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…