[HN Gopher] U.S. Fed accepts $756B in daily reverse repo operation
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U.S. Fed accepts $756B in daily reverse repo operation
Author : dgellow
Score : 160 points
Date : 2021-06-17 18:21 UTC (4 hours ago)
(HTM) web link (www.reuters.com)
(TXT) w3m dump (www.reuters.com)
| [deleted]
| [deleted]
| Zelphyr wrote:
| Can someone provide a ELI5 for this?
| carapace wrote:
| Riiight? I read that and my reaction was Red Dwarf Cat "What is
| it?" https://www.youtube.com/watch?v=BLc5mvOGgxc
| hall0ween wrote:
| Don't quote me on this, pretty sure I'm wrong. The Fed bought
| assets (with the agreement to give it back for even higher
| rates of return). I heard one interpretation of this being that
| the moneys worth less than the assets and the fed is looking
| for ways to incentivize financial institutions to take money.
| ganoushoreilly wrote:
| Yes, govt bonds are looked at as not reliable and the fed is
| incentivizing the purchase of the bonds nightly with
| additional interest. Problem is this is to stave off excess
| inflation, but it ironically will create it.
| wtn wrote:
| > the fed is looking for ways to incentivize financial
| institutions to take money
|
| Right, the current situation is a money market "plumbing"
| issue; there are more deposits than banks can handle due to
| GSIB balance sheet regulations.
|
| Here's some background info: https://fsforum.com/news/fixing-
| whats-broken-the-gsib-surcha...
| BenoitEssiambre wrote:
| Central banks raised interest rates a tiny amount from 0 to
| 0.05%. Banks were like: we no longer want to borrow all this
| cash we weren't doing anything with anyways please take it back
| central bank.
| BenoitEssiambre wrote:
| To add to this, central banks don't lend out cash without
| banks pawning an asset in return. And they only do so on a
| limited time basis. The banks have to promise to repurchase
| the pawned asset at a certain date, hence the name "repo"
| (reverse repo from the central bank's perspective).
|
| Central banks are basically pawn shops that get to create
| their own cash to lend out.
| rawtxapp wrote:
| This was a good and simple explanation on why this might be
| happening: https://www.youtube.com/watch?v=O0fSPO7AW7k.
|
| tl;dw: too much money in the system, big banks don't want the
| liability, push it to money market funds which use short term
| treasury while treasury is trying to increase their long term
| debt and reduce the short term ones. essentially, not as scary
| as it sounds.
| jnorthrop wrote:
| Great link. Thanks
| MuffinFlavored wrote:
| > big banks don't want the liability
|
| How is holding lots of cash a liability?
| choeger wrote:
| Well, banks do not hold cash. Cash is always held by the
| central bank (that's where the other banks have their
| accounts). Nowadays, this can easily involve negative
| interest rates. So if a bank now buys some security back
| from the central bank, they effectively remove money from
| the system (and get that security in return).
| MuffinFlavored wrote:
| > Nowadays, this can easily involve negative interest
| rates.
|
| Source? Does it? I thought negative interest rates were a
| thing in the EU but not in the US yet?
| rawtxapp wrote:
| It increases their regulatory obligations without
| increasing their profits.
| ketzo wrote:
| Because it's not actively generating value, and is in fact
| actively losing value thanks to inflation. It's legally
| considered a "liability" in the context of a lot of banking
| regulation.
| stryker7001 wrote:
| is it more fair to say one reason they don't like holding
| cash because they have to pay interest to their
| depositors on it without getting any return on it?
|
| So putting the cash to work (in a reverse repo) even at
| 0.05% allows them to convert it to an asset and generate
| some return.
| joosters wrote:
| To the banks, it's a _debt_ and hence a liability. If you
| put money in your bank account, then the banks owe you
| money.
| rsp1984 wrote:
| Yea, but you gave the bank the money first. Which brings
| us back to the first question: How is holding cash a
| liability? Are they worried about deflation?
| edgyquant wrote:
| Deflation would be a good thing (as the cash would be
| worth more.) Cash is a depreciating asset due to
| inflation (it isn't a liability.)
| [deleted]
| devin wrote:
| In the case of inflation, your purchasing power will
| decrease. For example, there was a period during the 1940s
| (1941-1951) where if you held cash, t-bills, cash in a
| bank, or t-bonds instead of equities, you would have seen
| your purchasing power decrease by 30-50% over that time
| period.[0]
|
| [0]: https://www.lynalden.com/may-2021-newsletter/
| jkhdigital wrote:
| At a _very_ high level, this is one among many Rube Goldberg-
| esque interventions in financial markets that the Fed uses to
| try and whip markets into behaving how it wants.
|
| In more concrete terms, banks (i.e. members of the Federal
| Reserve System) keep USD reserves on deposit at the Fed. The
| only thing they can do with these reserves is loan them
| overnight to other member banks at a market-determined interest
| rate--the Federal Funds Rate--which is targeted to a certain
| range by the Fed's policymaking committee. The Fed also pays
| interest on these reserves, at two rates: one rate for
| _required_ reserves, and another for _excess_ reserves. These
| serve to put a floor under the FFR, since there is no reason to
| lend reserves at a rate below what you can get by just sitting
| on them.
|
| Of note is the fact that _only Fed member banks_ have access to
| this, so other financial institutions must go through the banks
| when they have excess cash to park somewhere. In essence, the
| bank can accept overnight cash from non-banks and split the
| IOER with them. This transaction is consummated through a
| _repurchase agreement_ (repo) in which the bank sells a "safe"
| asset to the counterparty with an agreement to buy it back soon
| thereafter (often overnight, but potentially up to a year
| later) for a slightly elevated price. The price difference is
| effectively the counterparty's cut of the IOER accrued during
| the time that the bank was sitting on the cash. Repo
| transactions are used for all sorts of short-term funding needs
| among non-banks, so the overnight rate on high-quality repo is
| _roughly_ equivalent to the FFR.
|
| It is for this reason that the Fed started its reverse repo
| operation, whereby it offers basically the same deal that I
| described above to certain qualified non-bank counterparties,
| in order to _set a floor on overnight repo rates_. (You can
| ignore the "reverse" in the name; it just means that the Fed
| is the one lending securities in the transaction.) The Fed is
| extremely wary of negative interest rates and the effect they
| might have on market behavior, so reverse repo appears to be
| the preferred method for preventing this.
|
| So what does it mean when usage of this facility skyrockets?
| Well, it means that banks are not willing to engage in
| overnight repo at the rate that the Fed is offering, which in
| turn means that there is suddenly a large imbalance between
| repo supply (high-quality lendable securities held by banks)
| and demand (idle cash held by non-banks). As to what _that_
| fact means for the near future, opinions may differ sharply.
|
| Banks essentially make money by arbitraging time preferences--
| they borrow short term (e.g. demand deposits which can be
| withdrawn at any time) at very low interest rates, and lend
| long term for much higher rates to risky ventures. They realize
| a profit by earning a sufficient spread between these rates to
| offset losses due to counterparty risk (i.e. default) on their
| lending. One consequence of this model is that a bank may
| abruptly become insolvent due to short term market conditions,
| if it cannot roll over its sources of funding. Since financial
| assets can typically be liquidated quickly (as opposed to, say,
| a bunch of idle factories owned by a defunct manufacturer) this
| can lead to systemic instability when an insolvent bank is
| forced to sell everything and drags down the prices for assets
| held on other banks' balance sheets.
|
| After the GFC, regulators decided to come up with a more
| nuanced set of rules about how "healthy" a large bank's balance
| sheet must be, in order to spot trouble before it exacerbates a
| liquidity crisis and produces a solvency crisis. A business's
| leverage ratio is basically capital (equity) divided by assets
| (or its inverse, depending on your framing). For banks,
| however, just looking at leverage is not that helpful since the
| assets being held have very different levels of risk. The new
| metric is the Supplemental Leverage Ratio (SLR), which includes
| off-balance sheet exposure. Notably, the bank's reserves at the
| Fed as well as holdings of US Treasuries are normally included
| in the denominator (risk assets), but at the start of the
| pandemic an exemption was put in place so these could be
| excluded, thereby boosting the leverage ratio and allowing
| banks to engage in more lending than would otherwise be allowed
| by the normal SLR calculation.
|
| However, the SLR exemption has now been allowed to expire, and
| thus banks must tighten up their balance sheets to avoid the
| severe restrictions of a low SLR. We are now squeezed between
| the Scylla and Charybdis of financial regulation and monetary
| stimulus, as the Fed engages in QE to encourage lending towards
| riskier economic activity while simultaneously imposing
| leverage constraints to prevent large banks from posing
| systemic risks. The Fed's reverse repo has become the pressure
| release valve, as banks are completely hamstrung by their
| inability to offer negative rates so everyone is now going
| straight to the Fed for their overnight deposits.
|
| Ironically, this is essentially a (short-term) negation of the
| Fed's QE activity, as the Fed is simultaneously purchasing
| assets as well as lending them out on an ongoing basis. In
| other words, the market is sending a pretty clear signal that
| QE is really unnecessary at this point in time.
| newaccount2021 wrote:
| The world economy is a ponzi scheme played out over a very long
| term
| dmw_ng wrote:
| https://fed.tips/sico4-1/
|
| This relates to scarcity of short-duration treasuries, it's
| mostly a scary sounding non-event
| ganoushoreilly wrote:
| First, it's been at 500 or so for a few weeks this is a
| substantial jump. The previous high record was $589 on the
| 14th. This has never been this high.
|
| But more than likely you need to understand what Reverse Repo
| is and why it impacts all of us. Here's a great ELI5 On Reddit.
|
| https://www.reddit.com/r/investing/comments/1ixbwf/eli5_repo...
|
| TLDR: More inflation and shakey times ahead.
| eightysixfour wrote:
| The jump is substantial because the Fed raised the interest
| rate on overnight reverse repos from 0% to .05%, so the
| demand skyrocketed.
| izend wrote:
| Note you are off by a magnitude:
|
| "as it raised the rate on its overnight Reverse Repo
| facility from 0% to 0.05%"
| eightysixfour wrote:
| Thanks, I've edited it.
| onlyrealcuzzo wrote:
| That is an annualized rate, right?!
| guffaw5 wrote:
| Banks have a ton of cash, and they're worried about inflation.
| So, they store their cash with the fed (through a repo
| [repurchase] agreement) temporarily.
|
| [0] What is a repo? -
| https://www.richmondfed.org/publications/research/econ_focus...
|
| [1] Repos in charts -
| https://fred.stlouisfed.org/series/RRPONTSYD
| wtn wrote:
| The immediate situation is a problem of money market funds
| having more inflows than they could allocate (without nominal
| losses) in a zero interest rate environment. It's not about
| inflation per se.
| ffggvv wrote:
| that doesn't really explain why they'd give the fed money for
| 0 percent interest if they are worried about inflation
| dragontamer wrote:
| A 30-year bond is 2.20% APY yesterday.
|
| If inflation happens, the 30-year bond will likely rise
| with inflation: maybe 3% or 4%. It is better to store your
| cash today, than to "lock in" to 2.2% APY.
|
| Next month, if inflation starts to kick in, maybe you'll
| get 3% over the next 30 years instead of 2.2% over the next
| 30 years.
|
| -----------
|
| Obviously, a 30-year bond is 'different' than cash.
| However, when you start looking at 6-months, 3-months,
| 1-month, and overnight lending rates... things look more-
| and-more like cash.
|
| No one ever holds "cash" per se, its always better to lend
| it out (even for only 1 day, you wanna have that cash
| generate more cash). By betting on shorter timescales (ex:
| 1-month), you're really betting that the longer-time scale
| bonds (ex: a 30-year) will rise up.
| MuffinFlavored wrote:
| > they store their cash with the fed (through a repo
| [repurchase] agreement) temporarily.
|
| What does this gain them? Are they paid interest?
| notahacker wrote:
| Contrary to the other two replies, yes, they are paid
| interest (it's a reverse of the standard repo where they
| borrow money from the Fed and pay the interest)
| selectodude wrote:
| Reading the comments on financial articles on HN makes me
| question the comments on the stuff I don't actually know
| something about.
| eloff wrote:
| They pay for the privilege of having the Fed hold their
| cash.
| professoretc wrote:
| Banks don't like holding cash (because it doesn't belong to
| them, and could be withdrawn at any time). So it's actually
| the opposite: they _pay_ for the privilege of not having to
| hold onto that cash.
| MrStonedOne wrote:
| That does not explain what a reverse repo is.
| rbx wrote:
| the banks have too much cash and not enough collateral
| (typically bonds). The FED lends them the bonds for one day
| (reverse repo) so that their books look ok at the end of the
| day.
| testfoobar wrote:
| Reverse repo is where money goes to die 24 hours at a time. It
| isn't the opposite of QE because it is a 24 hour operation that
| reverses at the end. But string a lot of 24 hours together and
| you get something that behaves like Quantitative Tightening
| during the duration.
| qeternity wrote:
| Except that it's opt in based on liquidity needs, which is very
| different than tightening.
| testfoobar wrote:
| It isn't exactly tightening. But the RRP facility does drain
| liquidity in 24 hour segments. It presents an interesting
| risk.
|
| Here is a quote from a paper at the Federal Reserve itself
| from 2015:
|
| https://www.federalreserve.gov/econresdata/feds/2015/files/2.
| ..
|
| "However, a facility that could allow a very rapid and
| unexpected expansion of ON RRP might exacerbate disruptive
| flight-to-quality flows during a period of financial stress
| and thus could undermine financial stability. Market
| observers and policymakers both have described such risks.
| For example, the Minutes of the June 2014 FOMC meeting state
| that "[m]ost participants expressed concerns that in times of
| financial stress, the facility's counterparties could shift
| investments toward the facility and away from financial and
| nonfinancial corporations, possibly causing disruptions in
| funding that could magnify the stress" (FOMC 2014a). "
| camnora wrote:
| The podcast Making Sense by Jeff Snider and Emil Kalinowski dig
| into how the Fed functions and how dollars/collateral affect the
| (world) economy. Very interesting if you're looking to learn more
| about this. Jeff also has some very informative blog posts.
|
| https://share.transistor.fm/s/b33f1c10
| enraged_camel wrote:
| This might be an unpopular opinion, but the economy we have right
| now feels quite fake, for lack of a better word, in the sense
| that the official numbers that are reported don't seem to reflect
| its actual health. I find it deeply concerning that every warning
| sign is summarily dismissed as "transitory" and the government
| and the Fed continue to drive full speed ahead.
| foogazi wrote:
| > This might be an unpopular opinion, but the economy we have
| right now feels quite fake, for lack of a better word, in the
| sense that the official numbers that are reported don't seem to
| reflect its actual health.
|
| opinion - feels - seems ?
|
| Do you have any sources for your unpopular opinion?
| rrss wrote:
| you don't need to have sources to state an opinion on how
| things feel
| thesagan wrote:
| Although you're being downvoted, this is a growing sentiment
| among researchers and others near the field. There are calls to
| improve measurements of a society's wealth, as well as
| individual.
|
| Current headlines use the broad statistics, such as the most
| exclusive unemployment stats, that don't really capture what's
| happening on Main Street.
|
| The reporting on the economy barely pokes at issues and are
| generally just looking for general correlations, such as
| "Stocks do X as Y does that," or "GDP is doing X while Y is
| doing Z."
| iudqnolq wrote:
| > Current headlines use the broad statistics, such as the
| most exclusive unemployment stats, that don't really capture
| what's happening on Main Street.
|
| You probably know this, but just to clarify economics has
| many more complicated statistics than those that make it into
| newspaper headlines. For example, the "unemployment number"
| is technically U1. U2, U3, U4, etc. capture different
| nuances.
| znt wrote:
| It _is_ fake.
|
| The thing is is your average American would never even consider
| the ultimate possibility of a foundational collapse of their
| economy and currency.
|
| And it's not just the average American. Nearly all hedge funds
| etc have USD as their basis.
|
| Bitcoin, Gold, Stocks, real estate etc has a value tag that's
| denominated in Dollars.
|
| You open up your portfolio and be happy when the USD value goes
| up in a nice green color.
|
| But what happens when USD gets diluted and debased so much that
| it's not possible to stop anymore. Are we not past point of no
| return already?
|
| Debasement of currency marked the end of the Roman empire, why
| would American empire be any different?
|
| Because US has nukes?
|
| Because they can force the rest of the world to keep using USD
| at gunpoint?
|
| For how long?
| runawaybottle wrote:
| Life is relative. Every economy worldwide has been using
| monetary easing.
| bubbleRefuge wrote:
| I think for as long as the rest of the world wants to export
| its goods and services to America in exchange for dollars.
| Maybe a better question is who in the world wants to be the
| importer of last resort ? Who wants to run trade deficits ?
| Trade deficits are a real benefit to the importer and real
| cost the exporter, but it seems the rest of the world doesn't
| get this. They want to manufacture using sweatshops, polluted
| air, local natural resources, so that we can have our Iphones
| and Teslas and they can have electronic digital dollars in
| the bank. We should keep doing this till they stop.
| chollida1 wrote:
| > Nearly all hedge funds etc have USD as their basis.
|
| This is false, many have CAD, EUR, and other currencies as
| their basis.
|
| > Bitcoin, Gold, Stocks, real estate etc has a value tag
| that's denominated in Dollars.
|
| This is false as well. You can measure BTC,Gold, stocks or
| realestate in any currency you want.
|
| Do you really think Canadians denominate their real estate in
| USD? Why would BTC, Gold or stocks be any different.
|
| The US denominates BTC, Gold, Stocks and real estate in USD.
| The reset of hte world uses their own currency.
| thereare5lights wrote:
| > Debasement of currency marked the end of the Roman empire,
| why would American empire be any different?
|
| The fall of the Roman Empire had so many causes that to
| attribute it to one thing is misleading at best.
| [deleted]
| csomar wrote:
| > Because they can force the rest of the world to keep using
| USD at gunpoint?
|
| And the alternative? The EUR which is held by an EU that will
| likely break in the future. The CNY which is held by China
| (great idea :) ) or Russia's currency which is inflating like
| there is no tomorrow.
|
| Bitcoin/Gold could be a hedge but it's quite volatile to
| preserve value especially for short/medium term holding
| periods.
|
| There is no alternative to the USD at the moment.
| samatman wrote:
| Bitcoin would no longer be volatile if it expanded to
| represent an appreciable global fraction of liquid value.
|
| Which is a huge if! That's the maximalist bet, and I still
| have trouble believing in it even as I've watched
| intermediate predictions come true.
|
| If the BTC chain became a Schelling point, where all market
| players see it as their best move to hold some, then
| eventually a satoshi could be worth about a 2021 US cent.
| It would then be unlikely to fluctuate more than a fraction
| of a percent in BTC/fiat pairs per day, unless one of those
| fiat coins happened to be hyperinflating.
|
| If both of those things happened, then pricing things in
| satoshis would be more stable than pricing them in fiat,
| because that's what hyperinflation is: it's when inflation
| in a currency gets so bad that it becomes a bad unit of
| account.
|
| The fact that there's no alternative to the USD at the
| moment is the best argument for the BTC chain forming that
| Schelling point. But! It hasn't happened, and contrary the
| maximalists, there is no law of nature which says that it
| will.
| TMWNN wrote:
| >Because they can force the rest of the world to keep using
| USD at gunpoint?
|
| People and countries outside the US don't use the dollar
| because of the US military, any more than they use the Swiss
| franc because of the Swiss military. They use both currencies
| (and the UK pound, and the Euro, and the Japanese yen)
| because decades of experience show that the countries that
| issue said currencies are the least likely to default on
| their financial obligations, and are most transparent about
| their own financials.
|
| Russians and Chinese themselves avoid using their own
| countries' currencies when abroad as much as possible because
| they are most aware of this. To put another way, the primacy
| of the dollar isn't a supply issue (something that the US
| directly forces), but a demand issue (it's the currency
| everyone else prefers to use).
|
| (This is where you'll bring up the "petrodollar". No, the
| petrodollar isn't real. Well, it's real in the sense that oil
| is, like almost every other product, usually denominated in
| US dollars when sold internationally. What's not real is the
| theory that the US has a particular need for (say) Iraq back
| in the day to denominate its oil sales in dollars, as opposed
| to Euro. Or that Venezuela attempting to denominate its oil
| in yuan today surely augurs the collapse of the US economy
| tomorrow.)
| bob33212 wrote:
| It is fake in the sense that billions of dollars are being
| minted by crypto without any real use case other than
| theoretically fixing the financial system "someday". But fake
| stuff has always been a big part of the economy. Realtors
| extract 6% of most real estate transactions, but provide
| minimal "real" value, for example. The important thing is that
| inflation isn't running away and also businesses are not
| shutting down rapidly, causing a cascading effect of more
| businesses to shutdown and fire even more employees.
| logicalmonster wrote:
| No running away inflation? According to what? CPI?
|
| Many people who live in the real world know that CPI is a
| garbage measure of inflation and life is increasing in price
| faster than they say.
|
| CPI doesn't even measure the right thing: inflation is a
| monetary, not a price phenomenon. It's not things getting
| more expensive, it's the value of money growing less. But
| they don't publish the m2 money stock charts any more. Wonder
| why?
| lotsofpulp wrote:
| > billions of dollars are being minted by crypto
|
| This makes no sense, if only because the US government is the
| only entity that can "mint" US dollars.
|
| More directly, just because the brokerage website says you
| have $x worth of an asset based on multiplying quantity of
| the asset times most recent sale price of a unit of that
| asset, unless you can trade it and deposit the cash into your
| account, you do not have $x.
| bubbleRefuge wrote:
| Good point. I think the financial community has created a
| false sense of legitimacy for bitcoin by quoting its prices
| on front pages, displaying performance graphs, etc, as if
| BTC were as legit as stocks, bonds, and other financial
| instruments.
| Geee wrote:
| This is what happens when a central authority is controlling
| the economy. Everyone should know that free markets can
| allocate resources better than any central planner, but still
| somehow those economists think that we need central bank
| policies to control the whole thing. Central planning might be
| appeling idea especially for those who benefit from it, and
| provides unlimited avenues for complex economic theories, but
| it just doesn't work in the long run.
| andrekandre wrote:
| Everyone should know that free markets can allocate resources
| better than any central planner
|
| for the most part yes, but market failure is a thing... 1929
| being the best example...
|
| and what the fed is doing is reacting to trends to prevent
| the system from tilting out of control, not centrally
| planning things (when the fed starts making 5-year plans then
| we can talk)
| j1vms wrote:
| > economists think that we need central bank policies to
| control the whole thing (...) but it just doesn't work in the
| long run.
|
| Roughly speaking, a central authority might work in certain
| scenarios, for a short time, to prevent situations where
| market participants might otherwise panic.
|
| In the long run, the problem is the same authority does not
| have to all "local", decision-making information available to
| the individual market participants, and that might prevent
| the economy from reaching an optimal configuration.
| bubbleRefuge wrote:
| Not a central planned economy. The fed sets interest rates to
| attempt stabilize the economy in terms of unemployment rates
| and price stability. The congress spends money in a Keynesian
| fashion to smooth the business cycle. Other than that, the
| economy goes where the actors in the economy, the
| corporations and consumers, want it to go within the rules.
| babaganoosh89 wrote:
| That's what 0% interest rates are like. Limitless amounts of
| money as long as the economy has enough confidence to use it.
| sschueller wrote:
| Yet I can't get a 0% interest load anywhere. How does this
| benefit anyone other than large institutions?
| adammunich wrote:
| Now you know what OP meant by "fake"
| [deleted]
| xxpor wrote:
| No, but you can get a ~3.5% 30 year fixed mortgage for the
| same reason.
| iso1631 wrote:
| And if the inflation hawks are right, that's a great deal
| - the capital you owe, and the interest you need to pay,
| will vanish within a couple of years and you'll still own
| the house.
|
| Banks clearly don't think there's much risk of long term
| high inflation.
| conanbatt wrote:
| If inflation goes up and ratings go up, mortgages get
| expensive, and then housing more unaffordable.
|
| Your debt is liquified but your house value also goes
| into the crapper.
| new_realist wrote:
| The bankers are not the ultimate buyers of mortgage
| bonds. The Fed is. So, these low interest rates are not a
| predictor of lack of inflation, but a reflection of
| policy. The government is taking this risk.
| NegativeLatency wrote:
| Banks have overhead, and want to turn a profit.
|
| Also "the system" isn't setup to be nice to you.
| post_break wrote:
| I got 0% on a $5,000 line of credit recently. Refinanced my
| house at 2.5%, etc.
| [deleted]
| throwawaycities wrote:
| Not sure why you are down voted, everyone (when it benefits
| them) takes credit for the "greatest economy the world has ever
| seen" and "record stock market", simultaneously they ignore
| record wage stagnation, record income gaps, record
| homelessness, record student loan defaults, record debt
| defaults of nearly every kind, record young people living at
| home to record high ages...I'd say record high unemployment, to
| which someone would inevitably point to the unemployment
| numbers and claim it's actually record low unemployment, which,
| to your point highlights the farce and disconnect from reality.
|
| The FED is sitting on trillions of taxpayer bailout money from
| the CARES Act, yet if you took about 1/8th of that money,
| government could wipe the entire student loan debt, but then
| you'd hear the media talking point screaming how we can't
| afford it.
| adflux wrote:
| Cancel a debt and you won't immediately see "number go up".
| Hence probably even less attractive from a political
| standpoint
| jandrewrogers wrote:
| Canceling debt creates a taxable event for the person with
| the debt under the tax code. Transferring money to a person
| and then voiding the liability is indistinguishable from
| unearned income, and is taxed as such. People aren't going to
| be very happy when they get hit with an unexpected $10k tax
| bill due immediately.
|
| Similarly, the people with the largest student loan debt tend
| to be affluent. Gifting the affluent more money than a poor
| person who could not afford school may be able to save in
| their lifetime is a bad look politically, and would be deeply
| unfair.
| Havoc wrote:
| This is gonna end on tears for sure
| gregwebs wrote:
| This event doesn't make sense if you have assumed that banks take
| deposits and then loan that deposit money out.
|
| In reality deposits only cover around 10% of the loan. This is
| called fractional reserve banking and it means that a bank loan
| is actually a money creation event!
|
| Cash might seem like an asset. But in reality the loan is the
| asset that pays the bank money and cash is the liability because
| the cash can be withdrawn at any time (it is owed to someone
| else). Increased deposits are bad for banks if they cannot use it
| to generate a loan asset (which is the case today).
|
| However, I am still trying to understand why increased deposit
| liabilities are such a problem that the bank regulations force
| this issue to be resolved overnight in a reverse repo operation.
| seoaeu wrote:
| > In reality deposits only cover around 10% of the loan. This
| is called fractional reserve banking and it means that a bank
| loan is actually a money creation event!
|
| That's not how fractional reserve banking works. If I deposit
| $100 in a bank, they're not allowed to lend out $1000. In fact
| given a 10% cash reserve ratio, the limit is actually $90. The
| other $10 has to stay at the bank "in reserve", at least in
| theory. (In practice there's additional complexity because
| banks can borrow money to fulfill their reserve requirements.)
|
| When people talk about money creation from fractional reserve
| banking, what they mean is that someone has $90 from the loan
| and someone else has $100. Which sums to $190: more than the
| initial deposit.
| spiralx wrote:
| Fractional reserve banking is an incorrect model of money
| creation though, banks in today's world really do create
| money via lending.
|
| https://www.bankofengland.co.uk/-/media/boe/files/quarterly-.
| ..
| [deleted]
| Raidion wrote:
| Fairly new at this and don't work in the sector, just someone
| who enjoys this stuff.
|
| I think it's because if the banks have too much cash, that's
| expensive because it depreciates. They don't want just
| "mattress money", so when too many people deposit and not
| enough people withdraw, banks have too much cash, and need a
| place to park it. If they can't park it anywhere, that means
| that they don't want more cash, which pushes the interest rates
| down. Fed has decided that interest rates going down is bad, so
| they basically say "hey, we'll take the cash off your books,
| give you a small interest payment for buying the treasuries"
| and now the banks don't mind taking more cash in.
|
| Basically this is a way of keeping the interest rates higher on
| deposits, because the banks get subsidized to use that cash to
| borrow Treasuries, this gets unwound every night. So the banks
| can operate like they don't have too many deposit liabilities,
| even though they would without reverse repo.
|
| I think this is a defense against inflation: If banks can't
| earn anything from cash, that means they have to push out more
| loans. Loans add risk/leverage (because it's that money
| creating event) and they also serve to increase monetary
| supply, causing inflation. Fed has decided that they'd rather
| control this process instead of leaving it to the free market
| in hopes that the situation returns to normal instead of
| causing additional inflation. This could be just kicking the
| can down the road, but what do I know.
| spiralx wrote:
| Fractional reserve banking as a model actually requires
| deposits in order to make loans, but you're correct in saying
| that banks do not lend out deposits at all, they in fact create
| money by lending.
|
| This is the clearest overview of the process I've ever come
| across, and it's from the Bank of England who should know how
| :)
|
| https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
|
| There's another one covering money more generally as well.
|
| https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
| mensetmanusman wrote:
| Unprinting the monies
| 1-6 wrote:
| If money is printed, can it ever be destroyed?
| spiralx wrote:
| Just as bank lending creates money, paying back bank loans
| destroys money. Money is also created or destroyed by banks
| purchasing or selling debt assets such as government bonds.
|
| https://www.bankofengland.co.uk/-/media/boe/files/quarterly-.
| ..
| nverno wrote:
| yes, taxes for example. The Fed has power to print and
| destroy
| doggosphere wrote:
| Not technically a fed responsibility. Taxation and spending
| is fiscal policy.
|
| The fed can affect money supply by raising interest rates.
| [deleted]
| aazaa wrote:
| It really helps to have a look at the graph:
|
| https://fred.stlouisfed.org/series/RRPONTSYD
|
| This is clearly the highest level of reverse repo since the
| program was introduced, by a wide margin.
|
| There are three factors behind this:
|
| 1. The Treasury has temporarily backed off issuance of short term
| debt as it drains down an overflowing General Account.
|
| https://www.reuters.com/article/us-usa-treasury-liquidity-ex...
|
| 2. Banks have been inundated with cash resulting from federal
| government transfers (stimmy checks, paycheck protection program
| giveaways, etc.).
|
| 3. Banks can't simply accept cash from depositors and be done
| with it. They need to convert that cash into an asset of some
| kind. And right now, the asset of choice is short term treasuries
| (exactly the thing in short supply).
|
| Reverse repo is when the Fed loans treasuries to banks, typically
| at very low rate and no more than one day. This avoids the need
| for the Fed to sell its short term treasuries on the open market.
|
| By running reverse repo, the Fed can prevent short term interest
| rates from falling below zero (they have briefly broken this
| level in recent months). Such an occurrence would send a very
| unexpected signal to markets and could result in panic as
| investors see the value of money market funds shrink for the
| first time ever.
|
| Of course, you might ask why on earth the Fed doesn't just sell
| the treasuries it picked up by performing all that quantitative
| easing over the last 18 months or so. This is what's known as
| "quantitative tightening." If you want to see markets really
| freak out, watch what happens if the Fed were to suddenly
| announce a massive quantitative tightening program.
|
| Whether or not any of this matters is not clear. The Fed still
| has some tricks up its sleeve to keep the train rolling. And once
| the TGA is spent down, that could open the path to much more
| short term debt issuance. Of course, if demand grows faster than
| supply at that point, things could get crazy.
| [deleted]
| alisonkisk wrote:
| > Such an occurrence would send a very unexpected signal to
| markets and could result in panic as investors see the value of
| money market funds shrink for the first time ever.
|
| Panic how? what will they do, withdraw the cash that banks
| don't want anyway?
|
| I dont undertand the weird mythologizing of 0% interest rate,
| pretending transaction costa dont exist.
| dcolkitt wrote:
| I do agree with you that most commentators freak out about
| the zero bound more than is justified. Especially given the
| fact that negative rates have existed in Europe and Japan for
| a while without any major effects.
|
| But generally, banks are extremely discourages, both by
| regulation and convention, from charing negative interest
| rates on consumer accounts. The first bank that "burns" funds
| in your checking or savings account is going to get assailed
| by a pitchfork wielding mob. So you're forced to borrow
| deposits at zero, and lend negative, which is obviously
| unprofitable. Negative interest rates do create a game of hot
| potato, where banks continuously try to offload their
| consumer depositors on one another.
| jcranmer wrote:
| > The first bank that "burns" funds in your checking or
| savings account is going to get assailed by a pitchfork
| wielding mob.
|
| I think some banks have _already done this_ as a result of
| Europe 's persistent negative rates. See this Bloomberg
| article for a citation:
| https://www.bloomberg.com/news/articles/2019-09-22/banks-
| jus...
| wcoenen wrote:
| The current approach seems to be negative rates on
| deposits over a certain amount. E.g. ING Belgium will
| have a -0.5% interest on deposits over 250K EUR starting
| next month[1].
|
| Rabobank.be simply decided to close all accounts[2],
| which is another way to get rid of customer deposits
| while avoiding mobs. It will increase the pressure on the
| other banks who will receive those deposits though.
|
| [1] https://www.ing.be/en/retail/daily-banking/savings-
| accounts/...
|
| [2] https://www.brusselstimes.com/news/business/174304/20
| 0000-be...
| _spoonman wrote:
| Since the Fed owns so much of its own debt, couldn't it just
| decide not to repay itself the principal when those treasuries
| mature?
| dragonwriter wrote:
| > Since the Fed owns so much of its own debt,
|
| The Fed(eral Reserve) and the federal government are not the
| same thing. The forming owning debt of the latter isn't
| owning its own debt.
| testfoobar wrote:
| Sec. Yellen is operating close to the debt ceiling. It will
| take an act of Congress to remedy this.
|
| https://www.rollcall.com/2021/06/14/democrats-have-no-easy-o...
| mistrial9 wrote:
| Q. How many US Presidencies have "operating close to the debt
| ceiling" and needed an "act of Congress" to continue on..
|
| factual answers please, partisans
| eightysixfour wrote:
| The chart from 1940 to 2018 makes it look like the answer
| is "most of them." https://www.crfb.org/sites/default/files
| /DebtCeilingChart.JP...
| Traster wrote:
| There's something uniquely amusing about a chart that has
| an axis that goes $2,$4,$6,$8 and then in the title
| (trillions).
| testfoobar wrote:
| Wikipedia is your friend:
|
| https://en.wikipedia.org/wiki/History_of_United_States_debt
| _...
| darkwizard42 wrote:
| Found this quite insightful. Thank you for breaking it down!
| andrekandre wrote:
| Reverse repo is when the Fed loans treasuries to banks,
| typically at very low rate and no more than one day. This
| avoids the need for the Fed to sell its short term treasuries
| on the open market.
|
| coming from a programmers mindset, my immediate reaction was
| "this seems like a hack, whats the root cause of the issue, we
| should fix that instead"...
|
| i wonder what us the root cause? or in economics, i guess its
| never so straightforwards...?
| f38zf5vdt wrote:
| Whenever I delve into this stuff in depth it feels like
| people are explaining the world's most complicated PID
| controller for dealing with the human economy, which is
| itself a product of human psychology. Since no one
| understands the latter, it seems like economics is just the
| constant over-fitting of mathematics to the incomprehensible.
| AnimalMuppet wrote:
| > Such an occurrence would send a very unexpected signal to
| markets and could result in panic as investors see the value of
| money market funds shrink for the first time ever.
|
| Not the first time ever. At least two money market funds "broke
| the buck" (that is, lost value) in 2008, IIRC.
| rsync wrote:
| That is correct.
| jcranmer wrote:
| > Such an occurrence would send a very unexpected signal to
| markets and could result in panic as investors see the value of
| money market funds shrink for the first time ever.
|
| Apparently "ever" covers neither 2008 (where the Lehman
| Brothers bankruptcy caused the money market to implode) nor
| 1994, nor 1978.
| aazaa wrote:
| I stand corrected.
|
| https://en.wikipedia.org/wiki/Money_market_fund#Breaking_the.
| ..
|
| That said, I think it's safe to say nobody is prepared for
| what will happen if this became the norm.
| RandyRanderson wrote:
| This guy has a good rev repo explanation:
| https://www.youtube.com/watch?v=O0fSPO7AW7k
| B4CKlash wrote:
| If you're looking for more information about reverse repos and
| this action generally, I found this piece incredibly useful:
| https://fed.tips/sico4-1/
|
| Long but worth the education (if you're interested)
| onlyrealcuzzo wrote:
| Taking a step back - "repo" is short for "Repurchase
| Agreement".
|
| Financial Institutions put collateral into an overnight market
| and receive cash, and then they "agree" to "repurchase" / give
| the cash back (plus some fee) for the collateral the next day -
| right?
|
| This is the "opposite" in that Financial Institutions put cash
| in and get collateral (treasuries) out - right? The transaction
| is essentially going in the "reverse" direction it
| traditionally went - which is why it's the "reverse repo
| market".
|
| It's interesting because "having too much cash" is not usually
| a problem. Now it is.
| runbathtime wrote:
| So the banks are lending their cash to the Fed or (repo
| market), and holding the treasuries (making interest) to let
| other banks or the Fed borrow the cash for some reason
| overnight.
|
| The only thing I get from it is that banks are flush with
| cash and overnight rates should go lower because there is an
| abundance of cash being lent.
|
| Seems like a game. Must be nice to be a banker.
| Judgmentality wrote:
| What's really weird is they're getting interest to park their
| money overnight now (it's been zero interest for a while
| until today).
|
| This is really smoke and mirrors though. Moving the cash into
| the repo market doesn't change anything, other than now it's
| an "asset" instead of a "liability." Yes, there are obviously
| legal differences here, but it's still the same amount of
| cash owned by the same entity, except now they're getting
| paid just to park it overnight.
|
| I'm not saying the reverse repo market is nonsense. I'm
| saying the way the government has structured assets and
| liabilities in this instance is bizarre and seems like
| musical chairs. I've actually read up on this and am happy
| for someone to explain it to me further, but it really seems
| like they're just inventing new ways to kick the can down the
| road. I don't think they're actually solving anything;
| they're just making the problem worse and hiding the
| symptoms.
| tibbydudeza wrote:
| Definitely not an economist so reading stuff like this makes me
| think "heck just give everybody a million dollars".
| vmception wrote:
| Cefi flash loans
|
| It means a healthy economy and tons of deals, if it wasn't so
| exclusive the banks wouldn't have any business but it's hard to
| say if it would be bad. I think more and smaller deals would be
| finished
|
| Like, employees could do cashless stock option exercise by just
| going to the Fed's overnight lending market instead of dealing
| with boutique lenders
| MuffinFlavored wrote:
| For anybody else who doesn't know what CeFi means:
| https://swissborg.com/blog/defi-vs-cefi
| vmception wrote:
| > There is no argument that the advent of blockchain
| democratised access to finance.
|
| You'd think MySQL would have been the tool to tackle this
| obvious use case over all these years if you read this forum
| jules-jules wrote:
| Didn't you get the memo, there really is no use case for
| blockchain.
| vmception wrote:
| I kind of like the moving goal posts for being against
| blockchain based digital assets and settlement, I think
| it accelerates a lot of the improvements and everyone
| inside the space gets to participate in this global boom
| town either way
|
| Its interesting how outdated the detractors ideas get,
| and fascinating what new detractions they come up with
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