US Government Debt Different - Finance Department - University of ...

98 Thoughts on Debt Sustainability: Supply and Demand Keynote RemarksBut they are not the real thing. The duration issues, discussed in prevouschapters, are important. But given the extraordinary liquidityof sovereign debt markets, this only underscores the return advantagesovereign debt has in contrast with central bank liabilities.The role of sovereign debt as the base asset is not determined bylogic or principle but by experience and practice. The status can belost – as Greece, Portugal, Ireland and other European countries arenow finding out. This sad history betrays one of the original sins ofthe Euro: from the creation, they maintained the Deutsche Bundesbank’spretense that they would not monetize sovereign debt but intheir operations they then doubled-down on the Basel Committee’szero-risk weight for sovereign debt by giving all Euro-area membernations’ sovereign debt identical margin treatment in the EuropeanCentral Bank’s repo operations, treating them all as assets of identical,riskless characteristics.The preeminent role of Treasury securities as the base asset in theU.S. monetary system, rather than Federal Reserve liabilities, partiallyreflects a curious legacy of the Glass-Steagall Act. Since theseparation of commercial banking and investment banking in the1930s, the only institutions with access to accounts at Federal ReserveBanks have been commercial banks. Most countries would notdream of preventing important financial intermediaries from havingdirect access to accounts at the central bank.But because of the hangover from Glass-Steagall, it seems natural tous to limit access to accounts at the Federal Reserve to “real” banks –or at least those that the Fed deems to be real banks. So a broad rangeof financial intermediaries – all our non-bank financial intermediaries– cannot directly hold central bank liabilities at all and, thus, needto hold U.S. Treasury securities as a low volatility, base asset on theirbalance sheets. By definition, the market for Treasury securities iswider than the market for Fed Funds.Before one even considers the dollar’s role as a reserve currency, andthe financial intermediaries outside of the U.S. who actively manage