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Sort of but not quite.

A repo is really just a fancy interbank loan that can be extended by entities that aren't part of the ordinary interbank market. The reason that a bank might want to borrow in the money markets rather than the discount window is that the widows and orphans in the money market don't have access to the central bank support rate, so they might charge a lower interest rate.

I can't quite see how this can come back to bite anybody on the ass who is remotely important for the continued functioning of the financial system. The solution to a speculative bubble in a non-critical part of the financial system is to let the suckers go tits-up, and apply Ye Olde-Fashioned Keynesian Stimulus to the real economy. But if you don't like money market players repoing with the banking system, just allow money market players to make deposits in a central bank reserve account like regular banks, and pay the overnight target rate as a support rate for central bank reserves. That should kill the repo business stone dead.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 15th, 2011 at 12:04:06 PM EST
[ Parent ]
I would suppose that the danger of such a "Dragon Country" scenario emerging could be determined by the "haircut" being required for repo operations. I would expect the collateral damage to be in stocks and commodities that had soared on credit generated in such a manner. If they can make a buck I certainly doubt that JP Morgan would show much restraint, backed up as they are by the full faith and credit of the US taxpayer.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 15th, 2011 at 03:57:53 PM EST
[ Parent ]
It seems that such a process could explain how the stock markets continue to climb while stock mutual funds continue to show large redemptions. They could be being levitated money from "dark pools" derived in such a means and controlled by the TBTFs.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 15th, 2011 at 04:07:00 PM EST
[ Parent ]
by money

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 15th, 2011 at 04:10:35 PM EST
[ Parent ]
I would suppose that the danger of such a "Dragon Country" scenario emerging could be determined by the "haircut" being required for repo operations.

It's not a problem with repo operations. It's a problem with banks accepting shit collateral against their loans. You don't solve that problem by prohibiting repo operations, you solve that problem by making the banks stop accepting shit collateral against loans.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 15th, 2011 at 04:12:04 PM EST
[ Parent ]
True enough, but the problem in the US is that Bernanke's Fed has lead the way in "trash for cash" and he had to know the "assets" were trash, starting with the Maiden Lane "facilities". I strongly suspect that the TBTFs have been much more circumspect than the Fed since 2008. The problem with low haircut high multiplier scenarios could well be that of creating 10 or 20 to one multipliers with "high powered money" and then using that money to blow asset bubbles in stocks and commodities. If, as I suspect, the TBTFs are doing this starting with Fed money from one of the many "credit facilities", it will make it very difficult for the Fed to ever rein in the money supply by raising rates or reserve requirements without causing a monster crash. But it still remains that it is of the nature of bubbles to pop, so....

The whole situation is rather like a rich family or a royal family having a criminal in their midst who is empowered to continue his crime spree because, if found out, it would damage the family. If things get too out of hand, he could suffer an "accident". Except in this situation, failing a thorough-going housecleaning, none of the guilty are likely to pay any price, at least not a serious price. But there is already a world full of victims.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 15th, 2011 at 05:26:26 PM EST
[ Parent ]
The problem with low haircut high multiplier scenarios could well be that of creating 10 or 20 to one multipliers with "high powered money" and then using that money to blow asset bubbles in stocks and commodities.

The multiplier is irrelevant. It is an ex post accounting construct, not an ex ante operational constraint. As long as the financial regulator does not wish to ensure that banks do not finance speculative ventures, and as long as the central bank wants to retain control of the overnight funding cost (that is, the monetary policy rate), a lower multiplier simply means that more of the trash goes on the central bank balance sheet and a higher multiplier that it stays on member bank balance sheets.

If, as I suspect, the TBTFs are doing this starting with Fed money from one of the many "credit facilities", it will make it very difficult for the Fed to ever rein in the money supply by raising rates or reserve requirements without causing a monster crash.

Well, yeah, if you're using Maiden Lane facilities to cover up the fact that your big money market banks are insolvent, then it will end with Stuff Blowing Up. But a high money multiplier won't make stuff blow up any more spectacularly than it would with a low money multiplier. The money multiplier is a liquidity thing. You are having a solvency problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 15th, 2011 at 06:04:29 PM EST
[ Parent ]
Correct.

The insolvency of the general population - or rather a 'solvency' dependent purely upon inflated property prices - is a much greater problem than the related problem of the insolvency of the intermediary banks.

As Michael Hudson points out, 90% of the population are in debt to the other 10% who own substantially all the unencumbered productive assets.  

And again, as he points out as an economic historian, there is nothing new about this: it's what always happens when compounding debt combines with private property in land, and is why debt relief such as Jubilees has been necessary, and is once again.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 16th, 2011 at 09:19:57 AM EST
[ Parent ]

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