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New York Fed Again Upsizes Liquidity Plans for Turn of the Year

jessaustin 7y ago
Maybe this is where some of the missing Pentagon money has gone?
- charwalker 7y ago
  Unlikely, the Fed is fairly independent from the rest of the government and holds reserves or other assets as needed.
jdhn 7y ago
Ever since this whole repo issue started, we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced. Not to mention that the actual cause for the spike in repo rates has never been announced or identified.
- corporate_shi11 7y ago
  I believe there are two main causes. First, the massive issuance of treasuries used to fund the persistent and growing US budget shortfalls. As the big Wall Street banks have been tasked with buying up treasuries, massive amounts of liquidity have been siphoned out of the market. The Fed Will ultimately have to restart QE (in perpetuity) in order to fund the debt. Second, hedge funds have been taking advantage of the repo markets, funding massive leveraged trades. Of course as the Fed pumps more liquidity into the system, these hedge funds will only ramp up their leverage. This is why Fed lending will be perpetually insufficient, because any increase in lending will just be used to support more and more leverage. It's like throwing paper towels at a water main break.
- deleted 7y ago
  [deleted]
- JumpCrisscross 7y ago
  > we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced Short-term as in short-term financing, i.e. overnight lending. Nobody expects repo to go away in the same way nobody expects interest paid on excess reserves to go away. It's a tool the Fed uses to manage the money markets. Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from.
  - joncrane 7y ago
    >Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from. Wrong. It used to be this way but they switched it up in 2003.[1] The Fed is considered the "lender of last resort" and they manipulate the interest rates to keep it that way. They used to target the Fed Funds rate to be higher than the discount rate. But that didn't make sense if you think about the system the government wanted (for a while it was thought that embarrassment/the risk of increased oversight was enough of a barrier that the lower rate was OK). 1. https://datawrapper.dwcdn.net/0jhQV/4/ https://datawrapper.dwcdn.net/0jhQV/4/
    - JumpCrisscross 7y ago
      > Wrong. It used to be this way but they switched it up in 2003 There was no "switching up". The relationship between the discount [1] and Fed Funds [2] rates is a lever for tightening and loosening monetary policy. Over the Fed's lifespan, the discount rate has typically been higher than the Fed Funds rate, to dissuade the former's use. And neither is the topic of discussion, which are the repo reference rates [3]. All that said, yes, when the Fed is tightening one may find market rates cheaper than the Fed's. [1] https://www.federalreserve.gov/monetarypolicy/discountrate.htm https://www.federalreserve.gov/monetarypolicy/discountrate.h... [2] https://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx https://www.bankrate.com/rates/interest-rates/federal-funds-... [3] https://www.newyorkfed.org/markets/treasury-repo-reference-rates https://www.newyorkfed.org/markets/treasury-repo-reference-r...
repler 7y ago
> The New York Fed’s repo (repurchase agreement) loan program began on September 17 when repo loan rates spiked from approximately 2 percent to 10 percent Here is some context on the September 2019 bailout (dated September 23), and they actually foreshadow that more intervention would be likely: https://fortune.com/2019/09/23/repo-market-big-deal-400-billion-bailout-unnerving/ https://fortune.com/2019/09/23/repo-market-big-deal-400-bill...
jgalt212 7y ago
This repo operation is YUGE, but the writer of the article is adding his/her numbers up wrong (and perhaps on purpose). If I lend you $50 overnight, and then you repay. And then I lend you another $50 overnight and you repay, most market folks would consider this $50 in credit/loans, not $100 in credit/loans.
- ipnon 7y ago
  The distinction between credit and debt is crucial here.
  - jgalt212 7y ago
    only if you count your numbers in an unconventional manner.
noneeeed 7y ago
What's the obsession with the NYT specifically, in contrast to other news outlets? It made the post rather irritating to read. I'm not American, so I feel like I'm missing the significance that might be obvious to everyone else.
- davidw 7y ago
  They're considered one of, if not the, premier newspaper in the US, but have been falling down a lot lately. "One one side, we have geophysicist Dr. Alicia Gomez to talk about the history of learning about the shape of the earth and its place in the cosmos. On the other side, we have Bob from the internet, who claims it's flat". Edit BTW, good follow if you're interested in this sort of asymmetry and how it's playing out in many ways: https://twitter.com/jayrosen_nyu https://twitter.com/jayrosen_nyu
- tomcooks 7y ago
  I was wondering the same, maybe there are some NYT publicists spamming new articles? I've seen a lot of WSJ as well tho. Tangentially, if you want to see how several media outlets deal with a single piece of news i suggest https://spidr.today https://spidr.today (not affiliated, just a satisfied user) If you ignore the comment box it's pretty cozy and useful.
- deleted 7y ago
  [deleted]
- noneeeed 7y ago
  Wow, downvoted for asking a question. I wanted to understand more about the situation itself, but the writer's obsession with the NYT (to the exclusion of every other news outlet that is not covering this situation) was weird. I was curious why the NYT, above all others, is so important in this.
funemployed 7y ago
If I lend my friend $10 every day for lunch and he pays me back the next day and this happens 5 days in a row in what context would it make sense to say I have lent him $50 dollars? The linked discussion about cumulative liquidity seems completely full of FUD and designed to obfuscate rather than illuminate its readers. Less of this and more links to Matt Levine please.
- gulikoza 7y ago
  What if he doesn't pay back because ₿TC went down instead of up and he doesn't have it anymore? Ofc he needs the next $10 because now it will go up for sure and he'll make the other $10 back as well... :)
  - ww520 7y ago
    The loans are backed by assets. They will be seized if the loans were not paid back.
    - Red_Leaves_Flyy 7y ago
      Who pays if those assets are fraudulently overvalued rubbish?
      - quickthrowman 7y ago
        They aren’t, they’re US Treasuries and US Agency Debt. There are no toxic assets used for collateral in the repo market.
        Red_Leaves_Flyy 7y ago
        Looking at yesterday, there were mortgages used as collateral. https://apps.newyorkfed.org/markets/autorates/tomo-results-display https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
        7y ago
INTPenis 7y ago
I'm a foreigner so maybe someone can answer me; is this money earmarked? Will it be traced? Are the books open and available to everyone? In short; can we see exactly what this money is used for? Otherwise it's just a big robbery.
- JumpCrisscross 7y ago
  > is this money earmarked? Will it be traced? Are the books open and available to everyone? Yes, it's earmarked. Yes, it's traced. No, the Fed's books are not "open to everybody". They are, however, open on a delay to a ridiculous level as you can find from their website. (As in, if you want to know how much each institution has borrowed on what terms, you can do that.)
AnimalMuppet 7y ago
> The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days. We're talking about an overnight loan of $120 billion (that is, a loan that is paid back the next morning, lent again the next night, paid back in the morning, etc. This article is treating it as a cumulative loan - that is, the second day, it's now $240 billion (never mind that the first $120 billion has been paid back by then), and the third day it's $360 billion (never mind that the first $240 billion has been paid back by then). That's either incredibly stupid, or propaganda. My money is on propaganda.
- corporate_shi11 7y ago
  Except it's not all overnight now. >"The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days."
  - wmf 7y ago
    So that's still only $560B, right? It's not $2.93T.
    - me_me_me 7y ago
      yes, only.
  - cheald 7y ago
    The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing repo operations, so it's worth emphasizing.
snowwrestler 7y ago
This, from a WSJ article linked in the post, would seem to be important context: > Fed repo operations take in Treasury, agency and mortgage bonds from eligible banks in exchange for short-term loans of cash. They are effectively collateralized loans from the central bank, and they are designed to ensure the financial system has enough liquidity to keep short-term rates relatively steady. > The Fed has used repo operations, as well as purchases of government securities, for decades to control short-term interest rates, which is key to its ability to influence the direction of the economy. > The Fed’s response to the financial crisis and its aftermath, however, put repo operations on the shelf for just over a decade. The Fed started using them again in mid-September after interest rates in the repo markets, where firms borrow and lend securities and cash short-term, unexpectedly spiked. https://www.wsj.com/articles/new-york-fed-again-upsizes-liquidity-plans-for-turn-of-the-year-11576187805 https://www.wsj.com/articles/new-york-fed-again-upsizes-liqu... I think it matters quite a bit whether these operations are an unusual emergency measure, or the Fed is merely resuming common operations that it paused in the wake of the financial crisis.
harmmonica 7y ago
Here is my admittedly ignorant question about this: is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"? Similar to how a high-net-worth individual can borrow against their assets for a very low rate and then turn around and invest those cheap-interest-rate funds into higher-return (i.e., riskier) investments? This is wholly unsubstantiated, but a link someone posted on this issue in a previous submission on HN (I can't find it) suggested that hedge funds in particular are the main institutions causing this, that the too-big-to-fail banks (JP, BofA, etc.) are unwilling to lend to them in the repo market because the hedge funds are taking too much risk with those funds, and the hedge funds are in turn forcing the fed's hand by telling them that they either step in with funds or they'll either be forced to sell assets en masse or, worse, fail. I'm probably using the wrong language to describe the mechanics of how this would actually take place (e.g., I'm not suggesting a hedge fund actually calls up and forces the fed's hand). I have seen multiple people assert there's a reasonable explanation for this and others suggest this is just more QE and that the market, after years of QE, can't function properly without it, and so I'm floating what is likely a conspiracy theory as an attempt at getting an explanation from someone informed. Nearly impossible to believe this is a benign event. The parties (the fed, the big banks, hedge funds) haven't earned that trust so if it is benign then maybe there's a first time for everything.
- JumpCrisscross 7y ago
  > is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"? Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump them (or their mortgages) to pay taxes (or employees or creditors). Repos finance the asset side of the borrower's balance sheet. Tying fungible dollars to specific liabilities is a losing game. And if someone wants to repo Treasuries to take a new risk position, that's fine. The cash is still injected into the money market through the acquisition of the position. That's the point of the Fed's repo operations. Note that hedge funds aren't at the Fed's repo desks. They're at the banks'. > this is just more QE Repo pre-dates QE. And the Fed supporting money markets goes back to its founding purpose. QE was novel in its scale and the assets it supported, not its act per se.
gentle 7y ago
It looks like we hugged the server to death. Does anyone have a repost?
deleted 7y ago
[deleted]
resters 7y ago
This stuff is normal. It is not a signal. I do think there will be a crash similar to 2008, but this is not evidence that it is coming.
- deusofnull 7y ago
  > I do think there will be a crash similar to 2008, but this is not evidence that it is coming. i agree but i lack a specific metric or analysis that supports my thinking. do you have one?
  - joncrane 7y ago
    Inversion of the yield curve was probably the best signal, but that reversed itself.
  - resters 7y ago
    I think that there are significant incentives for financial institutions to create financial products (derivatives, etc.) that contain (and magnify) the systemic risk that is part of their inputs. Systemic risk is very costly to hedge against, and to do so requires keeping capital idle that could otherwise be productive. Also, esoteric financial instruments are always going to be less liquid than simple securities, yet the incentive of financial firms is to create them and find markets for them. This is analogous to any industrial input (raw materials) and output (finished product). Complex financial products are desirable for use as underwriting capital because they can have specific characteristics that make them preferable to cash. But in fact the actual desirable characteristic is that their usefulness as a hedge against systemic risk has been sold off, leaving something that is legal as risk capital but ineffective against systemic risk. Hence, the financial system has an incentive to create complex, entangled, webs of risk capital, none of which is cash, and all of which looks fantastic if you just look at its core (non systemic) risk characteristics. When there has not been a systemic risk event in a while, such systems appear to be ingenious and clever. Regulators "understand" them well enough to deem them suitable as risk capital in good times (due to their non-systemic risk characteristics) and in bad (due to their lower cost). The issue in 2008 was that the derivatives had baked in resilience to some systemic risk. If you design it with resilience to any systemic risk, it ceases to be useful. So the game is simply baking in enough resilience to comply with regulations, collect quarterly bonuses, and repeat. When you think about it there is really no regulatory framework for minimizing systemic risk exposure except for a handful of limits on firm size and some nuances of underwriting capital, created after the great depression.
codyb 7y ago
So 100bn a night, these figures are about a third higher than what was happening before when it was 75bn (IIRC)? It’s odd to me the overnight market has contracted to the point this extra liquidity is needed. I’m not particularly concerned about Fed’s overnight loans since I believe they probably technically make a small amount of money off interest. What’s curious is why the overnight market has become so expensive at the intrabank level? On one hand it could be a positive result of greater capital requirements due to post 2008 regulations. Alternatively banks could be holding greater amounts of assets in less liquid forms such as properties or perhaps stocks? Perhaps the high stock market has increased banks asset sheets causing greater liquidity requirements reducing their ability to lend? I’m very much not particularly well informed here, but if that’s the case, this doesn’t really feel so much like news as the Fed just performing it’s mandates as expected?
cascom 7y ago
This is a good pretty discussion of the issues (podcast) if you are interested. One of the takeaways is that this is an unintended regulatory effect from newer banking regulations https://news.ycombinator.com/item?id=21827424 https://news.ycombinator.com/item?id=21827424
PeterStuer 7y ago
In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is needed because left to their own devices banks would just leverage to the max regardless of their cash position. The crucial point is that the reserve is only measured at the end of day, so a bank can dip below the safety thresholds as long as they make it up by the evening. Overnight loans allow them to ignore the safeties since they just loan the cash for a brief moment to be in the clear with regulation come the daily measuring, but just return the money straight after the measurement has taken place. It is an organized method by which the Fed facilitates regulation dodging for the financial sector.
- joering2 7y ago
  Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?
  - IshKebab 7y ago
    Well, if you can trade all of your customers' money you make more profit! Yes your risk of collapse is higher, but that's somebody else's problem.
  - PeterStuer 7y ago
    I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past. Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.
yeahigotgoats 7y ago
if all you virtual signaling assholes bitching about climate and your self driving cars would focus on this bullshit, the world could actually change, until you do, nothing will.
neonate 7y ago
http://archive.md/IxHDK http://archive.md/IxHDK
BubRoss 7y ago
Why is it that the fed has to do overnight loans? I would think if interest rates rise, anyone would want those short term gains and would sell assets to have enough cash to get at the easy fast money of the repo market.
dang 7y ago
Url changed from https://wallstreetonparade.com/2019/12/new-york-fed-plans-to-throw-2-93-trillion-at-wall-streets-trading-houses-over-next-month-as-new-york-times-remains-silent/ https://wallstreetonparade.com/2019/12/new-york-fed-plans-to..., which points to this. If you see comments complaining about how misleading the article and headline are, they were probably about that one, not this one.

Maybe this is where some of the missing Pentagon money has gone?

charwalker 7y ago
Unlikely, the Fed is fairly independent from the rest of the government and holds reserves or other assets as needed.

jdhn 7y ago

Ever since this whole repo issue started, we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced. Not to mention that the actual cause for the spike in repo rates has never been announced or identified.

corporate_shi11 7y ago
I believe there are two main causes. First, the massive issuance of treasuries used to fund the persistent and growing US budget shortfalls. As the big Wall Street banks have been tasked with buying up treasuries, massive amounts of liquidity have been siphoned out of the market. The Fed Will ultimately have to restart QE (in perpetuity) in order to fund the debt. Second, hedge funds have been taking advantage of the repo markets, funding massive leveraged trades. Of course as the Fed pumps more liquidity into the system, these hedge funds will only ramp up their leverage. This is why Fed lending will be perpetually insufficient, because any increase in lending will just be used to support more and more leverage. It's like throwing paper towels at a water main break.
deleted 7y ago
[deleted]
JumpCrisscross 7y ago
> we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced Short-term as in short-term financing, i.e. overnight lending. Nobody expects repo to go away in the same way nobody expects interest paid on excess reserves to go away. It's a tool the Fed uses to manage the money markets. Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from.
- joncrane 7y ago
  >Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from. Wrong. It used to be this way but they switched it up in 2003.[1] The Fed is considered the "lender of last resort" and they manipulate the interest rates to keep it that way. They used to target the Fed Funds rate to be higher than the discount rate. But that didn't make sense if you think about the system the government wanted (for a while it was thought that embarrassment/the risk of increased oversight was enough of a barrier that the lower rate was OK). 1. https://datawrapper.dwcdn.net/0jhQV/4/ https://datawrapper.dwcdn.net/0jhQV/4/
  - JumpCrisscross 7y ago
    > Wrong. It used to be this way but they switched it up in 2003 There was no "switching up". The relationship between the discount [1] and Fed Funds [2] rates is a lever for tightening and loosening monetary policy. Over the Fed's lifespan, the discount rate has typically been higher than the Fed Funds rate, to dissuade the former's use. And neither is the topic of discussion, which are the repo reference rates [3]. All that said, yes, when the Fed is tightening one may find market rates cheaper than the Fed's. [1] https://www.federalreserve.gov/monetarypolicy/discountrate.htm https://www.federalreserve.gov/monetarypolicy/discountrate.h... [2] https://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx https://www.bankrate.com/rates/interest-rates/federal-funds-... [3] https://www.newyorkfed.org/markets/treasury-repo-reference-rates https://www.newyorkfed.org/markets/treasury-repo-reference-r...

repler 7y ago

> The New York Fed’s repo (repurchase agreement) loan program began on September 17 when repo loan rates spiked from approximately 2 percent to 10 percent Here is some context on the September 2019 bailout (dated September 23), and they actually foreshadow that more intervention would be likely: https://fortune.com/2019/09/23/repo-market-big-deal-400-billion-bailout-unnerving/ https://fortune.com/2019/09/23/repo-market-big-deal-400-bill...

jgalt212 7y ago

This repo operation is YUGE, but the writer of the article is adding his/her numbers up wrong (and perhaps on purpose). If I lend you $50 overnight, and then you repay. And then I lend you another $50 overnight and you repay, most market folks would consider this $50 in credit/loans, not $100 in credit/loans.

ipnon 7y ago
The distinction between credit and debt is crucial here.
- jgalt212 7y ago
  only if you count your numbers in an unconventional manner.

noneeeed 7y ago

What's the obsession with the NYT specifically, in contrast to other news outlets? It made the post rather irritating to read. I'm not American, so I feel like I'm missing the significance that might be obvious to everyone else.

davidw 7y ago
They're considered one of, if not the, premier newspaper in the US, but have been falling down a lot lately. "One one side, we have geophysicist Dr. Alicia Gomez to talk about the history of learning about the shape of the earth and its place in the cosmos. On the other side, we have Bob from the internet, who claims it's flat". Edit BTW, good follow if you're interested in this sort of asymmetry and how it's playing out in many ways: https://twitter.com/jayrosen_nyu https://twitter.com/jayrosen_nyu
tomcooks 7y ago
I was wondering the same, maybe there are some NYT publicists spamming new articles? I've seen a lot of WSJ as well tho. Tangentially, if you want to see how several media outlets deal with a single piece of news i suggest https://spidr.today https://spidr.today (not affiliated, just a satisfied user) If you ignore the comment box it's pretty cozy and useful.
deleted 7y ago
[deleted]
noneeeed 7y ago
Wow, downvoted for asking a question. I wanted to understand more about the situation itself, but the writer's obsession with the NYT (to the exclusion of every other news outlet that is not covering this situation) was weird. I was curious why the NYT, above all others, is so important in this.

funemployed 7y ago

If I lend my friend $10 every day for lunch and he pays me back the next day and this happens 5 days in a row in what context would it make sense to say I have lent him $50 dollars? The linked discussion about cumulative liquidity seems completely full of FUD and designed to obfuscate rather than illuminate its readers. Less of this and more links to Matt Levine please.

gulikoza 7y ago
What if he doesn't pay back because ₿TC went down instead of up and he doesn't have it anymore? Ofc he needs the next $10 because now it will go up for sure and he'll make the other $10 back as well... :)
- ww520 7y ago
  The loans are backed by assets. They will be seized if the loans were not paid back.
  - Red_Leaves_Flyy 7y ago
    Who pays if those assets are fraudulently overvalued rubbish?
    - quickthrowman 7y ago
      They aren’t, they’re US Treasuries and US Agency Debt. There are no toxic assets used for collateral in the repo market.
      - Red_Leaves_Flyy 7y ago
        Looking at yesterday, there were mortgages used as collateral. https://apps.newyorkfed.org/markets/autorates/tomo-results-display https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
        7y ago

INTPenis 7y ago

I'm a foreigner so maybe someone can answer me; is this money earmarked? Will it be traced? Are the books open and available to everyone? In short; can we see exactly what this money is used for? Otherwise it's just a big robbery.

JumpCrisscross 7y ago
> is this money earmarked? Will it be traced? Are the books open and available to everyone? Yes, it's earmarked. Yes, it's traced. No, the Fed's books are not "open to everybody". They are, however, open on a delay to a ridiculous level as you can find from their website. (As in, if you want to know how much each institution has borrowed on what terms, you can do that.)

AnimalMuppet 7y ago

> The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days. We're talking about an overnight loan of $120 billion (that is, a loan that is paid back the next morning, lent again the next night, paid back in the morning, etc. This article is treating it as a cumulative loan - that is, the second day, it's now $240 billion (never mind that the first $120 billion has been paid back by then), and the third day it's $360 billion (never mind that the first $240 billion has been paid back by then). That's either incredibly stupid, or propaganda. My money is on propaganda.

corporate_shi11 7y ago
Except it's not all overnight now. >"The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days."
- wmf 7y ago
  So that's still only $560B, right? It's not $2.93T.
  - me_me_me 7y ago
    yes, only.
- cheald 7y ago
  The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing repo operations, so it's worth emphasizing.

snowwrestler 7y ago

This, from a WSJ article linked in the post, would seem to be important context: > Fed repo operations take in Treasury, agency and mortgage bonds from eligible banks in exchange for short-term loans of cash. They are effectively collateralized loans from the central bank, and they are designed to ensure the financial system has enough liquidity to keep short-term rates relatively steady. > The Fed has used repo operations, as well as purchases of government securities, for decades to control short-term interest rates, which is key to its ability to influence the direction of the economy. > The Fed’s response to the financial crisis and its aftermath, however, put repo operations on the shelf for just over a decade. The Fed started using them again in mid-September after interest rates in the repo markets, where firms borrow and lend securities and cash short-term, unexpectedly spiked. https://www.wsj.com/articles/new-york-fed-again-upsizes-liquidity-plans-for-turn-of-the-year-11576187805 https://www.wsj.com/articles/new-york-fed-again-upsizes-liqu... I think it matters quite a bit whether these operations are an unusual emergency measure, or the Fed is merely resuming common operations that it paused in the wake of the financial crisis.

harmmonica 7y ago

Here is my admittedly ignorant question about this: is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"? Similar to how a high-net-worth individual can borrow against their assets for a very low rate and then turn around and invest those cheap-interest-rate funds into higher-return (i.e., riskier) investments? This is wholly unsubstantiated, but a link someone posted on this issue in a previous submission on HN (I can't find it) suggested that hedge funds in particular are the main institutions causing this, that the too-big-to-fail banks (JP, BofA, etc.) are unwilling to lend to them in the repo market because the hedge funds are taking too much risk with those funds, and the hedge funds are in turn forcing the fed's hand by telling them that they either step in with funds or they'll either be forced to sell assets en masse or, worse, fail. I'm probably using the wrong language to describe the mechanics of how this would actually take place (e.g., I'm not suggesting a hedge fund actually calls up and forces the fed's hand). I have seen multiple people assert there's a reasonable explanation for this and others suggest this is just more QE and that the market, after years of QE, can't function properly without it, and so I'm floating what is likely a conspiracy theory as an attempt at getting an explanation from someone informed. Nearly impossible to believe this is a benign event. The parties (the fed, the big banks, hedge funds) haven't earned that trust so if it is benign then maybe there's a first time for everything.

JumpCrisscross 7y ago
> is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"? Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump them (or their mortgages) to pay taxes (or employees or creditors). Repos finance the asset side of the borrower's balance sheet. Tying fungible dollars to specific liabilities is a losing game. And if someone wants to repo Treasuries to take a new risk position, that's fine. The cash is still injected into the money market through the acquisition of the position. That's the point of the Fed's repo operations. Note that hedge funds aren't at the Fed's repo desks. They're at the banks'. > this is just more QE Repo pre-dates QE. And the Fed supporting money markets goes back to its founding purpose. QE was novel in its scale and the assets it supported, not its act per se.

gentle 7y ago

It looks like we hugged the server to death. Does anyone have a repost?

deleted 7y ago

[deleted]

resters 7y ago

This stuff is normal. It is not a signal. I do think there will be a crash similar to 2008, but this is not evidence that it is coming.

deusofnull 7y ago
> I do think there will be a crash similar to 2008, but this is not evidence that it is coming. i agree but i lack a specific metric or analysis that supports my thinking. do you have one?
- joncrane 7y ago
  Inversion of the yield curve was probably the best signal, but that reversed itself.
- resters 7y ago
  I think that there are significant incentives for financial institutions to create financial products (derivatives, etc.) that contain (and magnify) the systemic risk that is part of their inputs. Systemic risk is very costly to hedge against, and to do so requires keeping capital idle that could otherwise be productive. Also, esoteric financial instruments are always going to be less liquid than simple securities, yet the incentive of financial firms is to create them and find markets for them. This is analogous to any industrial input (raw materials) and output (finished product). Complex financial products are desirable for use as underwriting capital because they can have specific characteristics that make them preferable to cash. But in fact the actual desirable characteristic is that their usefulness as a hedge against systemic risk has been sold off, leaving something that is legal as risk capital but ineffective against systemic risk. Hence, the financial system has an incentive to create complex, entangled, webs of risk capital, none of which is cash, and all of which looks fantastic if you just look at its core (non systemic) risk characteristics. When there has not been a systemic risk event in a while, such systems appear to be ingenious and clever. Regulators "understand" them well enough to deem them suitable as risk capital in good times (due to their non-systemic risk characteristics) and in bad (due to their lower cost). The issue in 2008 was that the derivatives had baked in resilience to some systemic risk. If you design it with resilience to any systemic risk, it ceases to be useful. So the game is simply baking in enough resilience to comply with regulations, collect quarterly bonuses, and repeat. When you think about it there is really no regulatory framework for minimizing systemic risk exposure except for a handful of limits on firm size and some nuances of underwriting capital, created after the great depression.

codyb 7y ago

So 100bn a night, these figures are about a third higher than what was happening before when it was 75bn (IIRC)? It’s odd to me the overnight market has contracted to the point this extra liquidity is needed. I’m not particularly concerned about Fed’s overnight loans since I believe they probably technically make a small amount of money off interest. What’s curious is why the overnight market has become so expensive at the intrabank level? On one hand it could be a positive result of greater capital requirements due to post 2008 regulations. Alternatively banks could be holding greater amounts of assets in less liquid forms such as properties or perhaps stocks? Perhaps the high stock market has increased banks asset sheets causing greater liquidity requirements reducing their ability to lend? I’m very much not particularly well informed here, but if that’s the case, this doesn’t really feel so much like news as the Fed just performing it’s mandates as expected?

cascom 7y ago

This is a good pretty discussion of the issues (podcast) if you are interested. One of the takeaways is that this is an unintended regulatory effect from newer banking regulations https://news.ycombinator.com/item?id=21827424 https://news.ycombinator.com/item?id=21827424

PeterStuer 7y ago

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is needed because left to their own devices banks would just leverage to the max regardless of their cash position. The crucial point is that the reserve is only measured at the end of day, so a bank can dip below the safety thresholds as long as they make it up by the evening. Overnight loans allow them to ignore the safeties since they just loan the cash for a brief moment to be in the clear with regulation come the daily measuring, but just return the money straight after the measurement has taken place. It is an organized method by which the Fed facilitates regulation dodging for the financial sector.

joering2 7y ago
Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?
- IshKebab 7y ago
  Well, if you can trade all of your customers' money you make more profit! Yes your risk of collapse is higher, but that's somebody else's problem.
- PeterStuer 7y ago
  I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past. Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.

yeahigotgoats 7y ago

if all you virtual signaling assholes bitching about climate and your self driving cars would focus on this bullshit, the world could actually change, until you do, nothing will.

neonate 7y ago

http://archive.md/IxHDK http://archive.md/IxHDK

BubRoss 7y ago

Why is it that the fed has to do overnight loans? I would think if interest rates rise, anyone would want those short term gains and would sell assets to have enough cash to get at the easy fast money of the repo market.

dang 7y ago

Url changed from https://wallstreetonparade.com/2019/12/new-york-fed-plans-to-throw-2-93-trillion-at-wall-streets-trading-houses-over-next-month-as-new-york-times-remains-silent/ https://wallstreetonparade.com/2019/12/new-york-fed-plans-to..., which points to this. If you see comments complaining about how misleading the article and headline are, they were probably about that one, not this one.