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Comment by mrosett | Hacker News Reader

Matt Levine's explanation of what happened is considerably less sensationalized. Take a look at the second item of his column today [0]. It's too long to quote and doesn't lend itself to an easy excerpt, but here are the facts that he quotes, from Bloomberg [1]:

> A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. …

> What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week.

> With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion.

Again, if those paragraphs don't obviously relate to the overnight lending market, read his column for context.

[0]: https://www.bloomberg.com/opinion/articles/2019-09-17/wework...

[1]: https://www.bloomberg.com/news/articles/2019-09-17/it-starts...

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>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week.

But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years.

This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits.

Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen.

[0] https://www.macrovoices.com/podcasts-collection/macrovoices-...

> If continues, this means the Fed will effectively be monetizing US deficits.

You seem informed, and I want to be upset by this, but...

What does "monetizing US deficits" mean here?

That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.

Why would the global community tolerate this, especially when the United States consumes much more than most countries?

Seems like a recipe for WWIII.

Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.

All money in modern economies is based on this kind of debt. Central banking is... confusing.

The immediate effect of the fed doing that isn't catastrophic, it's just devaluing the US Dollar, or put in another way, inflation.

Inflation at a certain level is thought of as a good thing, the fed and economists have inflation targets where they don't want it to be too high or too low. One of the thing that moderates inflation is how the fed creates money and lends it out.

The recipe for WWIII is runaway inflation where in order to keep things together, a central bank issues money at an exponentially increasing rate with a very small doubling period and the currency becomes worthless in trade with other currencies and to purchase goods.

The US is very far away from that. The increase in the deficit and debt is problematic and significant, but not anywhere near catastrophic.

Interestingly, deflation can also cause wars and lead to an economic downward spiral where everyone is worse off. Retaining the Gold Standard was a major contributor to both WW1 and the Great Depression. Japan’s deflation lost it a decade of economic growth more recently.

To a large degree, they aren't accepting it. This is why around 2014 treasury holdings by rest of world stopped growing on net.

Many governments/central banks are trying to exit the $ and UST's and are buying gold instead of treasuries.

Ultimately, the US has quite a large amount of liabilities, and entitlement spending on retiring boomers coming due in the next few years. Currently, at the peak of the economic cycle, we are running $trillion deficits.

Imagine what happens if there is a recession? Even if there isn't, these fiscal deficits, along with our large trade deficit mean:

The rest of the world gives us real goods, we give them paper IOU's. The debt is not shrinking but is growing, and faster.

So, they are not tolerating it. Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.

This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption. Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.

Iraq[0], Libya, Iran, Russia, and Venezuela[1]. Do we see a pattern of what happens to nations that try to do this? They either get regime-changed or become enemy number one for US government. Do you think it is a coincidence that Venezuela has the largest oil reserves in the world and just happens to be the next country US is involved in pushing regime change (them or Iran)?

To read about this system of petrodollar recycling, and how/when it was created in the early 70's because of collapse of Bretton Woods, check out an this excerpt[3] from excellent book "The Global Minotaur: America, Europe and the Future of the Global Economy" by Yanis Varoufakas former Greek minister of finance.

Good thread [3] covering a broad summary of trade, the dollar, and petrodollar warfare [4]

[0] http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.h...

[1] https://www.mintpressnews.com/petrodollar-warfare-the-common...

[3] https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-...

[3] https://twitter.com/TheSuperbubble/status/109944882078459904...

[4] https://en.wikipedia.org/wiki/Petrodollar_warfare

Thank you. This is such an important topic and I wish more Americans understood and discussed this.

This is along the lines of how I was interpreting things. Its really scary. I would be happy to hear a convincing argument against this version of reality if such a thing is possible and if anyone is able to make one.

> entitlement spending on retiring boomers coming due in the next few years

This is a frequently overblown fact. 12.4% of the population was >65 in 2000, increasing to 15.2% in 2006. So this huge incremental wave of retiring boomers is... 3% of the population.

> The rest of the world gives us real goods, we give them paper IOU's. This is fun to say but try paying for goods with a paper IOU. Chances are the store will prefer dollars, even though they're technically the same concept.

> Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.

People want dollars for various reasons. The dollar is stable relative to other currencies. They're harder for authoritarian governments to seize. There's inertia (It's already the reserve currency and working fine, so why change?). It's extremely liquid. All more valid reasons than this random oil conspiracy theory.

> This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption.

Not sure how this follows, at all.

> Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.

Nobody is exiting the dollar for trade. What're you gonna do, switch to euros? yuan?

HN and wacky economic conspiracy theories, name a more iconic duo.

You’ve been able to trade petroyuan in Shanghai since early 2018. The volume there is made up almost exactly with what a less conspiracy based hypothesis would expect: domestic Chinese firms, Russians avoiding sanctions & arbitraging actors.

There has not been a mass exodus to the yuan, quite the opposite China has been manipulating it up through that entire time.

Euro denominated oil is likely to come online in the next year or 2. The E.U. started a benchmark program this summer. Roseneft (a big Russian producer) switched to Euros a couple of weeks ago.

That doesn't seem like a convincing argument against the whole petrodollar "conspiracy". It seems like there is no assurance that trading in these alternative currencies can't increase dramatically among other countries.

I think the conspiracy theory is backwards. We didn’t use hegemony to make people us petrodollars. They used petrodollars because it made the most sense. By dramatically increasing our use of sanctions we’ve turned that on its head. And we are going to see petrodollars become less important.

We aren’t going to go to war with China, Russia or the Euro zone for switching off petrodollars. The opposite conclusion is ludicrous.

So, inflation?

Isn't that what the Fed wants? They've struggled to reach inflation targets for sometime.

Well we are getting slightly above the target no? And some say that once we overshoot and target expectations too high, taming them might be hard.

We're not seeing any inflation threats yet.

Aug 12, 2019: "U.S. consumer inflation outlook declined as Fed weighed rate cuts .... The Fed’s preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June."

https://www.reuters.com/article/us-usa-fed-inflation-survey/...

The problem with this type of inflation is that it's lopsided. Assets inflate -- equities and real estate. That's great for asset owners. But wages haven't really increased, because most workers don't "need" to own equities, and most Americans already own a house, so they aren't affected by rising rents and home prices.

This is why rent can raise 10% in one year -- the largest expense for nearly everyone -- and you can have 1% inflation. Most people aren't renters. So they aren't paying more for their rent. In fact, when bond prices go down (from this manipulation), mortgages get cheaper, so most people are paying LESS for the same house / mortgage.

Equities go through the roof.

If you're a laborer / renter, this is like a double gut punch. If you're a capitalist aristocrat, it's like a double gift horse.

And, as far as inflation goes, at least the way the Fed measures it -- it doesn't have a huge effect.

Commodities are so globalized now, and the US isn't 50% of the global economy anymore -- more like 20%. So strong upward pressure on commodities here, doesn't have a huge impact on commodities prices.

Actually I read that in period of high inflation, the factory workers tend to do OK. They are often unionised, have leverage by doing strikes, they typically manage to keep their wages in check with inflation. It is office workers that are going to be the most impacted.

Though that was from experience from times where there wasn’t this imbalance between supply and demand between blue collar (excess) and white collar (shortage).

Yeah effectively it's rich people deciding that enormous sums of money should be invented out of nowhere and given to rich people. And somehow everyone is ok with that

At least if you're rich...

Your comment has contradictions. For example, if "most Americans already owns a house", how are they at the same not affected by home prices increasing?

Like a lot of financial analysis I read, you seem to look at only one side of the transaction. For every renter, there's a rentee. For every buyer, a seller. For every borrower, a lender. Those people are abundant as well, and the exact opposite comment could be written about them.

Yeah, I'm a bit baffled by statements like:

> Most people aren't renters

Source? Most of my friends (outside of the tech echo chambers) are worried they'll never become buyers because of student loans, decades of wage stagnation, skyrocketing rent, real estate, college tuition, etc..

I’m probably going to ask the stupidest question you have ever been asked

how do you actually sell debt

Like can one sell their own debt?

You write your name on a piece of paper that says -

"IOU so much money"

and then you take money from anyone who's willing to give you money in exchange for that paper.

Debt = that paper

Selling = basically getting money for that paper

It's important to note that the amount of money you accept for that paper need not be what's written on it. I.e., you could sell a bond saying you'll pay back $1000 + interest and get only $981 for it, say, or maybe $1017 dollars for it, or any other number.

If the bond sells for more than its nominal value, then the effective interest rate you pay to borrow will be lower than the nominal interest rate, and if the bond sells for less, then your effective interest rate will be higher than the nominal interest rate.

Yes and no.

The face value of the bond is what you will receive at maturity. When the bond trades in the intermediate term, its price is determined by prevailing and expected interest rates.

You don't "own" your own debt. The bank / other entity you are indebted to "owns" the debt, hence why they can sell it to a debt collector for pennies on the dollar. Instead of owning your debt, you are liable (or there's a better word than "liable") for your debt. Basically, you already "sold" your debt when you first became indebted.

It's not really a dumb question. I get why people might look at their debt as something they own, given the debt itself is tied to their identity and credit score until paid off.

"Selling debt" is a euphemism for "selling bonds".

What you do is invent the phrase “as good as gold”. Then you convince the world that your paper is more valuable than theirs, and they store it in their vaults instead of gold. That’s how you export inflation and sell your debt to suckers.

> considerably less sensationalized

To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.

Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.

Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1].

Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway...

[1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1

No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.

Very few things can survive a 10x increase in costs.

They're financing on the order of a trillion dollars. It makes a difference.

because with ~1e12 in financing this ends up being a cool $209.7M.

Distributed over numerous billion-dollar businesses will annual profits in billions.

> Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273%

As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math:

1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%.

Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position.

In short, there's a massive difference between paying 2.3bps and paying 0.27bps.

So your business collapses when you have to temporarily pay $236 for something that normally costs $27?

> So your business collapses when you have to temporarily pay $236 for something that normally costs $27?

No, think of it as paying $236,000 for something that normally costs $27,000.

You can think of this business as providing banking services to large corporations, who aren't able to simply put money in a savings account at their local credit union.

It's doesn't collapse in the short run, but it can harm the ability of these corporations to access their funds. Short term financing disruptions can have major impacts across all markets.

Show me a business where a sudden 10x increase in costs isn't painful...

>No, think of it as paying $236,000 for something that normally costs $27,000.

While dealing with assets in the billions and lending out at higher interest all the time.

>Show me a business where a sudden 10x increase in costs isn't painful...

All the ones where one input went up 10x temporarily and survived, or just the most characteristic examples?

> While dealing with assets in the billions

Yes, those costs were computed on a book long 1 billion dollars of notional. There's a difference between notional and risk though. 1 billion dollars of 10y treasuries will be ~1mm dv01. Both matter.

> lending out at higher interest all the time

This isn't how rates trading works. Entering positions costs money. You're not making loans. If you hold treasuries, you're earning the coupon on them for the period that you own them. It gets more complicated when you factor in repo, but typically you pay GC repo when you're long.

The title says "overnight lending market", so clearly someone is borrowing for liquidity needs.

> The title says "overnight lending market"

This article is about repurchase agreements (repos). They are a form of collateralized loan used in rates trading. If you need to borrow money for a short period, you can do so in the repo market. You sell treasuries to a counterparty, agreeing to buy them back at a later date. You agree to pay an interest rate called a repo rate for this transaction. This is the rate the article is discussing.

Sorry, not explaining myself well.

Someone borrowing through the repo market is doing it to satisfy liquidity needs. They need the liquidity for some ongoing concern or investment or trade, or something (I don't know the details or relevant term, but it doesn't matter for the point).

That venture has some ROI. The temporarily higher repo rates have to be compared to that. That venture's costs are temporarily going from .002 percent to .02 percent of capital invested. Either way, a small portion. I don't see the emergency beyond "I wish this made the higher profit I am accustomed to".

> That venture has some ROI. The temporarily higher repo rates have to be compared to that. That venture's costs are temporarily going from .002 percent to .02 percent of capital invested. Either way, a small portion. I don't see the emergency beyond "I wish this made the higher profit I am accustomed to".

The difference between rates markets and, say, equities markets is that you think of your risk in basis points and not percentage points. A 10bp change in equities prices on a $1 billion book will cause $1mm change in pnl. However the $1mm dv01 treasury book (with notional $1 billion) will make or lose $10mm with a 10bp change in interest rates. You can see why basis point moves can be much more meaningful in the rates space.

Let's consider market makers now. They are mandated to make money by provisioning liquidity, not by taking views. This means that their return is supposed to come from earning spread and not from being positioned the right way on market moves. This often requires holding and financing hedged positions overnight. If your financing costs are >2bp, there's a pretty solid chance you're going to lose money on the positions you're holding, considering that you hedged them specifically to try to minimize fluctuations. It's not just a matter of making less profit as much as it is one of losing money entirely. Were such increases in financing costs to become prolonged or more frequent, there would be a deleterious effect on rates markets in general.

Given this is HN, a good analogy would be millisecond read times. I had a fellow snarky student once ask me “so you get bored in 1ms?”

The answer for finance is just the same as for computer science, you are doing things many times with big volumes, so tiny differences ass up.

add up. sorry.

I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch.

Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.

Bad analogy - the banking system doesn't fall apart if you miss lunch

Actually, that's exactly how banking systems fall apart, if you push it too far.

Actually, that takes such a broad view of the analogy that it has no semblance to the analogy, only the idea of completely ceasing all spending

You basically proved his point. The analogy is correct but no one cares if a little guy can't buy lunch. Same problem, different scale.

HN comments tend to have more charity than other places online – it's unlikely I "proved his point" by answering his query regarding if it's a bad analogy :)

Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying

You can pay for lunch with a credit card without having the funds available.

That's assuming you have good enough credit to get a credit card (without exorbitant fees attached).

And you get good credit by proving to banks that you won't run off with their money. In fact, they will loan you $1000s each month at 0% interest if you pay it back the next.

Unfortunately, the way credit risk is measured does not always measure actual credit risk, but your proximity to stereotypes of high credit risk.

Presumably it's because if a bank goes under, the economy can quickly nosedive (see 2008). If you can't get lunch, you're hungry for a couple of hours, but the world pretty much goes on unscathed.

It's hard to make analogies between household finance and corporate/national finance. Modern finance is a huge and complex topic. If you haven't and are interested, start with some basic economics, then move on to more focused topics.

There's a middle ground between making it impossible for certain private companies to fail (basically turning those industries into a permanent oligarchy) and saying "fuck it, let it burn".

As the income and wealth disparity, between people and between generation, the number of people thinking "let it burn" increases. A lot.

This is then multiplied when those people are those who actually do the work. Rich people in retirement homes can't get their stocks and 401ks or whatever to wipe their asses.

It’s not impossible for these companies to fail. Banks have failed over and over even since the crisis.

Aside from the fact that you can easily borrow money for lunch in a variety of ways, the main difference is that banks almost never default, compared to individuals.

Only one bank has failed in the US in the last two years.

https://www.fdic.gov/bank/individual/failed/banklist.html

The real risks are systematic (many banks failing), not that an individual bank will fail.

This feels like a circular argument: Banks get bailed out, because banks always repay their loans, because banks can’t go broke, because banks get bailed out.

Whether or not bank bailouts were prudent is a matter of debate, but unlike individuals, default is rare and overall bailouts were repaid quickly.

https://www.politifact.com/new-hampshire/statements/2012/oct...

Not really. It's more like, when a bank fails, there's a system in place to ensure a quick, transparent sale of assets to another financially sound institution.

No, banks don’t get bailed out. That’s the point. These aren’t being bailed out each night.

This is true- but for perspective in 2010 around 100 U.S. banks went under (actually seized, closed, and merged out by the FDIC).

But yes, it’s far easier to get funded as a bank than an individual, mostly because there are laws, institutions, and processes to try and remedy problem banks if trouble happens and individuals are really on their own to find advice and resources.

EDIT: I was wrong, according to FDIC it was 157[0].

[0]: https://www.fdic.gov/bank/historical/bank/

> Only one bank has failed in the US in the last two years.

That's not really that comforting, especially when there were 8 failures in 2017. 2018 was the first time since 2006 that there wasn't a bank failure and multiple bank failures. 2006 was also the last time we had consecutive years without a bank failure.

I wonder: as a percentage of the total number of banks, how does this compare to individual bankruptcies as a percentage of the total population?

From a quick search: apparently in 2017, there were 767,721 non-business bankruptcies in the US. That's about 0.236% of the population.

And that year, there were 4,909 banks. 8 failures would represent 0.163% of them.

So it looks like individuals were a bit more likely to go bust than banks in 2017, but those figures aren't really all that different.

(I haven't checked exactly what these figures mean, or how authoritative they are. Just wanted a ballpark idea...)

OK, we probably should exclude children from the calculation of the individual bankruptcy rate, which would make it look rather worse. Still, the difference between individuals and banks isn't as dramatic as I'd have expected.

also a layman, but i think a lot of people feel the same way, and it’s (as far as i can see) one of the motivations for a lot of the political change going on in the u.s

one other thing though, that i think about a lot is:

why do we even have a system that needs so many bailouts and adjustments and hacks to keep it going... seems like our “economic os” is lacking “memory protection”...

>one of the motivations for a lot of the political change going on in the u.s

Which is horrifying because it means it’s being driven by total ignorance.

>why do we even have a system that needs so many bailouts

Overnight lending is not a bailout, ffs. You can do the same thing as an individual with a credit card, a payday loan, etc.

It would help if much of the financial industry didn't purposely obfuscate the meanings, uses, and ramifications of use of their tools. There seems to be a lot of euphemistic jargon in use, for example.

I'm not sure you're helping.

Basically, the Fed issued a bunch of promises of positive growth in order to get businesses or people with money (cash) to dump that money into the banks to increase liquidity if I'm understanding this right.

The financial market actually only gets into trouble when money (capital reserves) get low in comparison to balances/liabilities. "Money now" being in the right places is more important in keeping things going smoothly than "Money Later" being dumped into the market.

"Money Now" shortages cause bank runs. "Money Later" (Treasury Bonds) excesses tend to attract "Money Now" when people want somewhere safe to plop "Money Now" to get back "Money Later". The extra "Money Now" allows interest rates on lending to drop.

As I understand it, low "Money Now" supplies are responded to by lending at increased rates, because the bank in question can't just issue loans without the capital to service them.

Or something like that.

Shit, I don't even know if I managed to help. I just spent a week pouring over economics stuff to try to make sense of it all, and I'm still not sure I'm grokking it.

You can get a credit card loan, a food bank gift, SNAP vouchers...

The short, non-snarky answer is, "No, you cannot, at least in time to get back from your 30 minute break."

You can borrow money interest free for 4-7 weeks for lunch by using a credit card. These banks are borrowing money with interest for one day (overnight) to keep solvency and liquidity.

No one was facing insolvency.

The Federal Reserve implements its mandate to control interest rates and inflation by managing the money supply. Specifically, they do that by creating and destroying money by buying and selling government bonds on the market, until the price of those bonds is such that the interest from holding them falls within the target interest rate range.

When certain interest rates were, for a moment, excessively high, they took a modestly extraordinary step to intervene. That's all.

Bank bailouts were a bad idea that increased moral hazard and left the economy more at risk than it was before, but this isn't a bailout, and the commentary is about as topical here as a generic Microsoft rant on a random HN article about compilers.

> I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch.

i think that says more about your relationship with your friends than it does the banking system.

The rich have a relationship to the NY fed analogous to a friendship?

try holding the world economy hostage with a massive amount of capital you've accrued through a combination of violence and abuse of capitalism's boom-bust nature for decades. then if you miss your lunch you can probably get someone to cover it : )

Solvency and liquidity are two different things.

If you are rolling short term debt and only have long term assets you can't sell, you are taking a liquidity risk. You may be perfectly solvent (have more assets than liabilities) but if you cannot refinance the debt one day, you will go bust.

The Federal reserve is not in the business of injecting capital into insolvent banks (which is why TARP in 2008 was a very unusual and controversial measure), it is in the business of providing a backstop of liquidity to banks that are solvent (this is enforced through capital requirement) but may require liquidity on a short term basis.

Is there a reason why I can't, say, sell equity in my car to cover the shortfall? I have a vehicle worth $nK at purchase, so I'm also solvent, just with a liquidity problem.

It just seems like real cash and assets are valued less than financial instruments? Because they're More Future Money That We Expect To Exist compared to Less Now Money Which Actually Exists? I guess that makes sense but is also absolutely insane?

Again, correct me if I'm wrong.

You can sell equity on your home with Point (https://point.com/) but I'm not aware of the same thing existing for cars, probably because it's a comparatively small chunk of change, and cars just depreciate in value, whereas homes are supposed to appreciate. Instead you could use your car as collateral for a loan, assuming you owned it.

_Land_ appreciates. "Real property". Many homes are built on land, and either come with the land itself as a package deal (almost all standalone residential property is like this, in the UK it would be "Freehold") or is offered as a long lease with an inherent interest in the land (more common where multiple homes share footprint, in the UK "Leasehold" or the more modern "Commonhold").

The building doesn't appreciate, if you spend $5000 on home improvements or repairs almost invariably an honest agent will tell you the value of the building was only marginally increased by doing this, because it was never the building value that mattered.

Where people just own the building and NOT the land, "mobile homes" or "manufactured homes" depreciation destroys the value of the home relatively quickly, within a lifetime usually.

Primary reason is that property has a stable value as you said.

There is also another reason. In most jurisdictions a mortgage is a super senior claim. It is senior even to the taxman, which is very rarely the case for private debt.

You could always borrow money for lunch, secured by your car?

The thing about financial instruments is that they scale infinitely better than "real assets".

It's like seeing Amazon, Google etc. spend so much on cloud computing, and then asking if real computers are valued less than virtual ones.

> Is there a reason why I can't, say, sell equity in my car to cover the shortfall?

This is what a loan is. Look at the assets and revenue someone has and give them money if you think they can pay it back. You could reconstitute that situation as thinking of it as selling the equity in your assets and future profits and then buying it back in installments.

Companies try as hard as they can to minimize the amount of money just sitting around and not doing anything. They accomplish this with frequent short term loans that smooth out the noise in their cashflow.

You can - they are called pink slip loans.

The challenge with real assets is they are hard to value, and hard to sell quickly. Therefore the interest and fees charged are higher (also people prone to need short term loans using their car as collateral are also very prone to not pay these loans back).

These financial assets can be calculated, sold, more purchased, etc. in known quantities very close to instantly. Standardized financial assets are very easy to move or use in large quantities for these reasons. A 5 yr US Gov't bond is a known quantity.

I think parent meant at the rates banks get.

Which, arguably, should be a thing, so long as it's elevated in priority to the level of a debt to the IRS (i.e. can put liens on anything you own and garnish wages).

Similarly, if the Fed loans to these banks at a penalty rate -- presumably much more that regular risk-free loans like in e.g. securities a money market fund -- I wish the Fed would let people sign up for these programs so our idle cash could get lent out at that rate.

You can in fact take out loans against your ownership of a vehicle, assuming you own it free and clear.

For assets whose ownership is more nebulous than an automobile you typically have to temporarily relinquish ownership of it to use it to secure a temporary loan, ie, pawn it.

You car is not a very good asset from the bank point of view, so it's not going to be cheap. But the typical example is to draw on your mortgage, (equity release, i.e. reborrow a little more against your home). That's pretty much as cheaply as a consumer can get liquidity against an illiquid asset (home).

And that's pretty much what banks do with the Fed. They have assets that they get funding for from the Fed with a short term repo transaction. In theory the Fed takes very little risk on the transaction.

With credit cards you are typically getting a 0% borrow rate for ~30days, secures by your credit rating.

True, though it is paid by the high transaction fee paid by the seller.

Sufficiently advanced illiquidity is indistinguishable from insolvency.

It's really not. These situations:

1) Imagine you own 10 houses outright. Congratulations, you're worth $5 million dollars! You want to spend some of that on a boat, but it's not liquid fungible money, so you can't, not without some intermediary steps that inject liquidity into your situation. You're basically solvent, no bank owns a claim on you.

2) Now, imagine you "own" 10 houses, only they each have a $500,000 mortgage. You are worth negative $5 million. But it's okay! You rent them out, and generate enough revenue to pay the mortgages. Again, you're solvent.

3) Repeat #2, only without the rent revenue. You're insolvent.

This doesn't mean insolvency & illiquidity can't coexist, but one is not an extreme form, nor does it necessitate, the other. You can be insolvent but very liquid. You can be illiquid but solvent. You can be insolvent and illiquid (which is basically #3 above)

Yes, I understand that it's possible to be illiquid but solvent. I understand the concept of not being able to buy things with the house directly so you have to get a loan. I understand that those terms have different definitions.

My point was that, when the illiquidity is sufficiently advanced -- when you the actual ability to sell is far enough into the future, and the possibility of making a sale is increasingly dubious -- then those judgments of how much it's "worth" become likewise dubious, and the venture is more reasonably characterized as insolvent, because the unwillingness of others to buy means the property doesn't have a value that supports its status as sufficient collateral.

Also, in your example, assuming (which was the thing I was conditionally disputing) that the real estate really is worth the $5 million, you'd be worth $0, not negative $5 million.

It's negative 5 million because you don't own it. It is a debt, and debts don't count in net worth.

If it's a typical mortgage, the asset is normally counted toward your net worth.

You're right, I'm wrong, it's a debt that counts against you, but also an asset that counts for you, cancelling each other out (assuming market value of the home == mortgage amount)

This isn't a bailout. The Fed is there for this specific reason, to ensure the market functions smoothly. The money injected into the repo market ensured that things ran smoothly. I would think they would simply unwind the repo positions as normal when the forcing factors on the market resolve... With no money lost or won...

Think of it as lubrication for a system that is a bit squeaky in some places.

Just like QE was to be unwound. How's that going?

You should be asking what the steady state looks like.

Why shouldn't the balance sheet permanently increase along with the size of income?

Yes, you’re reading this entirely wrong. This isn’t for rich people to stay solvent.

Given that these sorts of things can shock the economy, we usually have significant more wiggle room at all times to deal with coincidences like this. The fact that we're running out of wiggle room is the sensational problem. It's not like these coincidences haven't been happening since 2008..

Matt Levine is also a lawyer by training...

It does suggest that the Fed's goal of lowering rates may introduce some unintended consequences.

How so? This is the result of a glut in treasuries and a lack of dollars in money market funds.

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