We were told back in September that the liquidity injection then was a one-off response to a freak occurrence, nothing to worry about, won’t happen again.
Remember that banks have fractional deposits, so they might be left without money throughout the night and then have to literally be insolvent the following morning. So the Fed steps in to cover these situations.
This is important because the economy and the system in general is supposed to be doing “just swell” when there are symptoms of a disease
Where have I heard this before?
Basically there are actors borrowing at the low repo rates and using it on higher rate government backed mortgage products. Banks with money don't want to lend to these actors, hence the repo rate hike.
I didn't know higher risk firms like hedge funds, PE firms, and REITs are borrowing so heavily in the repo market.
So basically, this is the Fed just handing out cheap money to these firms. It's socialism for the super-rich.
“Powell has been adamant in pointing out that the T-bill purchases, though aimed at expanding the Fed's balance sheet and, correspondingly, bank reserves, this should not be confused with the quantitative easing that occurred during and after the financial crisis.“
https://www.cnbc.com/2019/10/11/the-fed-is-extending-its-ove...
We live in a fiat system; money is literally created out of nothing.
When money is created, it then needs to be injected into the system (economy)
This could be done any number of ways. The more transparent and straightforward though, the less of an advantage to the insider parties and the more meritocratic.
So an extremely complex, byzantine and opaque system has been created. People who are in this system will be happy to go into the many, many details of it. But they won't ever tell you why, it just is.
When I think of modern finance, I think of medieval Europe. Plenty of reasons were given as to why one person ranked above the other. Why one had access to certain things while others didn't. But in general, byzantine structures benefit the insiders at the expense of the outsiders. It's designed to be anti-meritocratic without having to claim being a decedent of the sun god.
I really fail to see why, other than avoiding meritocratic distribution, the fed doesn't open it's own lending window directly to the public.
They fret that lowering interest rates won't increase economic activity. I dare them to open those rates to the public and not see an increase in economic activity.
not out of nothing, all value is created out of shared assumptions about the future. money merely quantizes these assumptions.
Although, I must admit I don't understand the carry-trade dynamics that much. I hope someone else can throw some light on that!
Congress did not okay this, nor did the Fed need any permission due to their autonomy. I believed they infused over $200-billion this year. That is equal to giving $1-million in startup capital to 20,000 startups.
This isn’t the fed giving away money, it’s nothing at all like startup capital.
Economics are complex. Don’t be outraged that the fed is trying to maintain a stable economy.
Banks don't want cash. Cash sucks in terms of value. It's liquid, but it is constantly losing value due to inflation. Assets typically appreciate in value, so it is in the best interest of banks to maximize assets and minimize cash. You trade liquidity for value/earning potential. (Just thinking about opening a certificate of deposit at a bank compared to a money market or savings account. Lower liquidity == Higher interest rate)
The repo markets exists so that banks don't have to hold tons of cash. If it didn't, banks would need TONS of cash on hand for all of their transactions, and it would significantly devalue them.
In some sort of bad event won't the be unable to pay back the one day loan and so the fed is just helping them juke the required liquidity ratio?
The explanation for the FEDs doing the lending is it will spike short term rates or something. Why can't we be mad that the Fed is willing to do this? Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?
That's the problem. If you are one of these institutions, you're setting your interest rate much higher than is healthy for the repo market.
Is that what you are saying?
They have their judgments just like every other entity in the market. They use their best judgement to know that the repo market needs a cash injection.
They're not infallible, but as regulators... their job is to regulate.
$200-billion could have been implemented for more worthy projects than the repo market. In my opinion, the FED needs more oversight from Congress and/or the Treasury.
No, it's not. The Fed is just providing short term liquidity.
Only if the startups are each going to pledge $1 M in treasury bonds, and return the money the next day (or in two weeks, the article also mentions the 14-day repo market).