Just When You Think Sec. Geithner and His Treasury Department Can’t Get Any Dumber – Something Even More Stupid Comes Along

Treasury to Issue Floating Rate Debt In the Lowest Interest Rate Environment Ever

If Mr. Obama is defeated in the fall election America will be entering a fairly dark period, but one small beacon of light will be that Timothy Geithner will no longer be Secretary of the Treasury.  Mr. Geithner took his current position after being head of the New York Fed, and either by incompetence or ignorance or probably a combination of both he had great responsibility for the financial meltdown of 2007-08.  Also, he also apparently was notified of the LIBOR fixing, and did nothing.  And then there was that thing about  him not being able to do his income taxes.

Now the Treasury Department has come up with what is probably the single worse decision of any Treasury Department in modern times.  Treasury has decided to issue floating rate debt. Until now Treasury Notes and Bonds had fixed interest rate, but now there will be new debt where the interest rate will adjust upward or downward as rates move in general.

Unlike fixed-rate securities, floating-rate debt pays interest that is periodically reset either up or down, depending on how the index it is linked to has moved. That could pose a risk for Treasury—it would have to pay more to borrow if rates rise above today's low level.

"We do not try to time markets or to time interest rates. So we think this product makes sense over all market cycles—whether rates are rising or falling—that it is a complement to securities that we offer today," Ms. Miller said.

So what’s the problem?  Well interest rates, particularly interest rates on U. S. Government debt are at historical lows, in fact they are so low it is difficult to see how they can go much lower.  But they can certainly rise, and at some time in the future that may well happen.  So what possible motivation would there be for any borrower to borrow in variable rates.  The only thing that can happen is a bad thing, interest rates and the cost of borrowing can only go up.

See when interest rates are high borrowers should issue floating rate debt, so that as rates drop their interest costs will drop.  When rates are low, borrowers want to issue fixed rate debt, so when interest rates go up their borrowing costs will not go up.  Everyone (expect maybe Treasury) knows this.  Really, they do, they are teaching it in the first grade now.

What the government should be doing is to issue only long term, fixed rate debt.  That way it would lock in low interest rates for decades, and save future taxpayers hundreds of billions. Apparently the Treasury Sec and the rest of the government is just too stupid to know this. 

Floating rate government debt is of course a great deal for banks and other large financial institutions.  And since Mr. Geithner can expect to take a great job in the private sector as soon as he is kicked out leaves government, it is easy to see whose side he is on.  In case anyone doesn’t know, here’s a hint.  It ain’t the taxpayers.