In today’s Fed Temporary Open Market Operations, the dealers took $20 billion in 14 day term repos and $67.6 billion in overnight repos for a total take of $87.7 billion. $61.5 billion expired. Therefore, the net increase was $26.2 billion in Fed repos outstanding, bringing the total to $190.3 billion.
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These Temporary Open Market Operations Repos Are Just a Bridge Loan
And, oh! By the way, these Temporary Open Market Operations are just the appetizer. On top of that, the Fed also bought outright (POMO) $1.1 billion in MBS and $1.6 billion in Treasury coupons today. So it added a total of $28.9 billion in cash to the banking system today.
Then on Wednesday it starts its outright T-bill purchases with a buy of $7.5 billion. Consequently, it will be interesting to see if the TOMO repos outstanding come down by a like amount.
And Wall Street and the Fed tell us there’s no crisis? Come on. Get real! They don’t pump $200 billion in cash into the market in a month, with a promise to do more for months to come, unless there’s a financial crisis.
The Economy Is Doing What It’s Been Doing, So There Must Be a Crisis Somewhere
We throw these numbers around like they’re nothing. But really, the fact that the Fed has had to pump nearly $200 billion in cash into the banking system in just one month, and promise to add another $480 billion or more in outright purchases of Treasury securities over the next 6 months is mind boggling.
Why else would they do this? The US economy is trundling along at a slow but steady growth rate. Why the urgency? Because the banking system, and the Primary Dealer system in particular, are on the verge of collapse, groaning under the weight of the unprecedented, and ever growing mountain of US Treasury securities, they are being forced to absorb and hold.
Virtually all of those bonds were bought on margin, with repo loans from other banks. Every tick lower of bond prices puts more and more of these holdings under water. The banks and dealers don’t have the collateral to cover the margin. The Fed has no choice. It must keep them on life support, or the system will collapse.
We knew that something like this was coming. To follow my in depth reporting, analysis, and forecasts on this story, including what to expect next, see Liquidity Trader.
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