Why I'm Worried About the Repo Market | Hacker News Reader

Why I'm Worried About the Repo Market

bloomberg.com

80 pointsyasp69 comments

It’s essentially QE4. Fed’s balance sheet is increasing (even if for a short duration). Make no mistake - this results in lower return on cash for savers. At a time when big banks call 0.05% “high yield”, this is the last thing we need. If banks are short on reserves they should be increasing interest rates to attract new deposits and maybe selling some of those foreclosed homes they’ve been holding onto for an eternity.

The banks have completely failed as a business and the fed is enabling their incompetence. How many stories do we need of money laundering, market manipulation, fraud, until we say enough?

The best part of all this? We don't even get to know the real reason there's a liquidity crisis. Obviously the "it's investors buying treasuries and corporations paying taxes!" explanation was BS.

even if for a short duration

Nobody will unwind their balance sheets in any substantial or meaningful way, ever. QT ending because asset values came down 10% from all time historical highs should make this abundantly clear. It's a post-2008 world, and the new mandate is to smash that VIX to zero.

Every central bank on the planet is engaged in this competitively, and none of them will stop until they manage to destroy their respective currencies. Bear in mind that the 100 year Austrian bond yields close to 1%, so the smart money is betting that it will take over a century for this to ever end.

While I am no fan of banks, I don't think that (unless we go to negative rates in the U.S., which while not as impossible as it once seemed, still seems off the table here) it makes much difference to savers if they are getting very nearly 0%, or very, very nearly 0%. In both cases, even our modest inflation is an order of magnitude greater, so for all practical purposes they are getting a real interest rate of -1x(the inflation rate).

Not that there's not problems with what, I agree, is in many ways QE4. Just that a number very near to 0 getting divided by 2 is not really the biggest one.

We don't know what interest rates would be if the fed wasn't promising free money to the big banks. My credit union can offer 2.0%, why can't Bank of America or Chase or Wells Fargo? This is no different from the LIBOR manipulation that happened a few years ago. Back then, the media was quick to point out how the LIBOR interest rate impacted everyone from pensioners to savers.

> My credit union can offer 2.0%, why can't Bank of America or Chase or Wells Fargo?

BoA and Chase can attract sufficient deposits without offering 2.0% on savings. Your credit union may need to offer higher rates to attract sufficient deposits.

> BoA and Chase can attract sufficient deposits without offering 2.0% on savings

Ummm, the fact that the fed is printing money for the banks seems to indicate otherwise?

The Fed only lends funds to financial institutions for a short term. These institutions still need deposits to meet reserve ratios (hence why they offer certificates of deposit and similar products).

It isn't immediately clear to me if there is a problem in the repo market (experts, please chime in!). It appears there were some side effects of various new regulations put in place since the last recession which resulted in a recent short term high demand for liquidity. This need for liquidity was satisfied by the central bank and everything worked the way it was supposed to work.

The Fed has been maintaining emergency interest rates for a decade now. When do we expect the emergency to end and rates to go back to the good old 3-5% band from prior to 2008? Short-term is looking decidedly long-term now. Interest rates are in a structural downward trend and probably going to break below 0. People keep saying 'temporary' and 'short term' around these economic decisions before they become business as usual.

If the banks mis-manage money to the point where the health of the system is at risk, the Fed creates more money to rescue them from their bad decisions. The Fed is then hailed as a heroic and necessary institution for 'saving [the economy|the banks|people's savings|our way of life]' by said banks. The incentive structures here are outrageous.

Problems will not be resolved if the punishment for running out of money is being given money. However if that is the approach to be taken there is no justification for not giving everyone free money when they run in to troubles. Except the fact that we all know the unfair advantage being given to the banks can't be scaled up to everyone without collapsing the economy.

If you have access to the Economist's plot of long-term interest rates since 1750, you'll find that the interest rates that many of us came to accept as "normal" (5+%) are historically quite high. Humanity has spent quite a bit of time at or below 4%.

https://www.economist.com/sites/default/files/images/2019/09...

I can see 3-5% was off the mark. From now on I shall say 2-6%.

Point remains that 0%-2% is decidedly a 2 times in 250 years style emergency rate.

> The Fed has been maintaining emergency interest rates for a decade now

There is no such thing as “emergency interest rates”. Rate targets are set based on, primarily, balancing employment and inflation concerns, and there is no special “emergency” threshold.

> When do we expect the emergency to end ad rates to go back to the good old 3-5% band from prior to 2008?

That 3-5% band “prior to 2008” only goes back to 2005, when rates were again below 3%, for longer than the period from 2005-2008 where they were in that range.

Some of it is broad economic conditions, but mostly it's just that the Fed has been covering for the failure of Congress to act when needed; Congress has more powerful and focussed economic tools and is really intended to be the primary actor for everything but smoothing the edges of economic fluctuations, but has been largely asleep at the switch (when not actively reinforcing negative conditions) for the past couple of decades.

> The Fed has been maintaining emergency interest rates for a decade now. When do we expect the emergency to end and rates to go back to the good old 3-5% band from prior to 2008?

The emergency will never end until the US defaults. When the Fed started quantitative tightening, by something like 25 bps, it caused the markets to tank. The Fed is no longer an independent institution; just like Yellen made Obama look good, Powell is making Trump look good. The right thing to do is raise interest rates to 10-15%; I suspect the real rate is somewhere there, possibly even higher. It will be very painful in the short-term, but recovery/rehabilitation always is.

They can't raise rates because that debt servicing would bankrupt every county, city, state, municipality and everyone else with a lot of outstanding debt. They also want ~0% (or negative) rates so that people are forced to spend all of their money to "stimulate" the lagging economy rather than sock it away. If they raise rates and make it worthwhile for people to start saving again spending and growth will very quickly turn negative. The bottom line is that our byzantine debt structure has been cobbled together because we have been borrowing against the future, making economic promises that were impossible to keep. Once you pull one brick out of the illusory pyramid it all comes tumbling down.

The game of infinite growth has to stop at some point. The idea of extremely low interest rates is to make the scam go further. However, the problem is spilling over to other markets, like the stock market, real estate, and other assets.

>The game of infinite growth has to stop at some point.

I couldn't agree more, but I don't think that anyone in a position to stop it will ever do so given the dire consequences that are sure to follow. Unfortunately our entire economic and political system is based on kicking the can down the road and hoping that it doesn't fall apart until someone else is in charge.

My best illustration for the world economy is a group of people owning pieces of a balloon. As the balloon expands, everybody is happy to see that their property is growing and expanding as well. The only problem is that they don't seem to realize that blowing the ballon forever will certainly cause it to pop, reducing their property to nothing.

Recovery/rehabilitation always is painful, but that doesn't mean painful = the right thing for recovery.

I respectfully disagree that interest rates of 10-15% would be good for the economy, in either the short or long term.

>We don't know what interest rates would be if the fed wasn't promising free money to the big banks. My credit union can offer 2.0%, why can't Bank of America or Chase or Wells Fargo?

Because banks aren't around to make the customers money, they are there to give the shareholders dividends.

> Because banks aren't around to make the customers money, they are there to give the shareholders dividends.

Fine, but that doesn't entitle them to free money from the Fed.

Once you are a sufficiently powerful and influential entity, you write your own entitlements and the government delivers them. We saw this clearly in 2008 and 2009.

For the Fed it’s just the “cost of doing business” at zero cost to them.

"When Fed Fixes Repo Markets, Don’t Call It QE: Brian Chappatta" https://www.bloomberg.com/opinion/articles/2019-09-23/when-t...

I'm sure the Fed asked this article be written. They're buying assets from banks and giving them money. What is your definition of QE?

Did you read the article? They specify the definition of QE (indirectly) there.

Per wikipedia (https://en.wikipedia.org/wiki/Quantitative_easing):

Quantitative easing (QE), also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy.

The fed is buying treasuries and MBS's on a nightly and ongoing basis from the banks to the tune of $100B. Is that not large scale? Are those not assets? Is this not injecting liquidity into the economy?

Hell, you can actually see the increasing fed balance sheet from their own data! https://fred.stlouisfed.org/series/WALCL

“repo operations”, “quantitative easing”, and “emergency asset relief” are all fancy methods of printing money.

Printing money in itself is not the problem. The problem is where this money goes and what is made of it. Operations such as QE are designed to inject money on the hands on the top of the 1% richest.

Who are you referring to when you refer to “savers”? Interest rates have been basically 0 for a very long time for retail bank customers.

Short term CD rates have hovered around 2%. They are not completely liquid but if you are saving for the medium term, they are a valid investment vehicle.

Marcus recently had a 'high interest savings' program where the base rate was 2%, you got a short-term bonus of another percent for signing up. (So effectively 3%). With limits and early withdrawal penalties, though.

I think the program's ended, but it was nice when it was available.

CDs / money market are essentially risk free. I don't understand why people expect a rate of return above inflation without taking any risk. This is a fundamental component of capitalism, and most people have no understanding of it.

No, rates were going up in lockstep with fed tightening and peaked late last year. I was finding 6-12 mo. CDs with nearly 3% coupon. Then everything fell apart back in the Spring and it has continued its downward trajectory until the yield curve inverted and now we're looking at all kinds of fucked up rates and short term CDs are like 1.9% but some of those banks are, well, you'd be crazy to do business with some of those names.

I watch corporate bonds and the same thing is going on. It's a giant shit show right now. Things are gradually heading in an ominous direction and I did reallocate my investments some just in case. The problem is, you can't rely on bonds anymore, either. So I'm in MM funds at the moment, and those have shitty returns and high fees.

The next defensive stage downward for me is precious metals hidden at home. I hate to even imagine doing that, but I won't pay negative rates on savings when gold and silver are available.

Have been getting 1% monthly uncapped for almost 8 years now on my checking account.

That’s over 12% APY. I think you’re either getting scammed or full of it.

Sorry, I should have been a lot more clear when I wrote this post last night.

1% compounded monthly is what I intended to say, as opposed to compounded continuously or yearly.

You mean 1 percent annual return compounded monthly?

Or 1/12th of a percent monthly return compounded monthly?

1% APY compounded monthly, which is roughly below inflation. And it's taxed of course.

Isn't your second statement the same as the first? 1200 dollar balance returns $1 per month, or $12 per year?

Technically (1 + (x/12))^12 != (1 + x)

In this case where x = 1% (or .01) they're so close it almost doesn't matter. For x = 10% it's a lot clearer.

That said, it's also not equal to (1 + y) ^ 12, where y is whatever value is needed to have (1 + y) ^ 12 = 1 + x.

That is an exception, not the rule. If you have Chase, Citi, BofA, etc. it’s been like .01% for 10 years.

If you're willing to move your funds to another institution, check out https://www.depositaccounts.com to see how much you could be earning with your money.

Consumer banks barely pay anything. It’s awful. I moved all my long term cash to online banks and investment accounts.

I understand where you are coming from, but my bank has something like 100B USD in assets under management, so I think such a plan is available to millions of people

Where are you getting 1% monthly? I’m getting like 2% yearly from Ally.

Where? Even with something like Lending Club, overall ROI bounces between 7-10% depending on default rates.

If you're getting 12% annually on anything, count me in.

Main Street is starting to see that the Fed will monetize anything, with no limit. They’re starting to demand access to the printing press. The moral hazard with permanent ongoing QE is becoming a reality if Yang is taken as an omen of what’s to come.

The value of the US dollar keeps going up while every other currency is going down. Off shore dollar reserves have been increasing as a safe haven.

This is a classic example of bad money expelling good money. The bad currency (dollar) is driving out all other currencies because it is easy to get and use. Its value keeps going up because there is demand, not because it has any value. As long as the dollar is the only/major currency used around the world, its value will continue to hold against other currencies.

The Fed created this problem. Yet he wonders why.

It’s reasons like this that cause people like Ron Paul to think the Fed is dangerous - they don’t understand their own creations.

Kocherlakota doesn’t understand it either.

The repo market explanation is simple: the IOER rate is higher than fed funds, but with the Fed reducing their balance sheet (QT) by $800 billion, there are going to be unusual effects. This is one of them.

For anyone who would like further reading on this, there is a great (readable) article here:

https://www.advisorperspectives.com/articles/2019/09/25/unde...

Without Fed intervention, the repo market is just big banks lending to each other overnight, using mostly risk-free assets as collateral.

Why wouldn't this market clear at a large spread above the fed funds rate? ... either a majority of banks are too low on capital reserves to participate in some lucrative low-risk loans, OR one or more unknown participants are close to insolvent and the others don't want counterparty exposure. Either way it's a dangerously close to a systemic liquidity crisis and the Fed is completely behind the ball.

Oh it's the _regulation_ that's the problem, not the inability of banks to not overleverage themselves.

Overleverage == self regulation

The reason why we start to see problems in the repo market is clear: the FED is paying banks to keep their money in a safe place, being rewarded for taking no risk! Why would a bank ever lend money to others if they see any problem whatsoever appearing in the horizon? In the next recession, you will see that ALL banks will stop lending to each other and let their excess reserves safe and sound receiving interest for doing nothing. The FED has created the very conditions for a sure repetition of what happened in 2008.

That’s only one consequence of the regulations taken after 2008 (the leverage capital requirements forcing banks to shrink their repo book, reducing liquidity in the repo market).

Tighter rules on capital requirements for holding many other asset classes, bonds in particular will also reduce a lot the capacity of banks to make a market for these instruments in bad times, resulting in more volatility.

None of that is new, banks have been warning about that for years. But it will only become visible in a sharp market downturn.

Noob question: does this have something to do with inverted yield curve? Isn't it simply more useful/profitable for banks to finance their operations with short term debt right now?

This article is unreadable on mobile with popups and scroll injection.

Looks fine on my iPhone.

Isn't this just a short-term shortage of credit? We have experienced similar things on different levels many times. Or did I miss any thing?

Outline to the rescue https://outline.com/DuqfDW

Let banks fail? Arrest the execs and bankers who can't keep enough reserves?

Arresting someone is always a good thing to do. They tried it in the Soviet Union in 1937. Worked like a charm.

I have a question though: do we arrest everyone who fail to perform, or only bankers?

For example, our county recently had to pay 16 million to the family of the guy who was killed because of a faulty traffic light. Should our county executive go to prison?

Also my train was late this morning by 40 minutes due to what they called "equipment failure". Should a person responsible for maintaining the equipment be arrested as well, or execution in front of the passengers would be a better measure here?

There's a difference between failing to perform and specifically making choices that hurt others.

If the county executive knowingly chose faulty traffic lights, yeah they should go to prison.

The bankers aren't bumfuzzled or victims of circumstance, they're just not optimizing for public good or the stability of the system, because why should they? They have no incentive to. If shit goes sideways, they'll just get bailed out.

So how do we change the incentives? Not sure personal liability is the answer, but it's not the worst idea in at least some cases. (Though in this specific case, as much as I even understand what's going on, the answer is probably just standard regulation on the banks themselves)

> The bankers aren't bumfuzzled or victims of circumstance, they're just not optimizing for public good or the stability of the system

Even with all the nonidealities of the USA financial system, it is still pretty darn stable. If you've visit other parts of the world, it is apparent that the USA financial system (and political system, notwithstanding media reports) is among the most stable in the world. This is why companies around the world seek financing in the USA and want to float their shares on NYSE and NASDAQ.

Is there room for improvement? Absolutely.

It’s stable until it’s not.

Lots of countries arrest people...the us tried to arrest its way out of the "drug crisis"

Your example would be more meaningful if there wasn't such a strong history of demonstrable and unpunished malfeasance by bank executives.

The county executive likely didn't select design or program the light....and the victims family did find justice. Your examples don't strike even a passing resemblence to what the op said. They are borderline strawmen.

We should talk bugs and vulnerabilities. There won’t be enough prisons.

> Holding people accountable for their acts of gross negligence for personal profit is a Soviet Union thing

It's not clear to me if you're trying to defend the Soviet Union or if you're invoking a Stalin flavored Godwin's Law or if you're straw-manning super hard.

Is there a difference between:

1. People who get paid peanuts but cause localized failures

2. People who rake in 10s of millions but cause large scale failures.

Do you understand the disconnect between privatizing profits and socializing losses?

Just want to plug a bank I love that is founded on good principles.

aspiration.com

5 mins to open an account with a bank which has a great "social conscience" and truly great perks you won't get from other "big" banks.

No. Seriously, take a look.

Also, in case you are wondering: your credit is not touched when signing up, so really - it's a no brainier

You can thank me later.

Reply on news.ycombinator.com