From a Washington Post article that comes tantalizingly close to what can happen operationally when a sovereign currency issuer enters into "debt" overlays. But hey, one person at a time...
But the most interesting explanation is that large U.S. banks, with the Federal Reserve's assistance, have helped put a lid on interest rates. How? In lieu of lending to the private sector, today's government-managed large U.S. banks have been borrowing heavily from the Fed (paying near zero percent for money) and buying risk-free U.S. government debt (Treasurys and agency securities), which has no capital requirement. To be sure, these purchases reflect rational behavior. Private demand for credit has evaporated, and tighter credit standards have frozen out small businesses.
Unwittingly or not, the Federal Reserve and the Obama administration are further encouraging these bond purchases through new capital rules, liquidity requirements and other regulatory changes that traditionally cause bankers to increase their holdings of government debt.
Last week, regulators including the Fed and the Federal Deposit Insurance Corp. upped the ante by jointly ordering the banks to maintain larger stocks of "unencumbered, highly liquid assets . . . readily available . . . during the time of most need." Topping the list of suggested holdings? U.S. Treasury securities.