RCM Reprint: Monkey Business Blog

Treasury Needs $550 Billion in Fourth Quarter. Obama Endorses McCain For President!
Treasury has announced that it will need to borrow $550 billion for the quarter ending December 31, 2008. I repeat, Treasury has announced that it will need to borrow $550 billion for the quarter ending December 31, 2008. Upon hearing this, Senator Barack Obama endorsed Senator John McCain for President!
People have been asking, "Where are we going to get all this money for all these bailouts?" Here is one way. Here is the really scary part: These borrowings do not include the borrowing Treasury must do on behalf of the Fed! The Fed's balance sheet has ballooned to well over $1 trillion with the additions of its commercial paper facilities, loans to AIG, etc. Therefore, the actual money borrowed will be a lot higher.
I remember in college there was always a lot of talk of "The Crowding Out Effect". That was a theory that when the government comes in and borrows on a very significant scale, it essentially elbows all other USD borrowing (like mortgage backed securities, corporate debt, etc) out of the paint. At some point, the sheer size of net Treasury issuance (the $550 billion is a gross number) has to increase risk free (Treasury) yields and therefore, probably increase all borrowing rates substantially. Right now, there is still a very good flight to quality bid factored into Treasury yields. This issuance should eventually swamp that bid. What is going to be interesting is now that Treasury has essentially guaranteed GSE (Freddie and Fannie) debt and senior bank debt (for the first three years), Treasury will sort of be competing with themselves! I wouldn't be surprised to see our own banking system absorbing good chunks of the longer dated Treasury debt as they work to carry (the difference between the banks cost of funds and the rate on their investments) their way back to health. How perverse is that? U.S. banks will use federally guaranteed deposits and federally injected capital to buy the debt that Treasury issues....to bail the banks out in the first place!