What is the role of bond primary dealers? How are they chosen?

Prof. Wolff, what is the role of bond "primary dealers" in the western economies and how are these primary dealers chosen? From what I read here in Brazil, they are pretty much chosen from central bank unilateral decisions outside any democratic criteria. Is that the same in the US? And, for instance, Goldman Sachs is a primary dealer both in the US and Brazil. What is behind all this? Why central banks must use these few financial institutions chosen by who knows what criteria, to "develop the bond market"?

Official response from submitted

The primary dealers are the handful of major firms given the privilege by the government to deal directly with the government. So, for example, when the US Treasury issues bonds, it sells them to the primary dealers who then resell them to the "public." Not all countries use the system of primary dealers. The US and Brazil do. In the US these days there are about 25 primary dealers who do bond trades directly with the US Treasury and with the Federal Reserve System. This is very profitable for the primary dealers and represent a cozy relationship of top financiers with the top government financial officers....a way of managing capitalism for the benefit of capitalists. Central banks could, of course, trade directly with the public without the use of primary dealers as intermediaries....as some central banks do. Goldman Sachs seeks to be and often is a primary dealer because of the power, profits, and prestige it entails.

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  • commented 2016-12-29 07:59:38 -0500
    Thank you for the answer, Prof. Wolff. In Brazil, there are 12 primary dealers.
  • responded with submitted 2016-12-28 19:52:19 -0500
  • published this page in Ask Prof. Wolff 2016-12-26 18:41:31 -0500


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