(Reuters) – According to documents recently viewed by Reuters, starting in June of 2011, the Obama Administration began allowing the People’s Bank of China special access to buy U.S. Debt directly from the Treasury Department, bypassing the open market – something that our own Federal Reserve isn’t even allowed to do.
Treasury Bills are issued in order to finance the reckless spending of the U.S. Government. Foreign central banks, and even our own central bank – the Federal Reserve, purchase these treasury bills at auction in something called the “open market”. The open market consists primarily of the large Wall Street banks such as Goldman Sachs, JP Morgan Chase, Citigroup, Morgan Stanley, etc. These banks buy the treasury bills directly from the Treasury Department, then the central banks that want to buy the U.S. debt have to buy them on the open market from these banks in an auction process. If you’re wondering why the Federal Reserve doesn’t have a direct relationship with the Treasury Department, they explain it on their website:
“The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the “open market.” The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms–so-called primary dealers–that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY). These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities. Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy.”
So then why has the Obama Administration decided to give the People’s Bank of China direct access to the U.S. Treasury Departments computer system, thereby bypassing the open market process that is required for all other purchasers of U.S. debt? Perhaps most alarming – why wasn’t there a public announcement regarding this special access? Such an unprecedented move is extremely newsworthy, so the fact that Timothy Geithner and the Treasury Department have been keeping this a secret for almost a year should be of enormous concern to American citizens.
Providing direct access to the Chinese is unlikely to sit well with other central banks, since they are stuck paying a premium on T-Bills that China is able to avoid. This also means that China will have additional incentive to own more U.S. debt than they otherwise would have had.
Additionally, the open market is supposed to provide transparency to the process, enabling us to keep an eye on how much U.S. debt the Chinese are buying. Since China now has a direct computer link to the U.S. Treasury to make their purchases, we have no idea how much debt the Chinese are buying. Back in 2009, the People’s Bank of China was caught trying to hide how much they were buying in U.S. Debt, so there should be no surprise that they want to keep the numbers secret. With a direct link to the U.S. Treasury now, it’s going to be next to impossible to keep track of how much of us the Chinese actually own.
It appears that with our future mortgaged to the People’s Bank of China, the Chinese government will now be able to effectively control our foreign policy in addition to our economy. For that, we can thank President Barack Obama.