Should the Fed Buy Munis?

June 21st, 2012

Mike Konczal floats a very interesting idea emailed to him by Richard Clayton, the Research Director of Change To Win (my bold for quick scanning).

under Section 14 b 1 the Fed has the authority to purchase any obligation of a state or local government of 6 months maturity or less. This provision seems clearly to permit a mass refinancing of state and local government debt at the current 6 month interest rate (very close to 0), which would save state and local gov’ts approximately $75 billion a year (going by the flow of funds #s for state and local interest payments). Moreover, since state and local govts do the bulk of infrastructure investing, the fed could create a program to fully fund such investment through purchases of newly issued 6 month bonds

I really love this idea (the alternative being the very iffy notion of the Fed buying REITs, ETFs, etc.), but I do wonder if it’s practical. Munis would have to issue new bonds, and they’d be in the position of having to roll them over six months hence. Could they do that? Would the Fed still be there in six or twelve months? Could the whole distributed machinery really be built quickly? Would muni managers get on board? Would the political pressure on the Fed resisting what looks like a very fiscal move make it difficult to implement? Is there a large and liquidly trading existing stock of short-term munis out there that the Fed could just buy (pushing down short-term muni rates)? Those are just a few of many questions that come mind. Thoughts?

Cross-posted at Angry Bear.

  1. Detroit Dan
    June 22nd, 2012 at 10:04 | #1

    This is a very interesting topic for me. Are you familiar with the discussion at

    Joe Gagnon is quoted from an interview with Mike Konczal. In the discussion, Beowulf and Tom Hickey provide further information and commentary.

    It seems to me that the executive branch should be involved in this sort of unconventional “monetary policy”. I would be interested in knowing more about the various laws involved.

    Beowulf provided a link to, which seems to be a good site to find out what the laws are. But I don’t know my way around there yet…

  2. Detroit Dan
    June 26th, 2012 at 14:42 | #2

    By the way, I guess I’m not very knowledgeable about the law. I tried to find “Section 14 b 1” in but couldn’t…

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