The FT has just sent out a mail saying this:
Banks and investors rushed on Wednesday to gobble up $75bn in short-term cash the US Federal Reserve made available in a second attempt to steady one of the world's most important money markets.
Dealers submitted requests for over $80bn in overnight borrowing, exceeding the maximum amount the New York Fed had placed on offer. That amount far exceeded the $53bn demanded when the central bank stepped into the market on Tuesday for the first time in more than a decade.
For those wanting a background explainer, see here or here.
The blunt fact is that the US market has run out of overnight security available within what is called the repo markets (see those explainers for details).
The official line is that US corporations owed tax this week, and $78bn of cash for a bond sale had to be settled at the same time.
Let me be clear, I have no better clue on this issue than anyone else: no one seems sure whether these excuses are good or not. But I am goi9ng to take a punt and say I suspect not: this has not happened in the last decade and tax settlement and bond sales have happened before, and I can be fairly sure coincidentally.
I, of course, accept that the repo market is ultra short term and so this may just be a short term blip. But the last time we saw a loss of liquidity on this scale requiring substantial government intervention was in 2008.
And we are at least right to worry now: this might be just 'one of those things'. But 'those things' are not meant to happen, and in this case usually don't. If there is a credit crisis happening the ramifications will be massive. And we're not ready for it.
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There are so many macro-economic deficits (inbalances), (UK, US, China, Japan, World) that are on a scale beyond anything seen before. debt, trade, payments, pensions, carbon, energy, demographics. My conclusion is it has been “staying up”, because no one can countenance it breaking.
The (Saudi) oil scare, trade wars, implosion of EU, real wars, a financial market “f**k-up” could all bring the house of cards down.
When it goes, it will be bigger than anything the world has seen before
I am selling places on my “Beat-theBear” self-sufficient farm community at £10,000 p.a. each!
The sudden quarterly tax demand was out of the blue was it…….? I know short termism is said to be rife in the financial sector these days but surely these brainy folk can count down 13 weeks.
Makes me wonder about the invisible hand of the market. Maybe it’s invisible for the same reason Boris Johnson was invisible at the podium in Luxembourg: because it isn’t there.
Or maybe it’s just a trial-run by the banks to assess how amenable Jay Powell is likely to be when the excrement really hits the extractor, and how quickly he can react. (?) Important to know how good the safety net is if you want to push your luck with risky activities.
They are playing games.
@ Andy Crow
Playing games…
Surely not?
Best wishes from the invisible hand…
“But the last time we saw a loss of liquidity on this scale requiring substantial government intervention was in 2008.
“And we are at least right to worry now: this might be just ‘one of those things’. But ‘those things’ are not meant to happen, and in this case usually don’t. If there is a credit crisis happening the ramifications will be massive. And we’re not ready for it.”
I’m not ready for it. My application to join the 0.01% isn’t even made yet. Never mind, there’s bound to be a google or apple app somewhere that make markets intelligent. (probably right next to the virtual NI Border that guarantees the Good Friday Peace process under brexit)
If there isn’t, Boris could just revoke Article 50 immediately then resign his government. We won’t need the GNU and can get on with our applications to join the .01% instead. Ooh, and send Gordon Brown over to Washington, he’s good at quick fixes of the type needed here when financial capitalism poohs its pants…
Disaster capitalism narrowly avoided (but wet wipes on the shopping list).
SERIOUSLY tho’ is $75bn as massive as it sounds for repo functionality? I’ve got no sense of proportion here. I couldn’t access the WSJ explainer and couldn’t get an answer from the Reuters one Help please Richard.
A shortfall of $75bn is big, yes…..
I suppose you can’t miss an opportunity to bandwagon, at least you admit to not having the first idea as to what it is about..still you wish for things to go wrong, sadly for you and your cohort doomsayers this story will pass as a pretty much a non event.
I pointed out it is not ordinary
It is not
And I was completely honest in saying no one is sure what this is about as yet
The only bandwagoner here is you
Steve pesenti says:
” this story will pass as a pretty much a non event.”
Of course it will. Except perhaps with the benefit of hindsight. (?) The financial ‘community’ has got their free money to play with; and the the mainstream commentators will quietly ignore that there are cracks in the whole, fragile global, banking and finance system.
Again.
Have you seen Frances Coppola’s take on this? TLDR; nothing unusual here, calm down. https://twitter.com/frances_coppola/status/1174382568034250753?s=12
Maybe…
But she’s wrong to say there’s nothing unusual here
This has not happened for a decade
That is unusual
That was precisely her point as I read it: this hasn’t happened for ten years because we’ve had an historically unusual ten year period, so this is just going back to the old normal from prior to 2008. And therefore not indicative of a crisis. I guess we’ll find out soon enough!
The period pre 2008 led to a crisis…
“The period pre 2008 led to a crisis…”
As Nigel Goddard says. “just going back to the old normal from prior to 2008.”
……but then he rather spoils his point by concluding ” And therefore not indicative of a crisis.”
I think that sounds uncommonly like what the shrinks call ‘denial’. 🙂
Hi Andy – amusing but not really to the point. The old normal was a multi-decade period which saw the usual ups and downs, so open market operations common then hardly qualified as indicating crisis. Of course, in the new normal such operations may indicate crisis but they may just indicate we are back to the old normal – which of course may end up in a crisis. In my completely untutored view, the basic issue is that the old normal isn’t really back but the Fed is trying to pretend it is. So it is pumping in money via the repo market (the way it always used to stabilise interest rates), rather than by QE. Probably it will have to revert to QE. Anyway I am way out of my depth in this discussion so will leave it there.
Nigel Goddard says:
“Hi Andy — amusing but not really to the point. The old normal was a multi-decade period which saw the usual ups and downs, so open market operations common then hardly qualified as indicating crisis”
I don’t think it amusing. And it could be very much to the point.
The ‘dot com’ bubble was hardly a usual up and down and was less than a decade preceding 2008. The eighties housing bubble and crash was not amusing at all for anybody wanting to move house and sitting on many thousands of negative equity, or losing their house altogether. The eighties and nineties was a period of boom and busts.
That may be one kind of ‘normal’, but it wasn’t necessary and it’s highly destructive. It represents a serious lack of government management of the economy and has a great deal to do with the deregulation of financial services in the mistaken belief that ‘the market’ knows what it is doing and that equates to what is good for society at large.
It’s not my impression that these were the good times. Far from it. The ‘multi decade’ stability was from the end of WW2 to sometime in the seventies. We were into the fifties before wartime rationing ended and it was getting ragged by the seventies. Barely 20 years. Hardly multi decade.
The next crash is likely to be a lulu because for the past decade central banks have inflated bubble markets beyond anything we have seen before. This little local difficulty the FED is patching-up ought to be taken very seriously as an indication that the system creaks. And another $20 billion monthly injection of QE from the ECB is not exactly a sign that we are consolidating from the dismal and incomplete ‘recovery’ after 2008.
So as you suggest we are in a new normal which includes QE and the FED is trying to deal with a current glitch using an old fashioned solution in a world that has changed. It doesn’t augur well. The neoliberal, monetarist dream is in all likelihood going to become a nightmare.
I’m not worried that you are out of your depth, nor that I am too. What is worrying is that central bankers and their monetary policy advisors seem to be out of their depth. And the politicians who should be responsible haven’t a clue……
Indeed. And it’s not like this hasn’t happened before in recent memory…
Indeed, “not like this hasn’t happened before in recent memory”
A liquidity shortage can be a feature of many things, but is always a precondition of economic depression. As Richard explains, the scale and scope of it matters here.
Sure, it might be an insignificant mechanical problem, but the value machine relies on fictitous capital to exist and depression threatens more than fictitous capital.
It;s carrying on
Wise people are worried
We should be
And wait until Brexit to learn about liquidity crises on a scale not known before in the UK…..
It’s not delays in ports that will cripple us
It’s failed cash flow that will
“Wise people are worried”
At the very least they are wondering to what extent this is signal and to what extent it may only be noise.
Indeed, it’s getting worse (not fixing itself)
https://www.sgtreport.com/2019/09/liquidity-shortage-getting-worse-feds-repo-oversubcribed-even-more-as-funding-demand-jumps/