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Helpful info and I understand repo predates QE, but could you shed some light on why this came about unexpectedly, why you think the funds dried up all of a sud

Helpful info and I understand repo predates QE, but could you shed some light on why this came about unexpectedly, why you think the funds dried up all of a sudden (and caused the repo rate (rates?) to skyrocket), and why the fed said, when it first started injecting funds, that it was a temporary measure (which is what all the pundits also said when it first started), but now is stretching the definition of temporary? Believe me I want to believe it's benign, but as I understand it if the fed hadn't stepped in the repo rate would've been high single digits and things would've ground to a halt. Also, I've heard the too-big-to-fail banks suggest that the funds would be available in the repo market if not for all the regulations around reserves, but I gotta be honest my trust level for what Jaime Dimon et al say is pretty low and in fact if they're saying it it makes it even more suspicious. That's my problem of course, but just looking for a more detailed explanation.

JumpCrisscross 7y ago
> could you shed some light on why this came about unexpectedly There are hypotheses. The involve post-crisis capital-requirement rules making banks more conservative with their cash interacting with unexpected demand for cash from tax payers. (There is another around carry trades [1].) At the end of the day, this is all speculation. Predicting demand for cash is difficult. It's also the Fed's job. That we can complain about an overnight rate spiking for a few hours is, itself, a luxury. > as I understand it if the fed hadn't stepped in the repo rate would've been high single digits and things would've ground to a halt Probably. Liquidity crises in leveraged markets force selling, which lowers collateral values, which forces selling, et cetera. The Panic of 1907 is one of the clearer cases of an unregulated money market turning a liquidity crisis into a solvency crisis [2]. This is a known market failure for which a lender of last resort is a solution. [1] https://news.ycombinator.com/item?id=21827998 https://news.ycombinator.com/item?id=21827998 [2] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907
nostrademons 7y ago
I would bet on the carry trade caused by negative interest rates in the EU. With rates negative there, it makes sense for savvy traders to borrow in Euros (and get paid for it), convert those Euros to Dollars at a U.S. bank (which requires that the bank have dollars available), and then lend in Dollars (and get paid for it). With everybody doing this, the banks quickly run out of dollars and accumulate large euro reserves. The accelerated lending at the discount window is needed so that banks can service all the traders looking to exchange euros for dollars. The natural economic response to the carry trade would be for the euro to weaken and the dollar to strengthen until interest rates equilibrate, but this'd have political implications that are unacceptable: notably, it'd make American goods even more expensive overseas and deepen the trade imbalance, which would cause job losses in manufacturing and other competitive domestic industries, which would sell out Trump's base for Wall Street's interests again. So the respective central banks get locked in a competitive race to the bottom, where the ultra-loose monetary policy in Europe has to carry over to the U.S. because otherwise either exchange rates or interest rates has to move opposite stated government policy.

JumpCrisscross 7y ago

> could you shed some light on why this came about unexpectedly There are hypotheses. The involve post-crisis capital-requirement rules making banks more conservative with their cash interacting with unexpected demand for cash from tax payers. (There is another around carry trades [1].) At the end of the day, this is all speculation. Predicting demand for cash is difficult. It's also the Fed's job. That we can complain about an overnight rate spiking for a few hours is, itself, a luxury. > as I understand it if the fed hadn't stepped in the repo rate would've been high single digits and things would've ground to a halt Probably. Liquidity crises in leveraged markets force selling, which lowers collateral values, which forces selling, et cetera. The Panic of 1907 is one of the clearer cases of an unregulated money market turning a liquidity crisis into a solvency crisis [2]. This is a known market failure for which a lender of last resort is a solution. [1] https://news.ycombinator.com/item?id=21827998 https://news.ycombinator.com/item?id=21827998 [2] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907

nostrademons 7y ago

I would bet on the carry trade caused by negative interest rates in the EU. With rates negative there, it makes sense for savvy traders to borrow in Euros (and get paid for it), convert those Euros to Dollars at a U.S. bank (which requires that the bank have dollars available), and then lend in Dollars (and get paid for it). With everybody doing this, the banks quickly run out of dollars and accumulate large euro reserves. The accelerated lending at the discount window is needed so that banks can service all the traders looking to exchange euros for dollars. The natural economic response to the carry trade would be for the euro to weaken and the dollar to strengthen until interest rates equilibrate, but this'd have political implications that are unacceptable: notably, it'd make American goods even more expensive overseas and deepen the trade imbalance, which would cause job losses in manufacturing and other competitive domestic industries, which would sell out Trump's base for Wall Street's interests again. So the respective central banks get locked in a competitive race to the bottom, where the ultra-loose monetary policy in Europe has to carry over to the U.S. because otherwise either exchange rates or interest rates has to move opposite stated government policy.