department of the Treasury with the responsibility of borrowing in the name of the new republic. In 1913, the drafters of the Federal Reserve Act assigned the Federal Reserve District Banks to serve as fiscal agents for the Treasury and facilitated the nationwide distribution of the debt. Later, in 1934, the Congress created the Securities and Exchange Commission to enforce securities laws that were targeted to counter the considerable problems at hand in private financial markets by nurturing fairness and openness. Although the Board works closely with the various agencies and has general oversight responsibilities for the activities of the District Banks, it has little direct regulatory authority for the U.S. government securities market.
We think that this arrangement is wise and gives the Board of Governors a unique perspective by allowing us to examine important issues regarding this market from an economywide perspective. Freed of the specific responsibilities of managing the debt, distributing securities, or policing trading activity, we can evaluate the consequences of proposed reform against broad public policy standards.
Our overall evaluation of both pieces of legislation started from a fundamental question: What are the problems that need to be addressed? In the Board of Governors' view, the government securities market ably performs an important allocative role in the U.S. economy by matching a voracious borrower, the federal government, with investors across the nation and around the world. The U.S. government has been able to tap this market with record issuance time and time again. This market is deep and liquid, routinely permitting participants to execute trades of huge size with remarkable rapidity at paper-thin bid ask spreads. Consequently, the market serves as an important source of liquidity for individuals and financial institutions.
The trading community commits large sums of risk capital to provide these services in the pursuit of profits. But there are economywide benefits as well. The government securities market has an impressive ability to digest news, translating the daily barrage of economic releases and political commentary efficiently into prices. In doing so, it provides real-time quotes on a host of issues that serve as benchmarks for the pricing of nongovernment securities. That responsiveness also serves monetary policy well because it gives us a reliable gauge of financial markets in general and a liquid and efficient venue to conduct open market operations.
However, we sit here today as the result of identifiable problems with the market. The problems that have come to light so far---evidence of lying in the issuance of government securities and episodes of price distortions that are perhaps related to attempts to manipulate the market-- clearly signaled the need to act. …