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Based on these comments, it seems like a lot of misunderstanding is being proliferated. I’m not an expert on the subject, but I’d like to dismiss the criticism

Based on these comments, it seems like a lot of misunderstanding is being proliferated. I’m not an expert on the subject, but I’d like to dismiss the criticisms of the fed that many are making. These cash injections give banks short term liquidity, which means that banks can complete transactions. These moves are not at all synonymous of a government bailout. The repo market is what is at concern here. In short, relatively safe financial institutions will loan money for very short term (a single day, for example) in return for a small percentage of interest. Trillions of dollars are moved in this market on a daily basis. When market trust lowers (or demand increases, but this is less likely. But, one example is quarterly taxes coming due), rates can increase. Repo rates are supposed to be low for the market to function properly. The broader reason for this occurring is that the Fed post 2008-crisis requires banks to maintain higher relative liquidity. On the Feds view, they would rather continue to inject cash than allow banks to maintain pre-crisis levels of liquidity. At least in my opinion, requiring banks to maintain higher liquidity is a smart move. As far as what this signals economically, I’ve yet to hear any credible answers. Certainly the banks will say regulation is the problem and the fed will respond that we can’t trust the banks that much.

privateSFacct 7y ago
The issue is that this removes an important signal to the market. If trust is down, rates will go up, because if you can't clear your own transactions you depend on borrowing to clear transactions. This is a sign that should maintain greater cover yourself. Of course, if fed steps in to subsidize the market - which is what this does by holding rates extremely low despite the potentially systemic risks posed by the market - then you can keep pushing for every fraction of a point. But if the repo market goes down that is going to be very serious - and so there should be a bit more cost in the market to reduce the reliance on it.
- bransonf 7y ago
  This is a very good point. My take is that the Fed is trying to be vigilant amidst indicators of a looming recession. If the repo market rate is too high, banks will hoard cash. Hoarding cash will devalue the banks, and we know that'll likely trigger a definitive recession.
  - privateSFacct 7y ago
    No question - but why not have some of these banks pay some high overnight rates? They have the money to do so. This push to squeeze every nickle of profit out leaves almost no margin if stress hits. The repo market is huge. If there ever is a real scare and people are used to be able to get free money (or expect the fed to step in) the fed will have to step in on a HUGE basis.
rdtwo 7y ago
This money is going somewhere, at best it’s chasing yields and driving up asset prices, at worst it’s keeping a zombie Institution or 2 alive

privateSFacct 7y ago

The issue is that this removes an important signal to the market. If trust is down, rates will go up, because if you can't clear your own transactions you depend on borrowing to clear transactions. This is a sign that should maintain greater cover yourself. Of course, if fed steps in to subsidize the market - which is what this does by holding rates extremely low despite the potentially systemic risks posed by the market - then you can keep pushing for every fraction of a point. But if the repo market goes down that is going to be very serious - and so there should be a bit more cost in the market to reduce the reliance on it.

bransonf 7y ago
This is a very good point. My take is that the Fed is trying to be vigilant amidst indicators of a looming recession. If the repo market rate is too high, banks will hoard cash. Hoarding cash will devalue the banks, and we know that'll likely trigger a definitive recession.
- privateSFacct 7y ago
  No question - but why not have some of these banks pay some high overnight rates? They have the money to do so. This push to squeeze every nickle of profit out leaves almost no margin if stress hits. The repo market is huge. If there ever is a real scare and people are used to be able to get free money (or expect the fed to step in) the fed will have to step in on a HUGE basis.

rdtwo 7y ago

This money is going somewhere, at best it’s chasing yields and driving up asset prices, at worst it’s keeping a zombie Institution or 2 alive