Sorry but I am still confused. You said the action of buying treasuries is to grow money supply, which is what I always understand it to be. But then you said that doesn’t increase the supply of short term papers to loan on the interbank market which is understandable too as papers are bought up. So, is QE actually providing liquidity or removing liquidity??? This is the first time I hear QE is removing liquidity but I understand you are a bond expert and that is why I ask further. Thanks.
For a bank to borrow short term funds from another bank the lender will require security as collateral - In the United States this collateral is almost always US Treasury securities in order to obtain the lowest cost borrowing. What happens when the US government has bought up a large portion of those loanable government securities so critical for non-government interbank lending liquidity and has been negligent about replacing them in kind? Thus, a “crisis” entirely manufactured by our wonderful Federal government bureaucrats. They made it and they own it. Banks that can’t find US government securities to buy and post as collateral will pay higher overnight Repo rates - thus the headlines. But in this current political climate of “more government is good” and “government bureaucracies know best” the media has a difficult time reporting reality.
Don't know if it's not getting enough attention, or if it's getting too much attention. In my trading, I'm not concerned. But generally, I am curious as to when the repo graph will drop back to zero? And what else (if anything) might coincide. Based on my limited daily news review, I think there's a decent split between the "no big deal, nothing to see here" crowd, and the "warning, next big recession is on our doorstep" crowd. https://fred.stlouisfed.org/graph/?g=oUQB#0 https://fredblog.stlouisfed.org/201..._term=related_resources&utm_campaign=fredblog
I'd like to respectfully request you think a minute before you use that term "government bureaucrats" in a pejorative manner in the future. As you will know, Fed policy is set by the Board of Governors, who are political appointees. The "government bureaucracies" you are denigrating are simply carrying out the policy determined by the political appointed board members, and the size of that "bureaucracy" has nothing to do with this specific policy which you're rightly criticizing (not to mention employees of the 12 federal reserve banks aren't even federal employees!) I spent 20 years as a "government bureaucrat" and it absolutely burns me when people who really do know better if they stop and think about it for a couple minutes heap criticism on "government bureaucrats" for doing exactly the job they were hired to do which was determined by either political appointees or laws passed by politicians and over which they have very little if any influence. Believe me when I say that absent pulling an Oliver North straight up violation of U.S. law (which I think we both agree isn't what you want your bureaucracy doing!) there's very little if anything a "government bureaucrat" can do to set policy. If you stop and think about it, it's actually rather counterproductive to focus ire on the folks who have very little control over making policy rather than focus on the politicians and political appointees who are actually making the policy.
The last time US stocks went down 30-50% was 2008-09, before that 2000-01. By early 2007 I had started following the markets and economy closely, and despite having 1% or less of the skill/knowledge I have now, the general outlines of the housing bubble and crash were obvious even to me. For at least 4 months before the SPX top, and almost a year before the actual crash phase got going, the problems of dud NINJA loans, CDOs, teaser rate reset induced defaults etc were all over financial blogs, news and media. The actual housing bubble had peaked way back in 2005, and several hedge funds blew up in June 2007 - so you had the widely-reported problems, and those problems actually started taking down Wall Street entities, but it took until October before the stock-market Titanic even started turning. There was nothing surprising or sudden about any of it, even if certain details (that Lehman wouldn't get bailed out, and the CDS stuff with AIG) were hard to predict ahead of time.
The problem is that it's easy to predict 9 of the last 2 recessions and the market can remain irrational longer than almost anyone can remain solvent. Trying to predict the timing of a crash, however inevitable it is, is a bit of a folks errand.
So after @bone said that the repo rates spiking is nothing new, I decided to do some research. Turns out this spike in September was a huge anomaly. First chart shows the past 6 months with some good granularity. Next chart shows the past 5 years. And lastly, all the way back to 1996. For this screen capture, I include the summary at the top where it states that the all time high was reached in September 2019. So even during the dot com bubble of 2000 and the financial crisis of 2008, it was this past September that caused the biggest spike. (The spike although isn't visible on this chart. Must be an end of month thing or something like this. And lets not forget that the rates in 2000 were higher, so spiking up high from these low rates today is a much bigger deal, so that high value of 6.94 given then were usually around 2 is a huge spike.) Now it may very well be that its the FED's doing, but based on these charts, it was an extraordinary event, and its only through the FED adding lots of liquidity that they were able to stabilize it. Watching more of George's videos, it was interesting to watch that the FED is adamantly not calling this QE, even though the dollars they are throwing at it is even higher on a monthly basis than QE2 or QE3. If it was just a glitch, they shouldn't need to throw money around like this. What they are papering over we do not yet know, but I hardly doubt this is just a spike as bone makes it out to be.
Again, this is a case of the Fed lagging commercial demand - but it appears that they are being much more accommodating as of late. US Banks have plenty of funds to purchase Repo Agreements - once again it's the FED that's been lagging demand in providing them to purchasers. Note how Banks pledged $49B in securities with the intent to buy 42 day repos - but the Fed only released $25B in 42 day repos: https://www.wsj.com/articles/new-york-fed-adds-97-9-billion-to-markets-11575301812 That humongous spike of 5.25 happened ONE DAY: 09/17/19. This has not been on ongoing event. If it were; there would be a problem. On 09/16 the rate was 2.42 and on 09/18 the rate was 2.50. https://apps.newyorkfed.org/markets/AutoRates/Rates-Search-Results-Page And your 5 year chart shows spikes that are substantial relative to the average range a few times in each year of the data you cite; granted, not as severe as the 09/17/19 spike - but quite significant from a historical context perspective.
Well, at least today the Banks offered $55B in Treasuries and $15B in MBS and the Fed took them all in exchange for one day Repos. The Fed continues, however, to buy up Treasury Bills like drunken sailors - today they bought $7.5B, and said they will continue through the middle of 2020.