Monday, October 7, 2019

Repo Market to Hit $20 Trillion?

Ed.'s note: Would you want a banker bailout or would you rather lose your life savings? That is what this comes down to in the final analysis. Delaying these hard choices are precisely why Americans are in this financial mess in the first place. All you have to do if just say "no" when they come begging. It's possible the Repo market will go to $20 trillion. That's cranking out $15 billion dollars a night! Growing Repos, growing bailouts then they come to congress. Americans are going to get slammed through this financial destruction (terrorism) just like they were in 2008.

Source: WSJ

Fix, Leave Alone or Close the Repo Market?

It is unclear why Amar Bhide doesn't just simply support rejuvenation of the Fed Funds market, a place where he concedes banks "can successfully access credit without providing collateral."

Oct. 7, 2019

The federal-funds rate is displayed at the New York Stock Exchange, Sept. 18. PHOTO: BRENDAN MCDERMID/REUTERS

While aptly noting the importance of market price signals and the bewildering interactions of bank regulation and economic events, Prof. Amar Bhide then confusingly pivots to advocate explicit central bank guarantees of overnight borrowings and a related guarantee fee ("To Make Banks Stable, End, Don't Mend, the Repo Market," op-ed, Oct. 2). It is unclear why he doesn't simply support rejuvenation of the fed-funds market, a place where he concedes banks “can successfully access credit without providing collateral." Finally, Prof. Bhide should note that the central bank of a least one Scandinavian country, Sweden, does use repo and currently has a negative interest rate on repo borrowings.

James Lovely

Lakeland, Fla.

On Sept. 17, the overnight repo rate jumped to 5.25% from the previous day's 2.25%, which was the top of the Fed's target range for the fed-funds rate. The Fed responded by executing reverse repo agreements, which increased reserves in the banking system. The intervention had its desired effect as the repo rate fell to within the Fed’s target range for the fed-funds rate.

Mr. Bhide supports Fed policy of targeting the fed-funds rate but would prohibit interventions to force rate arbitrage with the repo market, which, before the crisis, had been the Fed's tool for achieving its fed-funds target. Instead, the Fed would lend unlimited funds to individual banks at its targeted fed-funds rate under safeguards to ensure that Fed loans would only redress supply imbalances at the target fed-funds rate.

Mr. Bhide is correct in his opposition to Fed-induced arbitrage because it leads to excessive liquidity in the markets for government-related securities. However, his policy recommendation isn't viable under current Fed monetary policy procedures because it depends on banks borrowing in response to a reserve supply shortage at the target rate. On Sept. 17, the fed-funds rate only jumped the target range by 10 basis points compared with 300 basis points, indicating no shortage of reserves in the fed-funds market. With $1.4 trillion in reserves on bank balance sheets, this isn't surprising. For Mr. Bhide's policy to work, the Fed must return its balance sheet to pre-crisis size in which reserve balances were about $10 billion.

Steven R. Weisbrod, Ph.D.

Haymarket, Va.


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