"It would be neater to start afresh with a standing repo facility designed with the specific purpose of exchanging treasuries for reserves, rather than trying to use a discount window long seen as a last resort (complete with the stigma one would expect)." ftalphaville.ft.com/2020/02/10/158…
I agree that replacing the discount window with a standing repo facility would be a better approach than trying to repair the discount window. But the underlying problem is still that the Fed is trying to use international money markets to transmit US domestic monetary policy.
The Fed's interventions in the repo market are the equivalent of pre-crisis OMOs. They are of course much larger, because the repo market is much larger than the pre-crisis Fed Funds market and - importantly - not restricted to banks.
Leveraged trading inevitably amplifies repo rate movements. Transmitting monetary policy via a market in which leveraged trading is a feature forces the Fed to intervene constantly to dampen those movements.
At least Quarles now realises continual large interventions will be a feature of the emerging monetary policy framework. But I am still not seeing any discussion of the consequences of the Fed in effect backstopping leveraged trading by non-banks.
When non-banks are run on, the money flows through banks can be huge. The Fed must provide unlimited liquidity to banks to enable those flows to happen. If it doesn't, then disturbances in the non-bank (shadow bank) sphere can cause bank failures. Hence the need for SRF.
Or at least for a functioning and non-stigmatised discount window facility and free daylight overdrafts. But providing unlimited liquidity to banks to facilitate very large flows when non-banks are being run on is NOT the same as providing unlimited liquidity to the whole market.
If the Fed persistently dampens repo rates it is effectively backstopping the entire repo market, including leveraged trading. Please can we have a sensible discussion about why it needs to do this and whether there are better alternatives?
Repo market spikes help to sort the solvent from the (probably) insolvent. If the Fed constantly dampens repo rate movements to keep them in line with the FFR, it will effectively prevent bad non-banks from failing. This is not how a market should operate.
I wrote about this back in December. The Fed has moved on a bit, but it's still not addressing the questions I asked here. coppolacomment.com/2019/12/the-bl…
And indeed I seem to have been writing forever about the need to find a way of providing unlimited liquidity support to banks without backstopping everything. Here, for example: coppolacomment.com/2013/07/anatom…
"One way or another, all money is held in commercial banks, and it isn't in practice possible to distinguish between different "pots" of money in the provision of liquidity support....Money is money, whatever its source" coppolacomment.com/2013/07/grievi…
unroll please @threadreaderapp
