Chicken Little wrote: ↑
Sat Oct 26, 2019 2:16 pm
TomCat96 wrote: ↑
Sat Oct 26, 2019 2:06 pm
Fill in the ????
For me, the story goes like this...
An "innocuous" spike in the repo rate causes the FED to change direction. Instead of raising rates and decreasing the balance sheet, they continue lowering rates and increasing the balance sheet
. Once the "spike" is beaten back, they announce that they're going to continue operations for an extended period of time.
So...things are going relatively well for the economy right now, and we've restarted operations?
Isn't this exactly the time to be doing the opposite? Weren't they doing the opposite not long before the "spike"?
Isn't there little room to maneuver if they want to ease?
I'm not telling you to panic, I'm telling you that I'm about to panic (I don't really see any point in panicking "after").
I'll add this...
There's certainly an idea that operations can smooth the business cycle. It's even been wondered whether recessions can not only be mitigated, but potentially even avoided with operations. I'm just looking at it from the other side. If operations can't prevent a recession, in this environment, can you even have a recession that doesn't develop into a systemic crisis?
(that's three "evens" in there, was going to edit but too slow on the draw, already quoted)
There's a lot of debt out there.
Take a look at what you wrote. Let's look at things factually.
The goal was this
Spike in overnight repo rates => ???? => Global Economic Meltdown.
This is what I have for you
Spike in overnight Repo rates => FED to change direction, increasing balance sheet, continuing operations => Global economic meltdown.
Right now, I would argue you have not made the case. You're still bridging the gap with a lot of panic. The fed increasing balance sheet does not lead to contagion, meltdown, or anything. Let's stay fact driven.
Let me fill in the blank as I understood for the 2008 crash.
1. Spike in Repo Rate, overnight lenders unwilling to accept mortgage backed securities as collateral.
2. Financial institutions dependent on overnight lending, i.e. Lehman Bros. underable to secure funding.
3. As a result of immense leveraging, Lehman is unable to maintain sufficient cash on hand, and goes bankrupt as they are unable to maintain their leveraged position.
4. Lehman Collapses. Other financial institutions follow.
5. The collapse of some financial institutions, creates a panic causes losses to other institutions in excess of their stock exposure. Example, Reserve Primary Fund had some of the money market invested in Lehman. Panic caused a run, causing money market to break the buck.
Let's look at #2.
First, there has to be some kind of mania. In 2007, it was housing. ok. but what does a bubble in housing have to do with financial collapse. Nothing direct.
Mortgages were securitized. These securities formed the basis of bonds. These bonds were sold globally, to pension funds, investment banks. Systemically they were riskier than then appeared, even when tranched, meaning the entire market got it wrong for years. Some were insured. Example AIG, Fannie Mae, Freddie Mac.
The safety of these bonds caused institutions to invest in them with leverage, which drove the need for overnight lending via the repo markets.
The point I'm making here to you, is that in the absence of dependency on the repo markets, repo spikes really don't mean much.
A question you should ask yourself is why a spike in the repo market would cause a financial meltdown as opposed to say, a quarterly loss on some financial institution's balance sheet?
Fill the blank as to why this would occur.
In order for the repo spike to cause a single financial institution to even crash, the financial institution would have to depend critically on the repo market for funding. Ask yourself, why would a single financial institution be so dependent on the repo market that they would go under if the rates were to change (especially when theres been such clear recent precedent) Fill the blank as to why this would occur.
Then ask yourself this, in order for a meltdown to occur, other institutions would have to have so much exposure to the financial institution that just went bankrupt, that they themselves would go bankrupt in the event of bankruptcy of the former. Fill the blank as to why this would occur.
In other words.
Scenario #1, spike in repo rate causes quarterly loss to one firm overly dependent on repo market funding.
Scenario #2, spike in repo rate causes not only quarterly loss but firm to collapse.
Scenario #3, spike in repo rate causes not only one firm to collapse, but several to collapse.
Scenario #4, spike in repo rate causes not only several firms to collapse, but a widespread financial panic.
Do you notice the chain of causation? Nowhere did I say Repo rate => Fed doing something dumb => Global Meltdown.
That's not how finance works. Make it concrete, or you will get prone to "feelings that something aint right", "spider senses", and "i didnt panic last time, but this...this scares me"
In the case of 2008, all of that was set in motion because of mortgage backed securities, the systemic mispricing, the spreading of such risk globally through the securitization of such bonds, and the over leveraging based on that.
I'm not saying it can't happen again in the future. But you should at least be able to identify why or how the market is systemically wrong this time. Where's the mania?
What is everyone so wrongly invested in that every financial institution screwed up?
Without that, a repo spike is just that and nothing more. It's better to keep yourself informed than cast large ambiguous characterizations of the fed screwing everything up. The latter is nothing but rank speculation and will make you prone to your emotions.
Search for facts to keep yourself informed, and keep your emotions grounded.