3 ms·

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

by 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...

by jdhn 7y ago

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...