Thursday, January 15, 2015

Antonio Weiss and Debt Management

One of the comments frequently made about Antonio Weiss and the job of Under Secretary of the Treasury for Domestic Finance is that position’s responsibility for managing the public debt. To read some of the comments, one would imagine the Under Secretary spending his time at his computer projecting cash inflows and outflow, running econometric models to decide on the most cost-effective way to borrow, and making daily decisions on debt issuance.
Of course, that is not the way it works. There is an entire office staffed by career employees dedicated to debt management and others who compile short-term forecasts of daily cash inflows and outflows. For the most part, the Under Secretary does not get involved in these decisions unless he or she wants to or desires to make a major change, such as to the maturity structure of the debt or to the type of securities issued (for example, inflation-indexed bonds or floating rate notes). Also, if there is a debt limit crisis, which has a large political aspect, the Under Secretary and the Secretary have to get involved, even though they would prefer to be doing something else.

During the Reagan and George H.W. Bush administrations, the Assistant Secretary or the Under Secretary sometimes became involved in debt management issues to fight off proposed changes they believed to be bad ideas. For example, during the Reagan Administration, there was a big fight over issues such as inflation-indexed bonds, making notes and bonds callable (in the case of 30-year bonds, shortening the call protection which at the time was 25 years), shortening the maturity structure of the debt, issuing bearer bonds abroad, and so on. In the George H.W. Bush Administration, inflation-indexed bonds were more or less summarily dismissed by the Assistant Secretary and the Under Secretary, but there was major pressure, which was successfully resisted, to sell bonds linked to the price of oil as a budget gimmick to finance additional oil purchases for the Strategic Petroleum Reserve. Also, Resolution Funding Corporation (“RefCorp”) bonds were issued, which was a budget gimmick to put $30 billion of the cost of the Savings and Loans cleanup off-budget.
One Under Secretary who had a strong interest in debt management was Peter Fisher of the George W. Bush Administration, perhaps not surprising since he had been in charge of open market operations at the New York Fed. He was very proud that he was able to shorten the time between the auction deadline for Treasury securities and the announcement of results. That, of course, was a worthy goal, but one has to wonder if it should have been a priority objective of an Under Secretary.  He also achieved notoriety for the botched announcement of the discontinuance of issuance of 30-year bonds, a decision that has since been reversed.

The truth about debt management is that, while there is a substantial amount of detail involved, it is not that interesting unless one is an active market participant with money riding on Treasury decisions. The Treasury can certainly make mistakes, but, as long as it does this task competently, it is usually little noticed. It is a necessary task, but it is not an area in which to achieve major social change.
Consequently, most Under Secretaries take the job with other agendas. It is not clear why Antonio Weiss wanted the position, and it would have been interesting to hear his answer to that question at a confirmation hearing.

As for his critics, I think they wasted political capital in successfully tanking his nomination, though not in preventing Weiss from taking another position to advise Secretary Lew. Absent a crisis, major initiatives from Domestic Finance look unlikely in the next two years. It is true that Treasury’s formal role in financial regulation has increased, and perhaps that was Senator Warren’s real concern. The problem though with financial regulation is at the front-line agencies – their turf fights, their looking out for “their companies,” and their susceptibility to regulatory capture, at least on some issues. Those problems should be addressed, but, in all likelihood, will not be in the current political climate.
In other words, I agree with the frequently made comment that this fight was not really about Weiss, who had the misfortune to find himself in the crossfire between different factions of the Democratic Party. It is hard to see, though, how this fight benefitted anybody, except providing some amusement to some Republican onlookers.

Sunday, January 11, 2015

A Comment about the Price of Oil and Futures Markets

Every time there is a big increase in the price of oil, people are quick to blame speculators in the futures markets. Funny, though, now that there has been a large and rapid fall in the oil price, I haven't seen anything blaming the speculators. At some point, though, the price of oil will increase. Look for speculators to be blamed.
A few things to remember about futures markets:

For every long position there is a short position. The futures markets are a zero sum game (except for things like commissions.) The gains and losses offset each other.
Very few futures contracts are held to maturity and result in delivery of the underlying commodity. It is the threat of delivery that causes the cash and futures prices to converge as maturity approaches.

To make the case that the futures market is affecting the cash market price, one has to make the case that some development in the futures market is affecting the underlying supply and demand conditions for the commodity in a way that would not happen if the futures market did not exist.
Despite the foregoing, I actually think that financial institutions are often not subject to enough regulation or supervision, resulting in imprudent risk taking that can ultimately cost the government and/or society. However, those in favor of better regulation should not use market developments that they know are unpopular (e.g., a stock market decline or an increase in the price of oil) to make the case for more regulation unless they have a good reason to believe that the development is due to lax regulation. Often, they do not have a good case, and this hurts their credibility with people who have some knowledge of the markets in question.