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New York Fed Adds $115.14B in Short-Term Liquidity to Markets (wsj.com)
82 points by spking 4 days ago | hide | past | web | favorite | 104 comments

Based on these comments, it seems like a lot of misunderstanding is being proliferated.

I’m not an expert on the subject, but I’d like to dismiss the criticisms of the fed that many are making.

These cash injections give banks short term liquidity, which means that banks can complete transactions. These moves are not at all synonymous of a government bailout. The repo market is what is at concern here. In short, relatively safe financial institutions will loan money for very short term (a single day, for example) in return for a small percentage of interest. Trillions of dollars are moved in this market on a daily basis. When market trust lowers (or demand increases, but this is less likely. But, one example is quarterly taxes coming due), rates can increase. Repo rates are supposed to be low for the market to function properly.

The broader reason for this occurring is that the Fed post 2008-crisis requires banks to maintain higher relative liquidity. On the Feds view, they would rather continue to inject cash than allow banks to maintain pre-crisis levels of liquidity. At least in my opinion, requiring banks to maintain higher liquidity is a smart move.

As far as what this signals economically, I’ve yet to hear any credible answers. Certainly the banks will say regulation is the problem and the fed will respond that we can’t trust the banks that much.

The issue is that this removes an important signal to the market. If trust is down, rates will go up, because if you can't clear your own transactions you depend on borrowing to clear transactions. This is a sign that should maintain greater cover yourself.

Of course, if fed steps in to subsidize the market - which is what this does by holding rates extremely low despite the potentially systemic risks posed by the market - then you can keep pushing for every fraction of a point. But if the repo market goes down that is going to be very serious - and so there should be a bit more cost in the market to reduce the reliance on it.

This is a very good point.

My take is that the Fed is trying to be vigilant amidst indicators of a looming recession. If the repo market rate is too high, banks will hoard cash. Hoarding cash will devalue the banks, and we know that'll likely trigger a definitive recession.

No question - but why not have some of these banks pay some high overnight rates? They have the money to do so.

This push to squeeze every nickle of profit out leaves almost no margin if stress hits. The repo market is huge. If there ever is a real scare and people are used to be able to get free money (or expect the fed to step in) the fed will have to step in on a HUGE basis.

This money is going somewhere, at best it’s chasing yields and driving up asset prices, at worst it’s keeping a zombie Institution or 2 alive

We were told back in September that the liquidity injection then was a one-off response to a freak occurrence, nothing to worry about, won’t happen again.

Right. What is going on here? Really hope someone on HN can explain this in a succinct way.

It means that the individual banks don’t trust each other and are leery to provide credit to each other literally “over night”. So they aren’t willing to provide liquidity to each other because they fear they will not pay back.

Remember that banks have fractional deposits, so they might be left without money throughout the night and then have to literally be insolvent the following morning. So the Fed steps in to cover these situations.

This is important because the economy and the system in general is supposed to be doing “just swell” when there are symptoms of a disease

So there’s a ton of money in the economy but no way to actually make it liquid short term short of the fed, indicating that maybe the money on the books has a better chance of suddenly vanishing into thin air than anyone is comfortable with?

Where have I heard this before?

Well if it’s all loaned out and invested away you can’t exactly conjure it back home every night. But yeah, essentially the Fed is trying to stay ahead of this issue they were the cause of.

There's an explanation here: https://wolfstreet.com/2019/11/06/whats-behind-the-feds-bail... & https://www.youtube.com/watch?v=ORGFtWowKKM

Basically there are actors borrowing at the low repo rates and using it on higher rate government backed mortgage products. Banks with money don't want to lend to these actors, hence the repo rate hike.

I'd bet more on the European carry trade, with various financial firms attempt to arbitrage the difference between negative interest rates in Europe and positive rates in the U.S. That creates a natural demand for short-term dollar loans:


is this to support specifically the emerging non-QM product ($20-ish BN so far in 2019) sector?

Wow. This is an interesting take.

I didn't know higher risk firms like hedge funds, PE firms, and REITs are borrowing so heavily in the repo market.

So basically, this is the Fed just handing out cheap money to these firms. It's socialism for the super-rich.

One of the best explanations I've read on this is here: https://www.reddit.com/r/Economics/comments/d6e8qv/the_fed_p....

Although, I must admit I don't understand the carry-trade dynamics that much. I hope someone else can throw some light on that!

My understanding: Demand > supply for short term high quality, liquid financial assets. The ny fed provides a lower bound of sorts for yields in this market, they need to provide huge amounts of liquidity right now to prevent ST yields from spiking.

Low key quantitative easing

It is QE

It’s really funny how insistent the Fed is on it not being QE so they don’t scare anyone.

“Powell has been adamant in pointing out that the T-bill purchases, though aimed at expanding the Fed's balance sheet and, correspondingly, bank reserves, this should not be confused with the quantitative easing that occurred during and after the financial crisis.“


I can't say about the exact details, but this is what I understand:

We live in a fiat system; money is literally created out of nothing.

When money is created, it then needs to be injected into the system (economy)

This could be done any number of ways. The more transparent and straightforward though, the less of an advantage to the insider parties and the more meritocratic.

So an extremely complex, byzantine and opaque system has been created. People who are in this system will be happy to go into the many, many details of it. But they won't ever tell you why, it just is.

When I think of modern finance, I think of medieval Europe. Plenty of reasons were given as to why one person ranked above the other. Why one had access to certain things while others didn't. But in general, byzantine structures benefit the insiders at the expense of the outsiders. It's designed to be anti-meritocratic without having to claim being a decedent of the sun god.

I really fail to see why, other than avoiding meritocratic distribution, the fed doesn't open it's own lending window directly to the public.

They fret that lowering interest rates won't increase economic activity. I dare them to open those rates to the public and not see an increase in economic activity.

> We live in a fiat system; money is literally created out of nothing.

not out of nothing, all value is created out of shared assumptions about the future. money merely quantizes these assumptions.

Did the Fed state that, or was it just the general interpretation?

It won't happen again again /s

$100-billion handed over to banks for overnight loans! The top 15 largest banks now hold a combined total of $13.7 trillion in assets. Like they really needed it.

Congress did not okay this, nor did the Fed need any permission due to their autonomy. I believed they infused over $200-billion this year. That is equal to giving $1-million in startup capital to 20,000 startups.

Assets don’t equal cash. Cash is liquidity. Without it, banks can’t make transactions. And due to post 2008-crisis rules, banks have to maintain a higher percentage liquidity. In the view of the fed, they would rather inject cash than return this requirement to pre-crisis levels.

This isn’t the fed giving away money, it’s nothing at all like startup capital.

Economics are complex. Don’t be outraged that the fed is trying to maintain a stable economy.

Why can't the banks sell stuff to achieve the proper liquidity percentage?

Well, you need buyers for one. And those buyers need cash. (And where do they get the cash... the repo market)

Banks don't want cash. Cash sucks in terms of value. It's liquid, but it is constantly losing value due to inflation. Assets typically appreciate in value, so it is in the best interest of banks to maximize assets and minimize cash. You trade liquidity for value/earning potential. (Just thinking about opening a certificate of deposit at a bank compared to a money market or savings account. Lower liquidity == Higher interest rate)

The repo markets exists so that banks don't have to hold tons of cash. If it didn't, banks would need TONS of cash on hand for all of their transactions, and it would significantly devalue them.

So there's not enough cash in circulation for banks to sell some of their assets marked down?

In some sort of bad event won't the be unable to pay back the one day loan and so the fed is just helping them juke the required liquidity ratio?

It's not a matter of cash in circulation. It's just against the incentive of banks to hold any more cash than necessary.

> Don’t be outraged that the fed is trying to maintain a stable economy.

The explanation for the FEDs doing the lending is it will spike short term rates or something. Why can't we be mad that the Fed is willing to do this? Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?

> Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?

That's the problem. If you are one of these institutions, you're setting your interest rate much higher than is healthy for the repo market.

..but the omniscient Fed knows better than the market?

Is that what you are saying?

Well, they're part of the market.

They have their judgments just like every other entity in the market. They use their best judgement to know that the repo market needs a cash injection.

They're not infallible, but as regulators... their job is to regulate.

Nonetheless, $200-billion has been added to the money supply. (See FRED M2 Index link below from September 19 to the present)

$200-billion could have been implemented for more worthy projects than the repo market. In my opinion, the FED needs more oversight from Congress and/or the Treasury.


This is not an equity investment, those 20,000 startups would need to return the money the next day.

> I believed they infused over $200-billion this year. That is equal to giving $1-million in startup capital to 20,000 startups.

Only if the startups are each going to pledge $1 M in treasury bonds, and return the money the next day (or in two weeks, the article also mentions the 14-day repo market).

> That is equal to giving $1-million in startup capital to 20,000 startups.

No, it's not. The Fed is just providing short term liquidity.

20k * $1m does indeed equal $200b...but they are most definitely not the same thing.

20k * $1M is $20B, not $200B.

[citation needed]

The dishonesty and irresponsibility of the fed is going to end in disaster - disaster, in this case, being destruction of the currency.

By when? It's easy to predict the destruction of the currency without setting a period.

A shot in the dark: It's European capital buying US dollar denominated securities en masse, as Europe is couple of basis points less attractive than the US at the moment. Strong dollar as side effect, which started at around Spring 2018.

People get all jazzed up about the Fed, but Banks have to play along Basel III.

Not saying a new crack will not break the system in 2020, but the Fed injection is somehow a side twist in this play.

What's the connection between European capital buying US dollar denominated securities and stress in the repo market?

If I ask to convert my EUR into USD, the US bank will hold more EUR, less USD. Less USD decreases my liquidity, which is what's on one end of the table in the repo market, no?

They don’t hold EUR, just EUR denominated assets. But irrespective of what currency you’re repoing, USD balances go down...that’s the whole point. They’re lending. That’s how lending works.

If it's actually European firms participating in the carry trade, then yes it would be EUR. When you decide to sell your S&P 500 index fund for Bitcoin, you don't actually directly exchange your USD-denominated assets for Bitcoin. Last I checked Vanguard was not willing to service redemptions in crypto. Rather, you sell the fund, receive USD for it, and then use the USD to purchase Bitcoin.

Same goes for ordinary foreign currency transactions. If you want to short negative-yielding Eurozone bonds and buy positive-yielding US treasuries, you borrow the bonds and sell them, receiving EUR in the process. Then you transfer the EUR to a US bank and receive dollars. Then you use the dollars to buy US bonds. Your European counterparty is now long European bonds and short euros. Your U.S. banking partner receives the euros you got from them and gives you currency. You give the currency to the U.S. government and buy the bond. To make the currency transactions net out, the U.S. government then needs to give currency to the bank to replace the reserves you took out to buy the bonds.

(In reality, the Fed doesn't have to make the transactions net out, because it can adjust the money supply. But if it wants to maintain the current interest rate in the face of strong demand for dollars to arbitrage away interest rate differences, it needs to hand out a lot of dollars.)

Not saying I agree with OP but they would repo EUR assets in USD to fund dollar denominated purchases.

Why isn't anyone talking about the liquidity squeeze?

The Fed has said nothing about which entities had trouble borrowing in the repo market. It has only discussed a couple of suggestions why banks might have refused to lend to the repo market, and has said that it is still investigating why banks had refused to lend to it. The whole thing is still shrouded in mystery, and speculation is all around it.


I found a convincing answer here connected to delays in raising the debt ceiling among other things like corporate tax payments in Sep.


On a per capita basis, it's as if everyone in the US lent $350 to the banks. (115B/327M)

According to this article, it's worse than that, we're lending money not to banks, but to hedge funds, PE firms, and REITs: https://wolfstreet.com/2019/11/06/whats-behind-the-feds-bail...

These firms than use the cheap money (interest rate < 3%) to make leveraged bets on risky assets (mortgage backed securities, CMOs, etc).

so? What could possibly go wrong? :-)

... and received $351 back the next morning.

Wow thats a crazy way to look at it...

Do these "loans" ever get paid back?

Yes, the next day. Sometimes they get rolled over, but that's why you watch the trend in the repo market over time.

If these loans didn’t get paid back, we’d have another crisis.


From 870 billion in 2008 to 4 trillion now.

One thing to keep in mind is the fed used to do this all the time before 2008. It is considered normal monetary policy then and now again.

More details: https://www.fisherinvestments.com/en-us/marketminder/everyth...

This whole situation really makes me wish that there was more transparency at the Fed. I want to know why they're doing this, because if some of the linked articles in this thread are correct, it amounts to nothing more than a bailout of people with ridiculously leveraged bets.

One thing to keep in mind is that some of the assets being used as repo collateral may be negative interest government bonds. In that case it’s possible that other banks may not want that as collateral thereby locking up a lot of supposedly very liquid assets

I understand very little about this subject. So here are some questions...

the fed issues treasury bonds (am I right?) then some bank buys them, i.e. the bank gives the fed money and the fed pays it back with interest until the bond's maturity (because that is what bonds are, right?)

then the bank can do whatever it wants with the bonds. As far as I undestand "bond securities", whoever holds the security (bond) recieves the interest from the issuer (this is an assumption, is it correct?)

but now, the fed buys the bonds back (?) through the repo (repurchase agreement), which means that whomever sold them will buy them back from the fed in a few days?

So the fed will (temporarily) owe itself the interest? what!? needless to say, I am slightly confused..

You don’t know about the overnight borrow market and the capitalization requirements banks must keep to to cover their leveraged position. There are layers to this problem.

How do i start a bank and get in on the action?

Pay off your local congressman.

Excellent idea, he's frequently in the news being accused of all kinds of nefarious acts. Donyou want in?

How many WeWork's is that?

Just crunched the numbers. If they had actually gone public at a valuation of $47b, that would be 2.45 WeWorks. At their current valuation of ~8 billion, its a much more reasonable 14.4 WeWorks.

Better yet, you can just opt to buy 67.7 Adam Neumanns! What a steal.

The Saudis invested $400M in Travis Kalanick's new startup. Asuming we could get about the same for Adam, we would end up with over 27 billion!

That is a steal. Count me in.

Omg. I can't speak further, but this startup and Kalanick are really awful. This is shockingly stupid.

In this particular case, I'm seeing a bunch of bad actors shooting each other in the foot, so no that awful in practice ...

An entire flock of canaries has died at this point.

Last chance to rush for the exit.

The question is of course: where do you park your money before the big one hits so as to minimize the damages.


High-tech stocks?

Real estate?


Bonds [lol]?


[edit] : not sure why the downvotes, this is a legitimate question: if you anticipate a recession in the next 2 years (I do) how do you structure your portfolio to minimize the damage?

Personally just going for the tried and true "index funds + ride the market" approach.

Don't need the money right now or for any time in the foreseeable future. Have the appropriate emergency savings to handle short-term needs. Paid cash for my house, so don't need to worry about making a mortgage payment.

Personal feeling is that if the market implodes to the point that this strategy doesn't work, everyone has much bigger problems to worry about.

Assuming "the big one" is constantly just around the corner is a really bad investment strategy. Just look at the pure statistics of it, the US stock market finishes the year positive over 74% of the time. You're playing a losing game trying to time it.

I know many of us are still emotionally scarred from the last credit crisis...but storing cash under your mattress is the wrong way to respond to those feelings. It was dumb when my grandparents did it 80 years ago after the Great Depression, and it is still dumb in 2019.

Of course, the world is uncertain and could end tomorrow. If you're uncomfortable with that idea, perhaps try religion?

> Assuming "the big one" is constantly just around the corner is a really bad investment strategy.

Incidence of "black swans" is much higher than we except. Not only it's a valid strategy, it's how massive fortunes are made, as long as you control losses.

Zero “massive fortunes” are made pulling your money out of the market and hiding in cash like OP suggested because you are scared.

To profit off of a black swan event, you need to do 3 insanely hard things. You need to 1) predict both the exact timing of the the crash & the recovery after 2) predict the scale of the move downward and 3) actually go short and expose yourself to massive asymmetric risk.

Massive fortunes are also made at the casino once in a while. That doesn’t mean it’s a repeatable strategy. Paul Tudor Jones and John Paulson know a thing or two about this.

Ray Dalio has been recommending gold... not in a "put all your money in it" manner, but more like "put 7-10% of your portfolio in it" as a way to protect against the market movements that are bad for both stocks and bonds, which in turn apparently tend to be good for gold.

I don't know if this is that situation though, or if this is part of what he calls "pushing on a string".

It's hard to make sense of all this. Supposedly, every 75-100 years there are Big corrections, but I thought the idea was that that was what we went through ten years ago, with the debt crisis and the "beautiful deleveraging" etc. So if that's true we're more looking at a run-of-the-mill recession coming at some point. But on the other hand maybe that crisis ten years ago wasn't actually the Big One.

Gold is weird, and I find it very disingenuous when it gets recommended to uninformed investors . Gold would not have protected you in 2008 for example. As a matter of fact, it sold off at first, further compounding the headaches of anyone who was using it as a hedge. It started gaining along with the recovery in the stocks.

I'm not saying you are uninformed or Ray Dalio recommended it to uninformed investors. However, these things then get picked up and parroted by less scrupulous individuals.

No worries, I've experienced more than a few gold recommendations from folks that have otherwise showed poor judgment, so I've always been suspicious.

Dalio has so far made sense to me, but man... trying to figure out how to dip into gold as a run-of-the-mill investor is not easy, at least not through Fidelity. It's either high fees or buying into gold mining stocks which doesn't seem quite right.

So, in the absence of going full-time into the investor rabbit hole, I'm guessing I'll be in the same boat as everyone else, trying to keep my stock/bonds allocation model rebalanced every few months as it theoretically all goes through the floor together. :-/

The easiest way is usually to trade one of the ETFs that track gold price (some of them are backed by physical gold while others use futures or other derivatives on gold).

Real estate works well if you don't need to liquidate in a hurry at some point. You can't time the market, the stock market or the real estate market it makes no difference. But real estate will at least generate some income (though it is not easy money).

Big farm. No kidding.

Actually this is the only sensible advice in this thread.

The one asset in limited supply is land, and the one commodity that we all are fundamentally dependent upon is food and water. Both require the appropriate land.

Interesting idea that I had not considered.

But not a simple endeavor.

For most people this is not a question at all, because they hardly have money. But hey, you are a whale.

Need to park your money? I have plenty of room!

> For most people this is not a question at all, because they hardly have money.

I am asking the HN crowd, not most people.

My guess is, given how many seem to work in the valley, they do have a little more money than most people and therefore skin in this game.

If you have an appreciable amount of assets (>$10m) you'd put some amount in a special Tail Event Protection fund who know what they are doing and will invest in a combination of volatility linked derivatives, risk-off assets (short dated bonds, precious metals, rates, etc...) and dynamic equity shorting strategies. They will do so with some amount of finesse, as many of the most effective tail hedge strategies cost a lot of money to fund. Unless you do the analysis yourself, which is anything but trivial, it is extremely unlikely that you'll do a good job at judging where the tradeoff should be.

If you have less, generally the best advice is to do nothing and weather it out, because the truth of the matter is that practically nobody can time the market, not even on the horizon of years and any attempts to do so will cost you more than doing nothing would have.

There is no silver bullet unfortunately. Think of it like this, if there was a cheap and easily accessible protection against crashes, people would pile into it and make it ineffective or expensive. Which is exactly what happens.

So I guess you don't want to park your money at my place? Bummer.

Attractive land/houses in big cities are safe investments, even if everything goes to hell you still have a nice house.

Yes. Sure. If they don't come with a loan or a city taxing your asshole away with property taxes.

Most definitely not high tech stocks.

Curious about this as well.

Gold? Doesn't generate any income though.

BTC halving is coming up...

what sort of effect do you expect this to have on BTC/USD? has it had a consistent effect previous times it has happened?


It seems to contribute greatly to the four year cycle that bitcoin has followed so far. Hit play on the graph to see where we are now. The blue lines are the halving dates, where mining rewards are halved, reducing supply.

Cryptos and big tech companies.

Those famously stable cryptos sound perfect yeah.

why the lol at bonds?

I was specifically thinking of govt debt, and:


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