Ok, I'm going to do a quick thread addressing one of the most common objections I got here, which is people saying that the repo rate spike last September was the somehow the real market clearing rate, and that the Fed is now "artificially" suppressing the level. /1
First of all, I get why people think this. If the price of oil crashed, and the yield on junk renergy bonds jumped 1000 basis points, and the Fed came in and said "we're going to buy energy debt until the move reverses," that would be indeed be suppressing credit market signs. /2
But that is not a proper analogy for what happened in September with the repo market spike. As a reminder, this is what the spike looked like. /3 
Here's why you can't compare it to a typical signal from the credit markets.
Remember our podcast with Zoltan Pozsar, he kept referring to reserves that banks hold at the Fed as "tokens" /4 bloomberg.com/news/articles/…
Remember our podcast with Zoltan Pozsar, he kept referring to reserves that banks hold at the Fed as "tokens" /4 bloomberg.com/news/articles/…
Tokens is a useful concept, because think about an arcade. The arcade says "to play here, you have to use our tokens, which physically resemble quarters, and are worth 25 cents each. But aren't quite the same as quarters." And of course, the arcade sets the quantity of them /5
Imagine a pinball tournament (financial market) that everyone had to participate in. And regulators tell the players (banks) that they have to hold a certain amount of tokens at all times. And imagine that suddenly the arcade started shrinking the supply of available tokens. /6
Naturally, you would expect people to suddenly pay more than a quarter per token, since there was a shortage of them, and since they were required to keep playing the game by law /7
This is exactly what happened reserves. Regulators demanded a certain amount be held, while the Fed started shrinking available reserves. /8
So basically, if you claim that the Fed's expansion of the balance sheet in September is manipulation, you have to explain why the shrinkage in the year period wasn't also manipulation. /9
Basically, the Fed's job is to set the short-term borrowing rate for banks. And keeping the repo market in line with that is totally consistent with that. Of course if you hate the Fed etc. -- as many people do -- then you might still be upset, but that's a different debate /10
The point though is that nothing special happened credit-wise in September with repo. There was no natural reason for them to surge the way they did, and thus the Fed's move to reduce the rate is not credit suppression the way you think it is. /11
Anyway, that's it. CC @jamesob @lylepratt and a bunch of people with crypto and bullion in their bios, and lightning bolts and rockets in their handles.
