Price fixing in the bond market by the Fed?

Interesting observation on the Yahoo! Message Board (UltraShort Lehman 20+ Trsy ProShares), December 31, 2008:

It seems as if one branch of the government (Treasury) needs money, so they auction off T-bills and T-notes. Obviously, the lower the interest rate, the better (less interest for us taxpayers to have to pay).

So now, another pseudo-branch of the government (Federal Reserve Bank – chartered by Congress in 1913) is now buying most of these T-bills and T-notes and putting them on their balance sheet. They are doing so in a scheme to keep the interest rates as low as possible. In other words, they have stepped in front of the market and now ARE the market for T-bills and notes. There are other buyers and sellers of T-notes and bills, but due to the size of the Federal Reserve, and the depth of their pockets, they are elbowing everyone else out of the market.

How is this even possible? Isn’t this price-fixing? The government is essentially selling T-bills and notes to itself in order to fix the interest rate? Shouldn’t this be illegal? This certainly seems to have more than a whiff of fraud to it, and yet our entire economic system is based on the premise of government selling debt instruments to itself? I am new to the bond market (certainly not an insider, and not someone who has “seen it all” by any means). But my reaction as an outsider looking in, is that this is a “scam”, a “scheme”, or whatever derogatory noun you would like to place upon it.

We charge Bernie Madoff for conducting a ponzi scheme. Is this “scheme” any less fraudulent than Bernie Madoff’s simply because two agencies of the Federal Government are the ones running it?

Seriously, what am I missing? I would appreciate it if someone would step forward and tell me “hey, wait a minute. You’ve missed something here (some very important fact about this arrangement) and this is why this is all legitimate.”

Thanks in advance. I am trying to understand this crazy world we live in…

25 Responses

  1. You have got to hand it to Milton Friedman here. He proved that inflation and deflation are always and everywhere a monetary phenomonem. Of course the Government can and must regulate the money supply and the interest rate on the money they have created. They also have the power to tax and spend if and when necessary.

    Nationalizing the entire commercial and investment banking system and/or consolidating with the Fed would not change this. It would simply change the number of accounting entities. Do you want a Soviet style economy completely managed by the Government? Probably not. So how many accounting entities would you prefer? And what monetary base would you prefer? A Democracy is free to choose.

    • What nationalizing the Fed would do is cut down substantially on taxes. Taiwan has a state-owned central bank that issues money for the government directly, and its citizens pay very little taxes.

  2. Hi Ellen,

    Do you remember the 1987 Market Crash? In 1984, I had a premonition that something drastic, I didn’t know what, was going to happen to the financial system in late summer/early fall of 1987. I know that sounds weird, but I really did. Please believe me, I am rational, and pretty Standard American. Still, I had a very strong premonition, so when the summer of 1987 came, I put a great deal of money in gold and silver options and futures. It should have been a financial home run. Instead, in order to quiet the overall market, the Fed, among other actions, stepped in and stopped gold and silver from rising. All conventional understanding, before that time, taught that gold and silver would go through the roof. In 1987, gold and silver was considered the ultimate protection of ones wealth. it held an even loftier position than government bills and bonds (because of the inflation scares we had in the late 70’s. That the Fed manipulated the gold and silver market is not speculation, it was admitted by the government and was reported in the press. If you google Barons or The Wall Street Journal, I would think you would find old articles.


    Just found this blog, and I would love to read more. On the matter of market manipulation in Gold, I thought you might want to check in to the Barrick, JP Morgan Chase style manipulations, which have characteristics of the Enron scam throughout.

  4. Hi Ellen,

    Happy New Year to you and all.

    This illuminates why I keep asserting that the problem is money itself, not which kind or from which source. These people are desperate now and have thrown caution to the wind. As I’ve repeatedly asserted, greed and arrogance make one stupid and our so-called leaders are proving me correct, again and again.

    Money is slavery-by-proxy and we have all been taken to the cleaners, big time. Perhaps the time has arrived to think outside the money-box and consider that truly wise and just models of civilization, not based on greed and deception, are both possible and necessary. Rearranging the deck chairs has never succeeded in re-floating a doomed ship. Even the rats know when its time to exit this scene.

    The time and the opportunity for true change has arrived, like a thief in the night.

    Peace and Wisdom

  5. Hi Ellen:

    I loved your book, and your insights continue to inform. In keeping with your Oz metaphor, I thought I’d take a shot at explaining the current financial crisis:
    It’s the story of a band of furry robbits led by Fraudo Bankins, (Frodo’s evil twin), as they cavort through the Kingdom of Piddle Earth (*) in my new book, The Lords of the Bling: A Tale of Moral Hazard.
    The robbits are aided in their quest by powerful wizard Greendalf and a cast of thousands. From their cozy, hidden hutches in the hedges of Bagman, Connecticut , they lie and steal their way to riches, protected by their Uncle Fred Bankin’s fractional deserve system(**). While wearing the magic bling, which makes them invisible to the law, they have their way with other people’s money, unhindered by the Society of the Gullibles, who are slaves to the GDP(***).
    Phil and Wendy Sham, fixers extraordinaire, as well as distant Uncle Bilbo, his wife Essie C., and her sister Sue M. also figure heavily in the tale.
    Chapter 1: All Calm in the Shire
    Fraudo is fat and happy after finishing his breakfast, consisting of a large bowl of Seedios and bilk. If the Seedios made him fat, the unexpected check for $2 trillion in his Xmas stocking from his Uncle Fred has made him truly happy…
    Perhaps a chapter with some raciness would make it more marketable – “Fraudo Goes to Bed with the Naked Shorts” (wherein Fraudo is almost done in by Elliot Expectorator, who is betrayed, off (and under) the balance sheets, by Fraudo’s aunt, Ashley Alexandra Dandybuck, a double-entry bookkeeper with a heart of gold).
     So far, no takers. The editors think it’s too derivative.
    (*) Piddle Earth is a trickle down society wherein the rich piddle on the poor and call it the greatest country in the history of the world.
    (**) Fractional Deserve Bankins System: Wherein those who create the most destruction through mastery of the art of fraud receive the most rewards, of which they deserve a vanishingly small fraction.
    (***) Gross Domestic Piddle

  6. It’s really not that confusing. The whole fractional reserve based monetary system is basically a Ponzi-like fraud so it’s not particularly shocking that the Fed would be buying T-bills to lower the yield. GATA also alleges that the Fed/Treasury complex artificially lowers the price of gold to keep depositors/suckers stuck in the banking system to limit leakage of savings to precious metals.

    The reason they would do this is the reason any government intervenes in any market – for price support. In other words, international support for the buying of T-bills at the (high) prices the US government wants to sell them at is falling away.

    If China or Japan still had a huge appetite for US debt they (obviously) wouldn’t need to do this.

    So the Fed is simply providing a floor to the government bond market.

    It also provides a great opportunity for holders of T-bills to exit the market at the highest point, and escape into gold or the euro. Much like rats fleeing a sinking ship.

  7. There’s actually many who thinks the Lord of the Ring was written as a allegory over the monetary system just as The wizard from Oz. Tolkien was against the bankers and wanted government to issue the money.

    BIS=One Ring to Rule Them All (I actually think Montague Norman had Ring as a name, wonder if any can confirm that?)

    Some quotes from Tolkien:

    “The true equation is: democracy = government by world financiers.”
    J.R.R. Tolkien, in “The Letters of J.R.R. Tolkien”

    “The main mark of modern governments is that we do not know who governs, de facto any more than de jure. We see the politician and not his backer; still less the backer of the backer; or, what is most important of all, the banker of the backer.”
    J.R.R. Tolkien, in “The Letters of J.R.R. Tolkien”

    “Throned above all, in a manner without parallel in all past, is the veiled prophet of finance, swaying all men living by a sort of magic, and delivering oracles in a language not understood of the people.”
    J.R.R. Tolkien, in “The Letters of J.R.R. Tolkien”

    “There should only be one source of money: one fountainhead from which flows the nation’s blood to vitalise commerce and industry, ensure economic equity and justice and safeguard the welfare of the people… In other words, it has always been our contention that the prerogative of creating and issuing the money of the nation should be restored to the state”

    • Tolkien never said those things. My understanding is that he underlined these quotes in Candour magazine. Evidently, Tolkien was quite taken Candour magazine as he saved a number oif issues – “In 1973, Tolkien’s copies of Candour were sold out of his estate for £10. In 1997, I inherited these newsletters from Chesterton’s secretary Moyna Traill-Smith. The quotations from Candour which follow have all been underlined by Tolkien with a red biro.”


  8. It is called Money Laundering. Get Bernanke and Paulson now before they leave office. Use RICO laws and put them away for good!!!

  9. Ellen,

    I seem to recall that you gave a statistic in either your book or an article that listed the percentage of income tax revenue that went towards interest payments on the national debt. Can you point me in the right direction please?


    • Hi, it’s about $500 billion, but I’m not sure what the total income tax revenue is now. I’d google it but don’t have time – sorry! It was over $900 billion when I first published Web of Debt, and debt service was then about a third of that.

  10. Not directly germaine to the present discussion, but do you have any comment on the prognostications at:!-Global-systemic-crisis-New-tipping-point-in-March-2009-When-the-world-becomes-aware-that-this_a2567.html ?

  11. Bernanke’s academic research discusses in detail the option of the Fed “monetizing” fiscal policy indirectly when the gov’t cuts taxes and issues bonds. He is just executing that plan before our very eyes but without the tax cuts- he can’t wait for that, he’s desperate.

  12. Old Cree Indian saying , “When the last fish is dead , the last stream poisoned , and the last tree cut down , the white man will learn that he cannot eat money.” Probably an ‘earlier’ way of
    expressing not how much does it cost , but do we have the resources and capacity for the enterprise.

    Great article Ms. Brown , I hope the Obama ‘people’ see it!!!

    Peace an Abundant New Year to you and yours ,

    Michael Z.

  13. Hello again all,

    One last word on the revolving ponzi scheme you have described. Perhaps another reason for the Fed putting T-Bills on its books is to create the illusion that there is and was ever anything of real value on its books. They are deathly afraid of what will happen when they are forced to account for what they have done.

    Not only is this house of cards built from smoke but the cards are mirrors. Hence, they are attempting to make it difficult to pierce the lie by adding another layer of endless loop accounting. Each card points back to another card which points to another, etc.

    One need only consider the core math of this grand deception, which is creating debt out of thin air and increasing it with compounding interest. For every iteration (turn of the wheel, etc.), additional debt is created and the money to pay of the debt merely expands the debt. In software programming circles, this is called an endless loop. In symbolic terms, it is called a bottomless pit. A pit symbolizes the most ancient form of a trap, and bottomless refers to its complete lack of truth, hence the inability to “get to the bottom of it.”

    Here is Wisdom…


  14. Fascinating article and comments. Thanks to y’all!

    I’m a retired Computer wizard, Big Blue to Tux. All I do for money is breath to keep getting my govt retirement benefits.

    I just finished a 10 month web project for a friend and am moving my focus to Economics and Energy.

    I’ve already started my research on both. As a mathematician and scientist I love parsimony or simple elegant solutions. As a psychologist and a humanitarian I am interested in the well being of all people living together harmoniously.

    ISTM, the current basis of money is trust. An intangible. If I base money on a tangible the only basis which makes any sense to me is energy. More specifically,”infinite” and “free” technologies such as wind and solar.

    However, I regard all people as “being created equal”. Each person inherently has the same equal right to the planet’s resources regardless of their “contribution” to humanity.

    As long as “might makes right” those in power will continue to control money regardless of money’s basis. With such control the vices of humanity will continue – including greed and fear/vanity.

    To change this globally we have to first change ourselves. In the Ohana, extended family, spirit of Hawaii: “Loving your neighbor as yourself” means, for me, treating _everyone_ with the same love and respect I would like to be treated with.

    I’m interested in the abstract of Economic theory to gain perspective upon energy flow in social mechanisms. I’m more interest in the practical of how energy flow affects the day-to-day life of myself and everyone.

    As such, my focus for this year and the coming years is becoming independent of the energy grid and helping others to become free. This year I plan to make my own electric vehicle. I also plan to use wind and solar to free my home (530 sq ft 1 bedroom house 1 mile from the Kauai coastline) and my EVs from the power grid.

    I live modestly so I expect to achieve my goals in small persistent steps, one after another. I also expect to achieve my goals because of the desire expressed in the global internet Ohana.

    The “price fixing” of the Fed is symptomatic of deep obsessive compulsive disorder, OCD. What we don’t need now is the classic Symptom Substitution where we fix the Fed symptom only to have it pop up again in other symptoms. Like the OCs who stop washing their hands 40 times a day only to have the symptoms appear as compusively arranging hangers in a closet or counting cracks in the sidewalk and only moving forward on an even count.



  15. Hi Allen,

    Come help Ellen straighten out her Wiki.

  16. Aloha Warren,

    I went to the model-economy wiki and my response at seeing the home page was: WOW!!!

    This is what I’m talkin about – the global internet Ohana.

    I joined.

    Mahalo Nui Loa (“Thanks a bunch” in Hawaiian)

  17. Problem-reaction-solution. The world is a heavily manipulated place and the current situation is a creation with purpose. One world government that will be desired by a fearful populace after it is offered as a solution to the current “debacle”and financial collapse. The real solution is to send the Fed Reserve employees and congressmen to prison for unlawfully conterfitting money as per art.1 sec.8(&10) of the constitution (after all ignorance of the law is no excuse). All monies gotten illegally are subject to confiscation (like drug forfiture laws) leaving no national debt, no Federal taxes required to pay debt, and a lot of real estate, companies, and media turned over to the people. Watch “freedom to fascism”(google video) the correct amount of Fed income tax that goes to the Federal Reserve-100%.

  18. Thanks, Ellen, I was wondering how Governments could gaily announce unlimited new borrowing in the full confidence that someone would gladly lend to them… especially since the totals from Europe and the US being poured into bail-outs as well as the regular deficits are probably greater in total than the worldwide amount of uninvested money.

    How much are we up to now, globally? Couple of $trillion plus, for next year? Are they kidding? Where else is it supposed to be coming from, if not the printing presses?

  19. Don’t know the Tbill market either, but from what I have read, this Fed buying is a very very scary thing, beyond being completely scammy/illegal. This could really blow up in our faces. Peter Schiff has a decent article explaining the dangers, while I don’t agree with some of his stuff, I do agree with his analysis of this situation:

  20. The Fed is buying Treasuries in an effort to sour the milk. They want to keep yields low so that Treasuries are not attractive to investors. They want investors to put their money into the languishing stock market.

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