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New York Fed Again Upsizes Liquidity Plans for Turn of the Year

wsj.com

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Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#61

Post by thisisnotmyname »

cheald wrote: post #38
corporate_shi11 wrote: post #23

Earlier quoted context omitted.

Except it's not all overnight now. >"The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days. "

The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing r…

What happens if banks systematically are unable to pay these loans back?

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#62

Post by Red_Leaves_Flyy »

ww520 wrote: post #31
gulikoza wrote: post #26

Earlier quoted context omitted.

What if he doesn't pay back because ₿TC went down instead of up and he doesn't have it anymore? Ofc he needs the next $10 because now it will go up for sure and he'll make the other $10 back as well... :)

The loans are backed by assets. They will be seized if the loans were not paid back.

Who pays if those assets are fraudulently overvalued rubbish?

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#63

Post by quickthrowman »

MichaelApproved wrote: post #54
ww520 wrote: post #46

Earlier quoted context omitted.

When you have $120B asset, the FED will gladly lend you the money. These are collateralized loans.

"asset" Who values what the asset is worth? That was the key issue with the 2008 crash. Banks were making up what the assets were worth and rating agencies were rubber stamping them. When the music stopped, people realized those assets were garbage.

Repo loans are secured with US Treasuries and Agency Debt, which are priced by market participants as “risk-free” assets due to the creditworthiness of the US Government. Treasuries are the most highly liquid securities in the world.

There are no toxic assets involved in the repo market.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#64

Post by nostrademons »

harmmonica wrote: post #30
JumpCrisscross wrote: post #21

Earlier quoted context omitted.

> is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"? Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump them (or their mortgages) to pay taxes (or employees or creditors). Repos finance the asset side of the borrower's balance sheet. Tying fungible dollars to…

Helpful info and I understand repo predates QE, but could you shed some light on why this came about unexpectedly, why you think the funds dried up all of a sudden (and caused the repo rate (rates?) to skyrocket), and why the fed said, when it first started injecting funds, that it was a temporary measure (which is what all the pundits also said when it first started), but now is stretching the definition of temporar…

I would bet on the carry trade caused by negative interest rates in the EU.

With rates negative there, it makes sense for savvy traders to borrow in Euros (and get paid for it), convert those Euros to Dollars at a U.S. bank (which requires that the bank have dollars available), and then lend in Dollars (and get paid for it). With everybody doing this, the banks quickly run out of dollars and accumulate large euro reserves. The accelerated lending at the discount window is needed so that banks can service all the traders looking to exchange euros for dollars.

The natural economic response to the carry trade would be for the euro to weaken and the dollar to strengthen until interest rates equilibrate, but this'd have political implications that are unacceptable: notably, it'd make American goods even more expensive overseas and deepen the trade imbalance, which would cause job losses in manufacturing and other competitive domestic industries, which would sell out Trump's base for Wall Street's interests again. So the respective central banks get locked in a competitive race to the bottom, where the ultra-loose monetary policy in Europe has to carry over to the U.S. because otherwise either exchange rates or interest rates has to move opposite stated government policy.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#65

Post by samsolomon »

apacheCamel wrote: post #55
PeterStuer wrote: post #35

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve thresho…

Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.

I'm also interested why the FED would want to do this. Could it be to maintain interest rates at a certain target? If the banks don't have money to lend, would it cause them to charge higher interest on their loans?

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#66

Post by aguyfromnb »

thisisnotmyname wrote: post #61
cheald wrote: post #38

Earlier quoted context omitted.

The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing r…

What happens if banks systematically are unable to pay these loans back?

>What happens if banks systematically are unable to pay these loans back?

And how would that happen exactly?

But if it did, the Fed would extend the loan, or loan more. Not very complicated.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#67

Post by quickthrowman »

apacheCamel wrote: post #55
PeterStuer wrote: post #35

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve thresho…

Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.

The banks have assets that are worth money they can post as collateral to borrow the cash to meet reserve requirements.

Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets?

Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as collateral for cash. It’s not a bad thing.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#68

Post by NovemberWhiskey »

MichaelApproved wrote: post #54
ww520 wrote: post #46

Earlier quoted context omitted.

When you have $120B asset, the FED will gladly lend you the money. These are collateralized loans.

"asset" Who values what the asset is worth? That was the key issue with the 2008 crash. Banks were making up what the assets were worth and rating agencies were rubber stamping them. When the music stopped, people realized those assets were garbage.

The only things that are eligible for the Fed repo operations are Treasury securities, agency direct obligations (i.e. other US Govt debt that's not in the form of a Treasury) and mortgage-backed securities issued by Fannie Mae/Freddie Mac/etc.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#70

Post by aguyfromnb »

MichaelApproved wrote: post #54
ww520 wrote: post #46

Earlier quoted context omitted.

When you have $120B asset, the FED will gladly lend you the money. These are collateralized loans.

"asset" Who values what the asset is worth? That was the key issue with the 2008 crash. Banks were making up what the assets were worth and rating agencies were rubber stamping them. When the music stopped, people realized those assets were garbage.

>When the music stopped, people realized those assets were garbage.

They weren't "garbage"; they were worth less than expected at the time they needed to be liquidated. This caused major problems (obviously), and it's precisely why the Fed stepped in to provide liquidity. Many of those so-called garbage assets turned out to be great investments.

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