The EconomistNovember 7th 2020 Leaders 1512 “sheer volume” of issuance means the market’s plumbing may
come under strain. That could disrupt the government’s ability
to borrow and cause tremors across the world’s financial system.
There are two fault lines. When Uncle Sam issues debt a group
of middlemen known as “primary dealers”—mostly banks—are
obliged to buy it up at “reasonably competitive” prices. Primary
dealers also act as intermediaries for investors who wish to trade
with one another. In a crunch Treasuries can pile up on dealers’
balance-sheets, causing them to swell and pushing the banks
closer to breaching the capital requirements set by regulators.
That makes it harder for them to act as intermediaries, and in-
vestors do not like trading without a big institu-
tion sitting in the middle. In the spring, as in-
vestors rushed to unwind their bets, primary
dealers were overwhelmed.
The second vulnerability is that the Treasury
market is symbiotically connected with another
crucial market: the one for “repo” lending,
whereby banks and other financial firms bor-
row from one another by temporarily exchang-
ing Treasuries for cash. Because primary dealers typically use
repo transactions to fund their purchases of Treasuries, the two
markets are closely linked. The repo interest rate is important to
the economy (more so than the “federal funds” rate that the Fed
officially targets) and anchors borrowing rates for businesses
and households. But when Treasury issuance or the Fed’s opera-
tions suck cash out of the banking system, the repo rate can spike
unexpectedly, catching policymakers off-guard. This happened
in late 2019.
It would be wise to mend the pipes before the next torrent of
issuance gushes down them. Some quick fixes are obvious. A
temporary exemption of cash and Treasuries from banks’ lever-
age ratios should be made permanent. Banks should not have to
hold capital against assets which are all but risk-free. And the
number of primary dealers could also be expanded, so that it
matters less if any one of them gets into trouble.
But it would be better still to implement a deeper overhaul.
The primary-dealer system is needlessly complex and would
never be designed from scratch today. It should be phased out in
favour of a central clearing house for Treasury trades which
would let smaller firms deal with each other without an interme-
diary clogging up the market. More debt issuance could take
place without middlemen, too.
The Fed must also get a better grip on rates in
the repo market, which influences the entire
economy. Currently it puts a floor under repo
rates but, in normal times, does not cap them.
The answer is a “standing repo facility”, through
which it would lend at its target interest rate to
any counterparty that can provide short-term
Treasuries as collateral. These Fed loans would
poselittlerisk to the taxpayer. And with a firmer grip on rates the
Fed would have less need to buy government bonds in a panic, a
tactic which over time is destined to cause a political stink be-
cause it looks as if the government is being financed by the print-
ing presses.
Dodgy financial plumbing is tricky to fix but it has the capaci-
ty to cause an almighty mess. It determines how well policy is be-
ing transmitted to the economy as a whole. As the pandemic
leads to an epic amount of government borrowing and blurs the
boundary between fiscal policy and the Fed, it is time for reforms
to make the pipes safer. 7Treasury issuance
United States, $trn 4
3
2
1
0
20
To O c t2017 18 19S
amuel patytold his pupils to look away if they might be of-
fended. He knew that caricatures of the Prophet Muhammad
are deemed blasphemous by Muslims. But since the images in
question were published by Charlie Hebdo, a French satirical
magazine whose staff were massacred by jihadists in 2015, they
were also relevant to a class about free speech. The teacher
thought his pupils old enough to decide for themselves. For this,
he was beheaded.
In the age of social media, outrage can swiftly go global. The
parent who denounced Mr Paty was not in the classroom, and
lied when he said his daughter had been. The jihadist who killed
the teacher did so after watching a Facebook video posted by that
parent. And when Emmanuel Macron, France’s president, de-
cried the murder and defended free speech, the leaders of several
Muslim countries accused him of Islamophobia. Among them
were Turkey’s president, who locks up thousands of Muslims for
belonging to the wrong religious group, and Pakistan’s prime
minister, who seems more upset by events in a classroom in
France than in next-door China’s million-Muslim gulag.
Unscrupulous politicians have always stirred up racial or sec-
tarian outrage to unite their supporters and distract attention
from their own flaws. But some critics seem sincerely to believethat France is the cause, rather than victim, of jihadist attacks on
its soil. They often point to its tradition of laïcité, or secularism.
This was entrenched by law in 1905, after a long struggle with the
Catholic church. It protects the right to believe, or not to believe,
and separates religion from public life. No French president
could be sworn in on a holy book. No French state school could
stage a nativity play. Some feel that such rules discriminate
against Muslims. A ban on “conspicuous” religious symbols in
state schools includes the crucifix, but some Muslims still resent
the fact that they (or their daughters) must remove their head-
scarves at the school gate. When Mr Macron recently announced
a crackdown on signs of “Islamist separatism”, such as home
schooling, which he sees as a pretext for radicalised teaching, he
was accused of “weaponising” secularism against Muslims.
Most controversial of all for some Muslims, French law pro-
tects the right to blaspheme and to insult any religion—although
not to discriminate against an individual on the basis of reli-
gious belief. Some see this, wrongly, as a French campaign to in-
sult Islam. Boycotts of French goods and anti-Macron protests
have taken place from Istanbul to Islamabad.
Discrimination against Muslims is a real problem in France,
as Mr Macron implicitly concedes. Employers are more likely toVoltaire’s heirs
France is right to defend free speechSecularism and Islam