Repo Blowup Was Fueled by Big Banks and Hedge Funds, BIS Says(bloomberg.com)
bloomberg.com
Repo Blowup Was Fueled by Big Banks and Hedge Funds, BIS Says
https://www.bloomberg.com/news/articles/2019-12-08/repo-blowup-was-fueled-by-big-banks-and-hedge-funds-bis-says
82 comments
> Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds
That’s the discount rate. Repo rate is the rate of borrowing under repo agreements. Both private and monetary participants repo.
What’s a repo? Secured borrowing. Imagine you want to borrow $100. I quote 2% interest for one year with collateral. So I give you $100 and you give me a claim on your computer monitor. In a year, you give me $102 and I release title to the monitor. If you fail to pay, I get the monitor. This is traditional secured borrowing.
There is risk, though. You could trash the monitor before I get it. Or you could refuse to co-operate with my requests.
Here’s another way to structure that loan. You sell me your monitor today for $100. You further agree to buy it back from me (and I agree to sell it) in a year for $102. When things work, it’s the same transaction as above. When they don’t, I already have the monitor.
That’s repo in a nutshell.
That’s the discount rate. Repo rate is the rate of borrowing under repo agreements. Both private and monetary participants repo.
What’s a repo? Secured borrowing. Imagine you want to borrow $100. I quote 2% interest for one year with collateral. So I give you $100 and you give me a claim on your computer monitor. In a year, you give me $102 and I release title to the monitor. If you fail to pay, I get the monitor. This is traditional secured borrowing.
There is risk, though. You could trash the monitor before I get it. Or you could refuse to co-operate with my requests.
Here’s another way to structure that loan. You sell me your monitor today for $100. You further agree to buy it back from me (and I agree to sell it) in a year for $102. When things work, it’s the same transaction as above. When they don’t, I already have the monitor.
That’s repo in a nutshell.
>it's the same transaction...
Actually, it isn't. The financial aspect might be equivalent, but look beyond the purely financial characteristics from your phrasing and you also relinquish any utility you'd have gotten out of the monitor in that time. Depending on number of monitors you have and other circumstances, that lends the transaction a very different character from the first.
EDIT: Downvotes without substantive replies or explations do nothing to further overall discourse.
I stand by my assertion that a classical collateral secured transaction is fundamentally different than a repo as described.
I'm open to having my mind changed. Just be aware, I don't look at transactions of value as only being financial in their entirety unless explicitly set out. Other forms of circumstantial value can and do emerge.
Actually, it isn't. The financial aspect might be equivalent, but look beyond the purely financial characteristics from your phrasing and you also relinquish any utility you'd have gotten out of the monitor in that time. Depending on number of monitors you have and other circumstances, that lends the transaction a very different character from the first.
EDIT: Downvotes without substantive replies or explations do nothing to further overall discourse.
I stand by my assertion that a classical collateral secured transaction is fundamentally different than a repo as described.
I'm open to having my mind changed. Just be aware, I don't look at transactions of value as only being financial in their entirety unless explicitly set out. Other forms of circumstantial value can and do emerge.
> EDIT: Downvotes without substantive replies or explations do nothing to further overall discourse
Please don't do this. It adds no information and the site guidelines explicitly ask you not to, as you'll see if you read them to the end: https://news.ycombinator.com/newsguidelines.html. It also guarantees further downvotes, and this time they'll be correct because you broke the rules.
Please don't do this. It adds no information and the site guidelines explicitly ask you not to, as you'll see if you read them to the end: https://news.ycombinator.com/newsguidelines.html. It also guarantees further downvotes, and this time they'll be correct because you broke the rules.
Thought I caught it before the edit window closed. Missed it by || that much apparently.
I don't understand what you mean, but if you mean you want to edit that bit out, let us know at [email protected] and we can reopen the comment for editing.
> a classical collateral secured transaction is fundamentally different than a repo as described
You shouldn't be downvoted. The observation is correct.
In a collateralized loan, the borrower owns the collateral. In a repo, the borrower does not. This is one reason why companies finance capital equipment with secured loans, not repos.
A repo also involves two collateral purchase-and-sale transactions; a collateralized loan involves zero. This restricts it to highly liquid assets, where everyone agrees on prices and settlement is fast and cheap. In practice, this almost exclusively means Treasuries.
I was handwaving when I said they're the same transaction. They're symmetrical, cash-flow wise. But you can't replace secured loans with repos or vice versa. Repos are secured borrowing with minimal counterparty risk. Secured loans are secured borrowing with broad asset coverage.
> a classical collateral secured transaction is fundamentally different than a repo
Not fundamentally. Just different. (I'd also note that the "classic" collateralized transaction is a spherical cow.)
Lender leasing the collateral to the borrower makes a repo functionally identical to a secured loan. Lenders requiring ring-fenced collateral (e.g. in a cash-backed loan) are repos with extra steps. This symmetry belies their fundamental similarity.
There are legal differences in edge cases. But fundamentally, they're both collateralized borrowing.
You shouldn't be downvoted. The observation is correct.
In a collateralized loan, the borrower owns the collateral. In a repo, the borrower does not. This is one reason why companies finance capital equipment with secured loans, not repos.
A repo also involves two collateral purchase-and-sale transactions; a collateralized loan involves zero. This restricts it to highly liquid assets, where everyone agrees on prices and settlement is fast and cheap. In practice, this almost exclusively means Treasuries.
I was handwaving when I said they're the same transaction. They're symmetrical, cash-flow wise. But you can't replace secured loans with repos or vice versa. Repos are secured borrowing with minimal counterparty risk. Secured loans are secured borrowing with broad asset coverage.
> a classical collateral secured transaction is fundamentally different than a repo
Not fundamentally. Just different. (I'd also note that the "classic" collateralized transaction is a spherical cow.)
Lender leasing the collateral to the borrower makes a repo functionally identical to a secured loan. Lenders requiring ring-fenced collateral (e.g. in a cash-backed loan) are repos with extra steps. This symmetry belies their fundamental similarity.
There are legal differences in edge cases. But fundamentally, they're both collateralized borrowing.
Indeed. If the asset produces a revenue stream itself, e.g. coupons or dividends, things get complicated fast.
Financial securities have little utility past their monetary value.
Off the top of my head, you give up on any cashflows, such as dividends/interest from the security and maybe also some anciliary rights, such as voting rights or whatever rights bondholders get.
However, you account for forgone cashflows by adjusting the repurchase price accordingly. As for the rights, you can recall the repo (it's usually done overnight).
Off the top of my head, you give up on any cashflows, such as dividends/interest from the security and maybe also some anciliary rights, such as voting rights or whatever rights bondholders get.
However, you account for forgone cashflows by adjusting the repurchase price accordingly. As for the rights, you can recall the repo (it's usually done overnight).
>Voting rights
I'd say that represents a very different transaction Still depending on where or not an important vote is coming up in the meantime, and who you are selling your voting stake to.
I'd say that represents a very different transaction Still depending on where or not an important vote is coming up in the meantime, and who you are selling your voting stake to.
That definition doesn't seem right. The repo rate is just the rate paid on repurchase agreements, a type of risk free, short term loan where collateral is exchanged for cash, then exchanged back again. Central banks shouldn't be involved. The Fed is only involved now as an emergency provider of liquidity.
https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfl...
https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfl...
Confirmed, yardie's definition is straight up wrong.
EDIT:
It's worth noting that the collateral is usually government bonds (this is called "general collateral", or GC), with bonds from quasi-government bodies like Fannie Mae or the World Bank being the second most common kind.
One way to look at repo is that it's a way for companies with a big stock of bonds (eg banks) to pawn them to borrow money. This is usually the cheapest option for them to borrow money at scale, and so the repo rate is seen as an indication of banks' financing costs.
Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash.
I have no idea which use case is more common.
EDIT:
It's worth noting that the collateral is usually government bonds (this is called "general collateral", or GC), with bonds from quasi-government bodies like Fannie Mae or the World Bank being the second most common kind.
One way to look at repo is that it's a way for companies with a big stock of bonds (eg banks) to pawn them to borrow money. This is usually the cheapest option for them to borrow money at scale, and so the repo rate is seen as an indication of banks' financing costs.
Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash.
I have no idea which use case is more common.
> Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash.
And the reason you'd do this is... to lock in yield in a declining interest rate environment?
And the reason you'd do this is... to lock in yield in a declining interest rate environment?
There are as many reasons to do it as there are reasons to buy bonds!
The five-year US treasury currently yields 1.658%, and SOFR, a measure of repo rate, is currently 1.55%, so that looks a bit like free money. As long as interest rates don't go up.
You might be selling bond futures, and want to cover your position.
You might think some specific bonds are undervalued relative to others, in which case you can buy the undervalued ones on repo, short-sell some overvalued ones, and wait for the market to correct itself.
I'm sure there are many far more ingenious things you can do with bonds.
The five-year US treasury currently yields 1.658%, and SOFR, a measure of repo rate, is currently 1.55%, so that looks a bit like free money. As long as interest rates don't go up.
You might be selling bond futures, and want to cover your position.
You might think some specific bonds are undervalued relative to others, in which case you can buy the undervalued ones on repo, short-sell some overvalued ones, and wait for the market to correct itself.
I'm sure there are many far more ingenious things you can do with bonds.
For example, if the yield on a long-term bond is 3% and repo rates are only 2%, you might buy the bond, financed with a repo transaction, and bet that over the term of the repo, the bond’s price will hold up enough to allow you to profit from the transaction. If it is a one year repo, the bond could decline in price by 1% and you would still make a profit because its yield is higher than the cost to finance the purchase.
A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.
A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.
So, stupid question: what's the purpose of suppressing short-term interest rates like that? Isn't that a meaningful market signal that banks should be running in a way that's less dependent on loans from other banks, just as a higher price for fish correctly signals market participants to look for substitutes?
(Side note: as someone who "should" benefit from more expensive liquidity as a holder of a money market fund, I looked up the Vanguard Prime MMF, and it turns out it doesn't hold any repos[1], even though that's a valid asset class for MMMFs[2]...)
[1] https://investor.vanguard.com/mutual-funds/profile/portfolio...
[2] https://www.pimco.com/en-us/insights/investment-strategies/f...
>New SEC rules require that government money market funds hold 99.5% of assets in government-related securities, including Treasury bills, agency discount notes and repurchase agreements (repos).
(Side note: as someone who "should" benefit from more expensive liquidity as a holder of a money market fund, I looked up the Vanguard Prime MMF, and it turns out it doesn't hold any repos[1], even though that's a valid asset class for MMMFs[2]...)
[1] https://investor.vanguard.com/mutual-funds/profile/portfolio...
[2] https://www.pimco.com/en-us/insights/investment-strategies/f...
>New SEC rules require that government money market funds hold 99.5% of assets in government-related securities, including Treasury bills, agency discount notes and repurchase agreements (repos).
Since the borrowers could sell the collateral instead, technically they aren't depending on these loans and they could stop using the repo market.
However, they would then 1) lose the yield on the bonds and 2) instead need to keep large amounts of money on some account and trust that the bank doesn't go bust. Bond holding is used as an alternative to deposits.
The government also doesn't want the repo market to shut down, because that means everybody dumps their gov bonds, since they wouldn't need them as collateral anymore. The dollar amount of outstanding repo contracts is measured in trillions so this would imply a catastrophic increase in the cost of borrowing for the government.
However, they would then 1) lose the yield on the bonds and 2) instead need to keep large amounts of money on some account and trust that the bank doesn't go bust. Bond holding is used as an alternative to deposits.
The government also doesn't want the repo market to shut down, because that means everybody dumps their gov bonds, since they wouldn't need them as collateral anymore. The dollar amount of outstanding repo contracts is measured in trillions so this would imply a catastrophic increase in the cost of borrowing for the government.
I'm probably way incorrect. But the article kept talking about repos and the repo rate without telling the reader what it actually means. I just went with whatever was the highest indexed in my search. I don't work in finance beyond layman so my understanding of finance domain specific lingo is very limited.
* And some would say to sneak in a little QE without calling it QE
It's not QE, unless everything is QE. When the Fed targets a short-term rate, this is just ordinary monetary policy.
Most repos involve banks, investment banks, money dealers and various investors.
>What Is a Repurchase Agreement?
>A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.
https://www.investopedia.com/terms/r/repurchaseagreement.asp
>What Is a Repurchase Agreement?
>A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.
https://www.investopedia.com/terms/r/repurchaseagreement.asp
Maybe I'm naive but I assumed the $120k banana "sale" was essentially a fake transaction intended to attract publicity and drive foot traffic to the venue.
That or a money laundering scheme.
I'm not a professional at money laundering, but under most circumstances, you'd want to do it without attracting attention.
There was a decent podcast on this about a month back, on Bloomberg "Odd Lots": https://www.bloomberg.com/news/articles/2019-11-11/this-is-w...
I listened to this podcast multiple time, and found it quite hard to follow.
I don't have a heavy background in finance, but in general I have a good enough understanding of the subject. In this case however the language was somehow making it harder than usual.
I don't have a heavy background in finance, but in general I have a good enough understanding of the subject. In this case however the language was somehow making it harder than usual.
Any specific parts you’d like to understand better? I’m sure someone here is well versed in this topic.
I’ve listened to that episode (after another recommendation here, a few days ago).
Didn’t find it very informative or good. The podcast discussion was opinionated and obtuse.
Didn’t find it very informative or good. The podcast discussion was opinionated and obtuse.
Everyone should listen to this podcast. It is short and informative. I've learned a lot about the difference between fiscal and monetary policy.
> Apparently, money is meaningless.
I am not going to argue in favour of the banana. But I am going to argue in favour of (expensive) art.
If I had only $10 and $1 would buy me food and shelter, then I would pay $9 for a Monet or van Gogh. Why? Because if I never see or possess an actual Monet or van Gogh, how can I verify things about the past? How can I verify anything? How can I have a physical and complete connection to the past?
To take a more historic example, if anything new (and real) about the man called Jesus is discovered, it would be equally valuable to nonreligous people as to religous people. Suppose for a moment that you find Jesus's diary and in it he wrote: "Can people please stop writing four separate accounts of how I am the messiah; I am not." Wouldn't the change that would bring about be more significant than the amounts of money spent in various contexts? For the record, I don't think the Jesus example matters much in 2019. But back in the Renaissance, our connection to the past (and the past's knowledge) was critical. Maybe Euclid's elements is not "art" to you but it sure as hell should be preserved as though it were art.
Art and artifacts are to history as experimentation is to science.
I am not going to argue in favour of the banana. But I am going to argue in favour of (expensive) art.
If I had only $10 and $1 would buy me food and shelter, then I would pay $9 for a Monet or van Gogh. Why? Because if I never see or possess an actual Monet or van Gogh, how can I verify things about the past? How can I verify anything? How can I have a physical and complete connection to the past?
To take a more historic example, if anything new (and real) about the man called Jesus is discovered, it would be equally valuable to nonreligous people as to religous people. Suppose for a moment that you find Jesus's diary and in it he wrote: "Can people please stop writing four separate accounts of how I am the messiah; I am not." Wouldn't the change that would bring about be more significant than the amounts of money spent in various contexts? For the record, I don't think the Jesus example matters much in 2019. But back in the Renaissance, our connection to the past (and the past's knowledge) was critical. Maybe Euclid's elements is not "art" to you but it sure as hell should be preserved as though it were art.
Art and artifacts are to history as experimentation is to science.
> "Can people please stop writing four separate accounts of how I am the messiah; I am not." Wouldn't the change that would bring about be more significant than the amounts of money spent in various contexts?
That would be in line with passages like John 1:3 where John insists the purpose of Jesus's piety isn't so he can be messiah, but rather so that the rest can follow his example and become like him. So Jesus claiming there should be no difference between him and us would be consistent with other passages in the bible.
That would be in line with passages like John 1:3 where John insists the purpose of Jesus's piety isn't so he can be messiah, but rather so that the rest can follow his example and become like him. So Jesus claiming there should be no difference between him and us would be consistent with other passages in the bible.
Alright; a historical artifact that supports that (or any other claim) would be intrinsically valuable.
Didn't some comedian eat that banana and they replaced it saying the banana was not part of the art?
> a real banana and duck tape sold for $120,000, 3 times.
There's also the urinal that sold for $1.7M in 1999 https://en.wikipedia.org/wiki/Fountain_(Duchamp)#Art_market
There's also the urinal that sold for $1.7M in 1999 https://en.wikipedia.org/wiki/Fountain_(Duchamp)#Art_market
"New tallest skyscraper in the world" has long been recognized as a sign of impending financial collapse. I wonder if one could objectively evaluate "inartistic garbage selling for high prices", as a means of predicting the same? Esthetics is hard to rate objectively, but there would certainly be a consensus agreement on both of these examples.
My intuition tells me that the "new tallest skyscraper in the world" and overpriced esthetics aren't so much signs of an impending financial collapse directly, but they're rather a sign of financial security during the past several years. The problem is that the business cycles are... cyclical, which means that long-lasting financial security is likely to be followed by a financial downturn (collapse). Thinking about it more, I'm not even sure what the difference is.
Interesting point. There is a school of thought that frequent, shallow and short recessions are preferable, because if you don't have them you will pile up problems that all fallout during a deep, long depression. If this is true, then as you say, the skyscrapers, ridiculous art prices, etc. are just the most visible indicators of "lots of easy money, being spent stupidly", which is both a result of prolonged financial security and a bad omen.
[deleted]
A replaceable banana.
The banana was eaten. “Hungry artist”
> 'finance isn't in your DSL'
That's a great turn of phrase, and a nice mental model!
That's a great turn of phrase, and a nice mental model!
Why did you go all that way to see a banana and a piece of duct tape? You could have admired that at your local grocery store.
That's the reason it sold for $120k.
That's the reason it sold for $120k.
I always assume those stupid art bus are a mix of idiots and money laundering.
> finance isn't in your DSL
DSL? Not sure I'm familiar with that term. Some tech jargon?
\s
DSL? Not sure I'm familiar with that term. Some tech jargon?
\s
This problem has sort of been visible for a bit, the first time I remember it was toward that latter half of 2018. I felt this was sort of an even-handed pondering of the ramifications.
https://ftalphaville.ft.com/2019/01/29/1548762302000/Don-t-f...
One bit in there is this:
>Second, as a result of the above, nobody really knows what the true cost of regulating the system is, or to what degree Basel III has changed the market in terms of elasticity.
In the OP article, this was the thing where I have mixed feelings:
>JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back.
On the one hand, I think it reasonable to sprinkle a little salt over anything coming from the global banks, especially when they are telling you they want to be regulated less. But on the other hand, JPMorgan for whatever reason really does seem to want to be that quasi-lender of last resort at the right price. They did it last year. I think Kaminska in my linked article has a pretty fair view that post-crisis regulation changed the game in ways we might not fully acknowledge or be aware of.
https://ftalphaville.ft.com/2019/01/29/1548762302000/Don-t-f...
One bit in there is this:
>Second, as a result of the above, nobody really knows what the true cost of regulating the system is, or to what degree Basel III has changed the market in terms of elasticity.
In the OP article, this was the thing where I have mixed feelings:
>JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back.
On the one hand, I think it reasonable to sprinkle a little salt over anything coming from the global banks, especially when they are telling you they want to be regulated less. But on the other hand, JPMorgan for whatever reason really does seem to want to be that quasi-lender of last resort at the right price. They did it last year. I think Kaminska in my linked article has a pretty fair view that post-crisis regulation changed the game in ways we might not fully acknowledge or be aware of.
> But on the other hand, JPMorgan for whatever reason really does seem to want to be that quasi-lender of last resort at the right price. They did it last year. I think Kaminska in my linked article has a pretty fair view that post-crisis regulation changed the game in ways we might not fully acknowledge or be aware of.
More like, they realize there is too much risk of intraday bankruptcy: https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-...
More like, they realize there is too much risk of intraday bankruptcy: https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-...
The original JP Morgan essentially "saved" the US Financial system in 1907.[1]
Jamie Dimon would probably love to get credit for duplicating that feat.
[1]https://en.wikipedia.org/wiki/J._P._Morgan#Panic_of_1907
Jamie Dimon would probably love to get credit for duplicating that feat.
[1]https://en.wikipedia.org/wiki/J._P._Morgan#Panic_of_1907
Mr Morgan put up his own money in the Panic of 1907. Mr Dimon would not have that kind of cash today.
"Economics of Money and Banking" - https://www.coursera.org/learn/money-banking
is a great course on the structure and operation of the money market, including repos. It's way more complicated that I ever imagined.
The BIS report "September stress in dollar repo markets: passing or structural?" https://www.bis.org/publ/qtrpdf/r_qt1912v.htm
The BIS report "September stress in dollar repo markets: passing or structural?" https://www.bis.org/publ/qtrpdf/r_qt1912v.htm
Scott Nelson, who studies the history of American financial collapses, has an interesting story on how he managed to avoid a financial collapse in 2008 by noticing that 'when rates go up and no one knows why it is time to be concerned' : https://m.youtube.com/watch?v=S-_pNxlbz8w&t=50m59s
wow a single data point. how convincing. the market has already risen substantially since the repo spike so had you sold you would need the market to fall 8% just to be vindicated
It seems like global capital has been all about running as close to the edge as possible in the past couple of decades. More money in good times, but if something happens there's little cushion to fall back on and it turns into a huge mess. I'm worried that the system is becoming too fragile and the people who are going to be most affected are those looking to buy their first home or who want to go to college.
I suspect this is news only because of the financial crisis last decade, otherwise it would be a footnote in the financial pages. I dont see why people should care. Presumably if it continues the main players will find a way to arb out the spread.
If you downvote me at least list why this repo problem affects anyone.
If you downvote me at least list why this repo problem affects anyone.
This "blowup" is the reason the Federal Reserve has printed $415 billion dollars since mid September.
reference: https://wallstreetexaminer.com/2019/12/chart-shows-fed-not-q...
reference: https://wallstreetexaminer.com/2019/12/chart-shows-fed-not-q...
Saying the Federal Reserve has "printed $415 billion" without qualification is dishonest. It has created $415 billion worth of liquidity for short-term operations of solvent banks, essentially printing money and then destroying it the next day. It has not added $415 billion to the money circulation.
>It has not added $415 billion to the money circulation.
But it did, even if for just a day.
But it did, even if for just a day.
Not all in the same day. If you loan $30, then take it back the next day for 10 days in a row, you're still just moving around $30, not $300
There are two separate things going on here; although both of them intended to relieve pressure in the money markets.
Firstly, there's a so-called "reserve management operation" which is intended to increase reserves held at the Fed by purchasing Treasury bills. Increases in reserves implies greater liquidity to support money market activities. This definitely shows up as a growth in the Fed balance sheet, as the policy is to roll into new Treasury bills at maturity.
Secondly, there's an ongoing campaign of overnight and term repo operations where necessary to achieve the policy target rates. These are short-term, and do not result in a significant balance sheet growth.
See the statement from the NY Fed: https://www.newyorkfed.org/markets/opolicy/operating_policy_...
Firstly, there's a so-called "reserve management operation" which is intended to increase reserves held at the Fed by purchasing Treasury bills. Increases in reserves implies greater liquidity to support money market activities. This definitely shows up as a growth in the Fed balance sheet, as the policy is to roll into new Treasury bills at maturity.
Secondly, there's an ongoing campaign of overnight and term repo operations where necessary to achieve the policy target rates. These are short-term, and do not result in a significant balance sheet growth.
See the statement from the NY Fed: https://www.newyorkfed.org/markets/opolicy/operating_policy_...
The impact depends upon if the market knows you will or won't continue to lend if it fails to be paid back.
> Saying the Federal Reserve has "printed $415 billion" without qualification is dishonest
No, it isn't. I stated exactly what they have done. If you want to make excuses for why they did it, go ahead. It seems you want to.
No, it isn't. I stated exactly what they have done. If you want to make excuses for why they did it, go ahead. It seems you want to.
Your statement was a lie of omission. They printed a much smaller amount, destroyed it shortly afterward, and then repeated that on several occasions until the total amount was about $415 billion. A reasonable person reading "the Federal Reserve has printed $415 billion since mid-September" would take it to mean that $415 billion was added to the monetary supply, which is not what happened. You're disingenuously leaning on how your words will be misinterpreted to stir up unwarranted hysteria about inflation and whatnot.
Nothing was "destroyed". Rather, it was rolled over for bidding the next day (or 14 days, depending on the specific operation). It's an important distinction, because until the actual FRB balance sheet unwinds back to the $3.76T level it was in September, it is precisely as OP describes.
The delta of the FRB's balance sheet between Sept and now is 4066-3761 == 305B. It's not 415B, but it's not even remotely close to 0, either. During this period, there has only been a single weekly draw-down. All other weeks have been accumulative, and should be considered QE4 unless and until these operations stop occurring.
Ref: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
The delta of the FRB's balance sheet between Sept and now is 4066-3761 == 305B. It's not 415B, but it's not even remotely close to 0, either. During this period, there has only been a single weekly draw-down. All other weeks have been accumulative, and should be considered QE4 unless and until these operations stop occurring.
Ref: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
Yes I know that, but how does it affect anyone? Worst I can see is that poor quality banks pay a few percent overnight if they need to borrow on bad days. Surely that is temporary with so many players.
The problem comes in in that the Fed should be the lender of last resort. Not the primary thing propping up the system.
If banks are not capable of engaging in interbank lending while maintaining elevated regulatory levels of liquidity then they've filled their books in such a way that they are not capable of doing one of the fundamental maintenance activities of the financial system.
This is also in essence a sort of signal that all is not well, since there is clearly not enough realizable margin between what the banks portfolios can generate vs. what they have to generate to be capable of playing clearinghouse for another actor.
My hunch is, this repo market is probably a normal mechanism used to moderate the system overall (some actors will have a good period, some'll have it bad, but over time everyone averages out) when the market is healthy, and generating actual value.
I think what we may be seeing now, is pickings starting to get so slim because of low interest rates/lower spending/lower actual (not surveyed, but actual) growth such that everybody is now turning to the Fed at the same time, because everyone sees everyone else as a threat to their liquidity.
The point is that in a healthy market, your growth should be able to surpass your minimum drop dead liquidity reserves.
We aren't seeing that so I'd say we aren't experiencing a healthy market; and no, I don't think the higher liquidity reserves are the chief cause of the unhealthy market. I think we're starting to run into the physical barriers in several industrial verticals as the low hanging fruit starts to dry up, and growth is becoming less and less certain, as well as less and less equitably distributed.
That's my wild-ass-guess anyway.
If banks are not capable of engaging in interbank lending while maintaining elevated regulatory levels of liquidity then they've filled their books in such a way that they are not capable of doing one of the fundamental maintenance activities of the financial system.
This is also in essence a sort of signal that all is not well, since there is clearly not enough realizable margin between what the banks portfolios can generate vs. what they have to generate to be capable of playing clearinghouse for another actor.
My hunch is, this repo market is probably a normal mechanism used to moderate the system overall (some actors will have a good period, some'll have it bad, but over time everyone averages out) when the market is healthy, and generating actual value.
I think what we may be seeing now, is pickings starting to get so slim because of low interest rates/lower spending/lower actual (not surveyed, but actual) growth such that everybody is now turning to the Fed at the same time, because everyone sees everyone else as a threat to their liquidity.
The point is that in a healthy market, your growth should be able to surpass your minimum drop dead liquidity reserves.
We aren't seeing that so I'd say we aren't experiencing a healthy market; and no, I don't think the higher liquidity reserves are the chief cause of the unhealthy market. I think we're starting to run into the physical barriers in several industrial verticals as the low hanging fruit starts to dry up, and growth is becoming less and less certain, as well as less and less equitably distributed.
That's my wild-ass-guess anyway.
Stealing my comment from the last discussion:
The explanation for the FEDs doing the lending is it will spike short term rates or something. Why can't we be mad that the Fed is willing to do this? Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?
The explanation for the FEDs doing the lending is it will spike short term rates or something. Why can't we be mad that the Fed is willing to do this? Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?
A too-big-too-fail bank is using cheap short-term funding (from repos) to invest in long term assets, bonds.
The magnitude is concerning.
When confidence in overnight lending between banks reduces (because the other banks realise what this funding is for), the interest rate (measure of risk) rises.
For repo rates: 2.5% is high, 10% brings the house down, and has a blast radius that impacts the entire system.
The magnitude is concerning.
When confidence in overnight lending between banks reduces (because the other banks realise what this funding is for), the interest rate (measure of risk) rises.
For repo rates: 2.5% is high, 10% brings the house down, and has a blast radius that impacts the entire system.
No, that is not what is happening. The too-big-to-fail banks were lending to the repo market, and hedge funds were taking the cash to buy more assets. Then the tbtf banks decided to buy treasuries instead of lending in the repo market and the hedge funds were SOL. It's the hedge funds that were the problem. When your fund relies on overnight funding for its existence, you won't last long.
From the article:
This [repo] market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.”
From the article:
This [repo] market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.”
I don't understand why we put up with these parasites on the economy. It seems too often we find out that well heeled bad actors in finance end up causing damage to the people who actually create wealth and prosperity in this country: the ordinary laborer.
Because everyone likes and uses credit. Including the ordinary laborer that takes on a car note so he/she can get to his/her worksite.
I don't really see what's the crash mechanism there.
From the lender side, repo financing is collateralized so if someone can't pay, then the lender doesn't care because they've got the collateral bonds already; it's not ideal, but it's not a disaster.
From the borrower side, if someone really needs short-term liquidity and would have usually used repos but can't get any right now, then they do have available bonds that they've used as collateral for that repo, so if they really need cash then they can sell the same bonds instead of borrowing against them. Again, that's not ideal and they'll probably lose some money on an urgent sale, and their plans to earn some profit on that borrowed money won't materialize, but that shouldn't trigger a crash that would affect the whole system.
From the lender side, repo financing is collateralized so if someone can't pay, then the lender doesn't care because they've got the collateral bonds already; it's not ideal, but it's not a disaster.
From the borrower side, if someone really needs short-term liquidity and would have usually used repos but can't get any right now, then they do have available bonds that they've used as collateral for that repo, so if they really need cash then they can sell the same bonds instead of borrowing against them. Again, that's not ideal and they'll probably lose some money on an urgent sale, and their plans to earn some profit on that borrowed money won't materialize, but that shouldn't trigger a crash that would affect the whole system.
Please don't downvote, I'm simply linking to another resource which I have been watching lately to try to wrap my head around what quantitative easing is, and why we are currently in QE4.
https://www.youtube.com/watch?v=outb-2Msd14
https://www.youtube.com/watch?v=outb-2Msd14
as a developer, the use of `repo` in the title confused me for a bit
In the financial domain, repo refers to repurchase agreements. You pledge some bit of collateral to receive a short-term loan that is cheaper than other forms of short-term lending, (usually as a funding mechanism for your daily trading activity, at least for bulge bracket investment banks), and then you pay back what you borrowed and you receive your collateral back.
The opposite is captured with “reverse repurchase agreements” which is exactly what I described, with the roles inversed.
It is actually quite interesting, but doesn’t come up frequently in daily personal finance much at all.
The opposite is captured with “reverse repurchase agreements” which is exactly what I described, with the roles inversed.
It is actually quite interesting, but doesn’t come up frequently in daily personal finance much at all.
> Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Also, I just got back from an art show where a real banana and duck tape sold for $120,000, 3 times. I'm not making this up. Apparently, money is meaningless.