Buckle up: Repo Meltdown Shows Budget Deficit Has Limits

[Recursion]

https://www.bloomberg.com/opinion/articles/2019-09-26/repo-meltdown-shows-budget-deficit-has-limits

The repo market madness lives on for a ninth day.

The Federal Reserve Bank of New York announced Wednesday that it would increase the size of its next overnight system repurchase agreement operation to a $100 billion maximum, from $75 billion previously, and also raise the limit on its 14-day term repo operation to $60 billion from $30 billion. Simply put, the bank wants to flood the funding market with enough cash to soak up all the securities that dealers submit 1 and leave no doubt that the critical financial-system plumbing is in fine working order ahead of the end of the quarter.

By now, just about everyone has heard the explanations for this persistent liquidity squeeze, which has lasted long enough to refute the earlier notion that it was merely a one-day confluence of unfortunate events. To some, the main structural issue is that banking regulations are disrupting the financial system’s inner workings. Others say the Fed has simply found the lower bound for reserves necessary to control short-term rates and can move forward accordingly.

In addition to those two assessments, I’d offer another angle that’s largely flown under the radar: The chaos in repo markets was a long time coming given the widening U.S. budget deficits and the lenders that are financing that shortfall.

TLDR: the Federal Reserve is having to create money to buy bonds from the Treasury so that the bond auctions don't fail.

[empedocles]

1. Great site. Thank you. My macro view, is that this is signficant. As demand falls,

prices fall. Falling prices may seem attractive for awhile, however, falling demand is a problem.

[Lucky Luciano]

9. Demand isn't the issue...the supply is unprecedented though!

Thank the thugs and fuckface for the outsized deficits.

[empedocles]

10. Price tends to folllow demand, and supply. What is ominous is the spectre of deflation.

Monetary stability and economic well-being works best in the fine tuning scenarios - not with frenetic attempted manipulations.

[CabalPowered]

2. Situation is more dire than most want to admit

This Forbes article scares me..

https://www.forbes.com/sites/caitlinlong/2019/09/25/the-real-story-of-the-repo-market-meltdown-and-what-it-means-for-bitcoin/#1df44a1a7caa

The Elephant In The Room

For every US Treasury security outstanding, roughly three parties believe they own it. That’s right. Multiple parties report that they own the very same asset, when only one of them truly does. To wit, the IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner plus 2.2 subsequent re-users believe they own the same collateral (often a US Treasury security). This is why US Treasuries aren’t risk-free—they’re the most rehypothecated asset in financial markets, and the big banks know this. Auditors can’t catch this because GAAP accounting standards obfuscate it, as I’ll explain later. What it all means is that, while each bank’s financial statements show the bank is solvent, the financial system as a whole isn’t. And no one really knows how much double-, triple-, quadruple-, etc. counting of US Treasuries takes place. US Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements—which means that no one really knows how big the hole is at a system-wide level.

[Python boot]

8. Collateral

If a bank pledge the same collateral for more than one repo that sounds like fraud. Similar to the mortgage-backed securities fraud in which buyers believed the securities were protected by credit default swaps that failed.

[empedocles]

11. Important perspective. Thank you.

[Squinch]

3. Yes, yes, this has not happened since right before the last complete economic catastrophe, and it

does say that our economy is not working but...

Nothing to see here. Move along.

Or so the powers that be keep saying.

We're in the process of being screwed and no one is noticing it.

Buckle up, indeed.

[uponit7771]

4. WHOA !!! This ... IS ... what happened in 2007 !!! WTF !!?!?! Were are the people who said the first

... time was just a techincal correction ?!?!

Bullshit !!

[IronLionZion]

5. The people saying that have cashed out and hoping someone else takes the loss

[uponit7771]

6. 👍🏼

[Recursion]

15. Big difference: in 2007 we had positive interest rates

Right before the meltdown we were at a 8% prime rate with 4% inflation.

We're currently at a 5% prime rate with 3% inflation. The Fed's got much, much less room to maneuver now than they did 12 years ago.

[IronLionZion]

7. GOP will solve this problem with more tax cuts and bigger deficits

and use that as an excuse for austerity measures in social programs. Since it worked out so well for them before.

When the economy goes south, they will blame it on impeachment.

[modrepub]

12. Need Austerity Backstop Legislation

We know the Repubs have been hankering for an excuse to cut all kinds of social benefit programs. What we need is some type of legislation that will focus the first "austerity" cuts on states that receive more federal funding than they generate. The "dead beats" in the system are far too often Republican strongholds; in effect the current system takes from the states and sub state areas that have good solid tax bases and transfers them to states and areas within states that do not have very good tax bases. The Republican way has always been "make somebody else pay my taxes".

[NoMoreRepugs]

13. THIS.

[moonseller66]

14. Business terrorism?

This stems from the failure to prosecute the banksters and others involved in the 2006-2008 debacle. They got away because we chose to "move forward" rather than holding these responsible.
And we've seen they didn't care about correcting anything so they simply did it all again knowing the same stern warning will apply once more.

Big businesses, CEOs and their legal teams really are the true American Terrorists. They've done much more damage to this country than any group of middle eastern radicals.

It's time to call out the real enemy and put a final check on them.

[erronis]

16. Yup - agree. But the acting government is part of the problem, indeed a child-monster of the problem

and unfortunately holds a lot of the levers that might be used to solve these problems.