New York Fed Again Upsizes Liquidity Plans for Turn of the Year • Hacker News Board

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

#91

Post by Bjartr » Wed, Dec 18, 2019, 8:02 PM UTC

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…

So I guess then the question to ask becomes "Is there a point at which these short-term loans become problematic, and if so, what are the signs it's hit that point, and what are the consequences of failing to stop that point from being reached?"

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

#92

Post by JumpCrisscross » Wed, Dec 18, 2019, 8:23 PM UTC

joncrane wrote: post #86

JumpCrisscross wrote: post #9

Earlier quoted context omitted.

> we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced Short-term as in short-term financing, i.e. overnight lending. Nobody expects repo to go away in the same way nobody expects interest paid on excess reserves to go away. It's a tool the Fed uses to manage the money markets. Because the Fed is the Fed, it's almost alway…

>Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from. Wrong. It used to be this way but they switched it up in 2003.[1] The Fed is considered the "lender of last resort" and they manipulate the interest rates to keep it that way. They used to target the Fed Funds rate to be higher than the discount rate. But that didn't make sense if you think about the system the govern…

> Wrong. It used to be this way but they switched it up in 2003

There was no "switching up". The relationship between the discount [1] and Fed Funds [2] rates is a lever for tightening and loosening monetary policy. Over the Fed's lifespan, the discount rate has typically been higher than the Fed Funds rate, to dissuade the former's use.

And neither is the topic of discussion, which are the repo reference rates [3].

All that said, yes, when the Fed is tightening one may find market rates cheaper than the Fed's.

[1] https://www.federalreserve.gov/monetarypolicy/discountrate.h...

[2] https://www.bankrate.com/rates/interest-rates/federal-funds-...

[3] https://www.newyorkfed.org/markets/treasury-repo-reference-r...

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

#93

Post by apacheCamel » Wed, Dec 18, 2019, 8:35 PM UTC

MichaelConlon wrote: post #90

PeterStuer wrote: post #76

Earlier quoted context omitted.

Tell me: Why was the cash reserve regulation introduced? What problem did it address? Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?

The cash reserve system was introduced to protect against a 1920's style bank run. The idea being that a bank should have enough liquid assets to cover 10 or 15% of their customers pulling all of their deposited funds out of the bank. The goal of a bank is to make as much money as it can with it's assets. It's in the banks interest to loan out as much as it safely can while staying above the reserve requirements. If…

I guess my question would be then why did the bank originally allow themselves to loan too much out? From what you said, it seems like they loaned too much out and without the Fed they would then have to dip into their assets to meet the regulation. So it still seems like the bank messed up and the Fed is bailing them out (despite with interest). I agree it would be a problem for them to dump the assets but it also seems like a problem they are in this situation to begin with.

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

#94

Post by Red_Leaves_Flyy » Wed, Dec 18, 2019, 8:35 PM UTC

harmmonica wrote: post #19

Here is my admittedly ignorant question about this: 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"? Similar to how a high-net-worth individual can borrow against their assets for a very low rate and then turn around and invest those cheap-interest-rate funds into higher-return (i.e.,…

It seems that some banks just decided to stop funding the overnight and short term repo needs of some other banks. There's lots of speculation about why. [1]

1. https://wallstreetonparade.com/2019/12/bis-drops-a-bombshell...

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

#95

Post by SilasX » Wed, Dec 18, 2019, 8:56 PM UTC

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…

>The point, more broadly, is that these are loans with a quick expiry baked in.

Not when they keep rolling them over, they aren't.

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

#96

Post by resters » Wed, Dec 18, 2019, 8:58 PM UTC

deusofnull wrote: post #84

resters wrote: post #24

This stuff is normal. It is not a signal. I do think there will be a crash similar to 2008, but this is not evidence that it is coming.

> I do think there will be a crash similar to 2008, but this is not evidence that it is coming. i agree but i lack a specific metric or analysis that supports my thinking. do you have one?

I think that there are significant incentives for financial institutions to create financial products (derivatives, etc.) that contain (and magnify) the systemic risk that is part of their inputs.

Systemic risk is very costly to hedge against, and to do so requires keeping capital idle that could otherwise be productive.

Also, esoteric financial instruments are always going to be less liquid than simple securities, yet the incentive of financial firms is to create them and find markets for them. This is analogous to any industrial input (raw materials) and output (finished product).

Complex financial products are desirable for use as underwriting capital because they can have specific characteristics that make them preferable to cash. But in fact the actual desirable characteristic is that their usefulness as a hedge against systemic risk has been sold off, leaving something that is legal as risk capital but ineffective against systemic risk.

Hence, the financial system has an incentive to create complex, entangled, webs of risk capital, none of which is cash, and all of which looks fantastic if you just look at its core (non systemic) risk characteristics.

When there has not been a systemic risk event in a while, such systems appear to be ingenious and clever. Regulators "understand" them well enough to deem them suitable as risk capital in good times (due to their non-systemic risk characteristics) and in bad (due to their lower cost).

The issue in 2008 was that the derivatives had baked in resilience to some systemic risk. If you design it with resilience to any systemic risk, it ceases to be useful.

So the game is simply baking in enough resilience to comply with regulations, collect quarterly bonuses, and repeat.

When you think about it there is really no regulatory framework for minimizing systemic risk exposure except for a handful of limits on firm size and some nuances of underwriting capital, created after the great depression.

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

#97

Post by AnimalMuppet » Wed, Dec 18, 2019, 9:21 PM UTC

SilasX wrote: post #95

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…

>The point, more broadly, is that these are loans with a quick expiry baked in. Not when they keep rolling them over, they aren't.

Well, you can regard that as rollover if you want. But if you do, you're regarding the second day's $120B loan as the same as the first day's $120B loan, not as an additional $120B loan. That is, even if you regard it as rolled over, it's still only $120B total, not $120B * N days.

That, I believe, is SilasX's point about quick expiry. The total amount doesn't accumulate. That's true, whether the loans are rolled over or not.

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

#98

Post by SilasX » Wed, Dec 18, 2019, 9:28 PM UTC

AnimalMuppet wrote: post #97

SilasX wrote: post #95

Earlier quoted context omitted.

>The point, more broadly, is that these are loans with a quick expiry baked in. Not when they keep rolling them over, they aren't.

Well, you can regard that as rollover if you want. But if you do, you're regarding the second day's $120B loan as the same as the first day's $120B loan, not as an additional $120B loan. That is, even if you regard it as rolled over, it's still only $120B total, not $120B * N days. That, I believe, is SilasX's point about quick expiry. The total amount doesn't accumulate. That's true, whether the loans are rolled ove…

I am SilasX :-)

And yes, that is my point about how to account for it (and that both $120B and $120B x n are bad ways to express the loan significance, for opposite reasons).

Here I was addressing the narrower, quoted point, that they're loans "with short expiry built in". No, when the intent from the beginning is to keep rolling them over, that should no longer count as a loan with "quick expiry built in".

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

#99

Post by thomaskcr » Wed, Dec 18, 2019, 9:34 PM UTC

AnimalMuppet wrote: post #16

> 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. We're talking about an overnight loan of $120 billion (that is, a loan that is paid back the next morning, lent again the next night, paid back in the morning, etc. This article is trea…

They're subsidizing risk in a cumulative manner. When you hold things on your books you're subject to overnight risk (i.e. a big move can happen when there is no liquidity to move something because markets are closed). This can be managed by position sizing, hedging, repo ops, etc. If you have ~~unlimited~~ consistently increasing/available, government provided repo money available, you get to take more risks and don't need to buy other forms of insurance.

So there is some cumulative impact to argue the point, but like you said it's not the sum of the loans. That said, I don't think this bodes well if you're in the camp that thinks the bigger the bubble the bigger the pop.

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

#100

Post by AnimalMuppet » Wed, Dec 18, 2019, 9:48 PM UTC

SilasX wrote: post #98

AnimalMuppet wrote: post #97

Earlier quoted context omitted.

Well, you can regard that as rollover if you want. But if you do, you're regarding the second day's $120B loan as the same as the first day's $120B loan, not as an additional $120B loan. That is, even if you regard it as rolled over, it's still only $120B total, not $120B * N days. That, I believe, is SilasX's point about quick expiry. The total amount doesn't accumulate. That's true, whether the loans are rolled ove…

I am SilasX :-) And yes, that is my point about how to account for it (and that both $120B and $120B x n are bad ways to express the loan significance, for opposite reasons). Here I was addressing the narrower, quoted point, that they're loans "with short expiry built in". No, when the intent from the beginning is to keep rolling them over, that should no longer count as a loan with "quick expiry built in".

Facepalm. Yes. Yes, you are. I believe that was cheald's point.

Why do you think that $120B is a bad way to express the loan's significance?