
The Repo Market Explained - omarchowdhury
https://www.bloomberg.com/news/articles/2019-09-19/the-repo-market-s-a-mess-what-s-the-repo-market-quicktake
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howeyc
Wait, the fed wants an overnight rate in a specific range. To do this they
just set the deposit rate under the "floor" to encourage banks to lend above
that, but they didn't set a ceiling, assuming it would magically stay in
target range??

Now they are "thinking" of making a standing offer to lend at the top of their
target range. Makes sense to me.

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nickles
> To do this they just set the deposit rate under the "floor" to encourage
> banks to lend above that, but they didn't set a ceiling, assuming it would
> magically stay in target range?

Yes. The Fed had hoped that IOER would serve as a floor for controlling
interest rates, when it ended up acting as a ceiling. They used repo
transactions to try and counter this. Prior to ~2007, the Fed used open market
operations to maintain a corridor system.

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jdhn
I honestly believe that this is how QE will be reintroduced. The article even
mentions that a "solution" to the repo squeeze will be for the Fed to begin
expanding its balance sheet in order to create more bank reserves.

My question is this: will interest rates ever be allowed to go back up to
historical norms? This episode clearly shows that the Fed won't allow rates to
go up even if it's a temporary spike, so why should we believe that Treasury
yields will be allowed to go back up?

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ohazi
I'm no economist, but my intuition is that under normal circumstances, it
makes sense for a country's interest rate to be close to the growth rate of
that country's economy. Given that, it doesn't seem likely that the US will
ever go back to 7% interest rates.

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guerrilla
I know you said intuition but can you elaborate why you think that?

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fedtotherescue
My understanding is that the problem is not that banks don't have money, but
that they don't have the right kind of money.

They need fed reserves, which is the only kind of money that works intra-day
for bank needs, but they have treasuries and other stuff, which only clears
the next day.

Why don't they sell treasuries today so that they have the money tomorrow and
thus no problem tomorrow I don't understand.

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bhangi
This article talks about a few factors that have created this crisis:
[https://www.nakedcapitalism.com/2019/09/the-fed-has-not-
cove...](https://www.nakedcapitalism.com/2019/09/the-fed-has-not-covered-
itself-in-glory-fed-funds-edition.html)

"What were they thinking?" indeed.

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GORE
The current situation means that one or more entities are in desperate need
for funding and will pay any price for it. A similar situation happened in
2013 when China's Banking system was on the verge of collapse. The repo rate
reached 20% before the Central Bank of China intervened to calm down the
market.

