This is the first time I’ve seen Wall Street banks clamor for the Fed to back off QE. The Fed struggles to keep the liquidity it created from going haywire.
They YOLOed the QE so hard it's starting to push short term interest rates below zero so they're hitting Undo, nervously pressing control Z repeatedly and hoping for the best. There's so much money sloshing around between banks and the banks can't generate loans to match it.
The government provides several financial products which they sell to fund stuff. One of the ways, for example, are bonds like the kind grandparents used to buy for their kids. There are other types of bonds and securities too. These sort of act like little loans. You buy it, the government agrees to buy it back at its full price and with interest or some kind of appreciation value later on. I suppose if you're dealing in bulk, you can make some money off the right kind of bonds so it's in your interest to do it. Unlike stocks or private investment they're almost zero risk since the government has to buy it back. The only way they couldn't is if the government didn't exist (:party-sicko: or some other major catastrophe like the government runs out of money and simply can't afford to pay them back.
Another thing that happens is the people who buy government bonds will sell them to other people. You buy thousands of really good bonds, nobody else gets them because they're not an infinitely abundant product, so now you can do a little retail markup on them and sell them to other people. If you never sell them, you still make money. Or you could sell them for an immediate return and the person buying them will make money too once the bonds reach maturity.
What bond dealers will do is sell the bonds quickly under a repurchasing agreement (repo), and buy them back quickly for a higher price. Some of the bonds have a periodic payout, kind of like taking dividends on stocks, so people buy it to collect that payout and then sell them back to the dealers. Now, I'm not totally sure the exact working or profit motives for this. I guess that the dealer is okay with doing this if the bonds are the kind that also come with interest so the government will pay them more money for them once they reach maturity.
The reverse can be true as well. When someone buys from a dealer they also enter a repo, but it's a reverse-repo where they agree to buy it now but sell at a later date. The big takeaway is that people use the way these bonds work to make money. If you time transactions right, there is profit to be made on all sides. It's kind of like exploiting game mechanics in a video game. You're not cheating, just using the features provided by the devs. And this is how it's supposed to work. It's not even an exploit really, just playing the game. This is why high finance people smell their own farts so much. They go get a job where they dig through these esoteric financial rules and instruments, then learn how to spin enough plates at once so they make millions.
Where the actual cheating comes in is that large investors or companies can use the repo market to hide how shitty their business is. This happened around 2008 with Lehman Brothers. They traded certain bonds in order to cover up their over extension on subprime loans. There were/are also problems with how the repo market works, that was never fixed because, as far as I can tell, it's how it's supposed to work. It's like a shitty market that shouldn't exist but it does because other markets exists and the wealthy need it to exist so that other things can exist.
The three-party repo market is basically the wild west. Since the repo market works on the very short term (48 hours) it's hard to actually keep up with transactions. Transactions take time anywhere. Even with the internet. Things have to go through clearing houses. This was one of the issues with $GME. It revealed that there are tons of transactions happening with retail investors (and even normal large-firms) that aren't basically backed by anything. Because when you make a trade it's done on credit, the idea is that they'll accept the trade right now with the understanding that the funds will actually get to where they're supposed to go, and the investments will also get to where they're supposed to go. However that doesn't always happen because it's an imperfect logistics network, not magic. And when there's an extra balance in the network, where someone never got their goods or someone didn't get their money, there's a crisis. The greater proportion of transactions where this happens, the more of a crisis it is.
Regulators stepped in after 2008 and tried to fix some of these issues in the repo market, by acting as a throttle. They could step in and back transactions with cash so it was assured that people got their money even if the transaction would fail otherwise. Or there wasn't enough credit to back the transaction to begin with. They also paid banks to not do play in the repo market at all. This has cut the repo market in half. However, the Federal Reserve itself has had to dabble in the repo market increasingly because it's how they compensate for banks not having enough money to loan out to people/businesses.
So, in summary, the Fed is buying back bonds or selling them because banks have too much money on hand that aren't being handed out as loans. By taking back $351M from the market, they're forcing banks to give loans to people (mainly giant corps and investment firms) to fill that hole. The issue here is that nothing is done in a vacuum and this is just them basically trying to keep things in a precarious balance. The might have to throw all that back in next week if something goes the other way and banks suddenly have too little reserve.
I think the moral of the story here is that the wealthy are throwing around tons of money so fast that the market can't really keep up with it even with computer technology. The Fed is trying to hold it together but who knows how long that will last. Two of the wealthiest men on Earth are also "getting divorced" and moving a ton of their assets around as well. I can't tell if there's more money up in the air right now compared to normal, but I feel like there's something going on. The rats are scattering.
Thank you so much for this explanation. I’m getting around it.
So, these bonds thst you said are being traded between banks — are the bonds themselves being traded as part of that previous transaction you mentioned? (The one where everyone makes money.) Or are they packaged into some kind of instrument?
I guess im trying to understand how they make money in those trades..
I have no idea what the exact methods are. The bonds themselves are traded between banks and individuals (companies/investors) and between the government and the banks, and between the government and individuals. There are different kinds of bonds with different features because at the end of the day they are products for sale. I'm sure they're often bundled into something else because that would make sense. But they could just sell some of them in bulk too.
I wish I knew more specifics but I weighed depth of knowledge with time watching dry financial videos.
I think, first of all, it means that the Fed doesn't have a long term plan--they are reacting. First they "print" a shitton of money, and now they are trying to reign in/reduce that amount via fincap magic.
These reverse repos are a sign that the banking system is struggling to deal with the liquidity that the Fed has been injecting via its QE.
So with one hand, as part of QE, the Fed is buying $120 billion a month in Treasury securities and MBS. With the other hand, the Fed took back $351 billion via overnight reverse repos, undoing nearly three months of QE.
Im too dumb to understand. What it means ?
They YOLOed the QE so hard it's starting to push short term interest rates below zero so they're hitting Undo, nervously pressing control Z repeatedly and hoping for the best. There's so much money sloshing around between banks and the banks can't generate loans to match it.
Why’s the bank not giving me them loans? But seriously, thanks for the explanations
I'm going to try to Liz Franczak this.
The government provides several financial products which they sell to fund stuff. One of the ways, for example, are bonds like the kind grandparents used to buy for their kids. There are other types of bonds and securities too. These sort of act like little loans. You buy it, the government agrees to buy it back at its full price and with interest or some kind of appreciation value later on. I suppose if you're dealing in bulk, you can make some money off the right kind of bonds so it's in your interest to do it. Unlike stocks or private investment they're almost zero risk since the government has to buy it back. The only way they couldn't is if the government didn't exist (:party-sicko: or some other major catastrophe like the government runs out of money and simply can't afford to pay them back.
Another thing that happens is the people who buy government bonds will sell them to other people. You buy thousands of really good bonds, nobody else gets them because they're not an infinitely abundant product, so now you can do a little retail markup on them and sell them to other people. If you never sell them, you still make money. Or you could sell them for an immediate return and the person buying them will make money too once the bonds reach maturity.
What bond dealers will do is sell the bonds quickly under a repurchasing agreement (repo), and buy them back quickly for a higher price. Some of the bonds have a periodic payout, kind of like taking dividends on stocks, so people buy it to collect that payout and then sell them back to the dealers. Now, I'm not totally sure the exact working or profit motives for this. I guess that the dealer is okay with doing this if the bonds are the kind that also come with interest so the government will pay them more money for them once they reach maturity.
The reverse can be true as well. When someone buys from a dealer they also enter a repo, but it's a reverse-repo where they agree to buy it now but sell at a later date. The big takeaway is that people use the way these bonds work to make money. If you time transactions right, there is profit to be made on all sides. It's kind of like exploiting game mechanics in a video game. You're not cheating, just using the features provided by the devs. And this is how it's supposed to work. It's not even an exploit really, just playing the game. This is why high finance people smell their own farts so much. They go get a job where they dig through these esoteric financial rules and instruments, then learn how to spin enough plates at once so they make millions.
Where the actual cheating comes in is that large investors or companies can use the repo market to hide how shitty their business is. This happened around 2008 with Lehman Brothers. They traded certain bonds in order to cover up their over extension on subprime loans. There were/are also problems with how the repo market works, that was never fixed because, as far as I can tell, it's how it's supposed to work. It's like a shitty market that shouldn't exist but it does because other markets exists and the wealthy need it to exist so that other things can exist.
The three-party repo market is basically the wild west. Since the repo market works on the very short term (48 hours) it's hard to actually keep up with transactions. Transactions take time anywhere. Even with the internet. Things have to go through clearing houses. This was one of the issues with $GME. It revealed that there are tons of transactions happening with retail investors (and even normal large-firms) that aren't basically backed by anything. Because when you make a trade it's done on credit, the idea is that they'll accept the trade right now with the understanding that the funds will actually get to where they're supposed to go, and the investments will also get to where they're supposed to go. However that doesn't always happen because it's an imperfect logistics network, not magic. And when there's an extra balance in the network, where someone never got their goods or someone didn't get their money, there's a crisis. The greater proportion of transactions where this happens, the more of a crisis it is.
Regulators stepped in after 2008 and tried to fix some of these issues in the repo market, by acting as a throttle. They could step in and back transactions with cash so it was assured that people got their money even if the transaction would fail otherwise. Or there wasn't enough credit to back the transaction to begin with. They also paid banks to not do play in the repo market at all. This has cut the repo market in half. However, the Federal Reserve itself has had to dabble in the repo market increasingly because it's how they compensate for banks not having enough money to loan out to people/businesses.
So, in summary, the Fed is buying back bonds or selling them because banks have too much money on hand that aren't being handed out as loans. By taking back $351M from the market, they're forcing banks to give loans to people (mainly giant corps and investment firms) to fill that hole. The issue here is that nothing is done in a vacuum and this is just them basically trying to keep things in a precarious balance. The might have to throw all that back in next week if something goes the other way and banks suddenly have too little reserve.
I think the moral of the story here is that the wealthy are throwing around tons of money so fast that the market can't really keep up with it even with computer technology. The Fed is trying to hold it together but who knows how long that will last. Two of the wealthiest men on Earth are also "getting divorced" and moving a ton of their assets around as well. I can't tell if there's more money up in the air right now compared to normal, but I feel like there's something going on. The rats are scattering.
Oh shit i just learned please never delete this
deleted by creator
deleted by creator
Thank you so much for this explanation. I’m getting around it.
So, these bonds thst you said are being traded between banks — are the bonds themselves being traded as part of that previous transaction you mentioned? (The one where everyone makes money.) Or are they packaged into some kind of instrument?
I guess im trying to understand how they make money in those trades..
I have no idea what the exact methods are. The bonds themselves are traded between banks and individuals (companies/investors) and between the government and the banks, and between the government and individuals. There are different kinds of bonds with different features because at the end of the day they are products for sale. I'm sure they're often bundled into something else because that would make sense. But they could just sell some of them in bulk too.
I wish I knew more specifics but I weighed depth of knowledge with time watching dry financial videos.
Splash of cold water on an overcooked ham
Just like mee maa used to make
I think, first of all, it means that the Fed doesn't have a long term plan--they are reacting. First they "print" a shitton of money, and now they are trying to reign in/reduce that amount via fincap magic.
I honestly think it’s because they want to prevent inflation in the “real economy” and prevent the short term bond market from going negative.