U.S. TREASURY IS QUIETLY DOING THE FED'S WORK
By JOHN CRUDELE

November 7, 2006 -- FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation's money supply seems to be confoundingly large.

It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation.

Repurchase agreements - or repos - have long been used by the Federal Reserve to get money quickly into the hands of financial institutions, which in turn can put the money into circulation in the form of loans.

Last Thursday, for example, the Fed executed $2.5 billion in overnight repos and $8 billion in 14-day repurchase agreements. These were reported on the financial wires.

The Treasury completed a $5.5 billion repo operation on the same day under what it calls the Term Investment Option. There was no mention of the Treasury operation on the wires. In the Fed's repo deals, the banks temporarily turn over securities to the central bank in exchange for cash.

The Treasury TIO program works in a similar way, except the financial institutions pledge securities as collateral in exchange for the cash.

Is this like the repo operation at the Fed? "Kinda'," says a spokeswoman for Treasury. "But not really." She said the TIO program only replaced the old way of putting government cash in banks without making the banks place bids, which gets the government a better deal.

Most people judge whether the Federal Reserve is trying to influence economic growth by its actions with interest rates.

If the Fed is raising rates, for instance, it really isn't tightening credit if it is also putting large amounts of money into the hands of bankers through repos.

The opposite is also true: the Fed can't really speed up the economy by cutting the interest rates it controls (and hoping all other rates come down) if it is keeping a tight fist on the amount of money banks have available to lend. This is the way the repo market has worked - up to now.

These days, whenever the Treasury finds itself with extra cash lying around, it can turn the money over to the Fed to be invested.

Apparently the Treasury doesn't report its repo auction results in the Fed's report since last Thursday's maturities in the two operations didn't match. It's difficult to call this operation "secret" if financial institutions have been using it for three years to increase their liquidity. But folks I asked on the trader side of the investment community [if they] had never heard of this arrangement.

Experts worry whenever there is too much money - liquidity - in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks.

But even more worrisome for the financial markets than too much liquidity would be an inability to track the amount of money being pumped into the financial system.

Unless I find out differently, it looks as if the Treasury has created a way to duplicate the Fed's power. And that is a disturbing possibility unless it is somehow monitored.

john.crudele@nypost.com