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I think its in the Article 123 provision, allowing the NCBs to act as lender of last resort to commercial banking, but not to their Treasuries.

In the US, when we want to pretend that the Fed can not act as public lender of last resort, we put in place regulations restricting the Fed to purchasing of bonds on the open market, and force the Treasury to pretend that it is selling the bonds to private holders, who turn around and sell to the Fed in pursuit of their Federal Open Market Committee actions in defense of their target cash rate.

But that pretense is a policy decision, not a structural requirement, and if it were to become inconvenient at a time when it was politically feasible, could readily be reversed ~ we have at some points since WWII have had direct purchases of Treasury security by the Fed, which is the above without the pretense (note that the pretense is useful for transactions income for the FIRE sector).

If an NCB was to purchase its own Treasury's securities to maintain a target long term interest rate, from private holders, that would make a market for the Treasury to sell those securities.

And in a self-fulfilling prophecy, if they act to make that market, the Treasury securities up to the amount that they elect to purchase will be worth precisely the interest rate terms at which they purchase it.

The moral hazard for a district central bank buying public non-sovereign debt from a provincial government is whether it can afford the debt service. In a conventional central bank, surplus income is returned to Treasury, so when it holds sovereign debt, there is no question of being able to afford the debt service.

So the question is: if an ECB member NCB has a surplus of revenue over costs, does it still return the surplus to its national Eurozone government? If so, it seems like it ought to be able to make a market in the debt of its own national government.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 1st, 2010 at 03:41:32 PM EST

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