Victoria McGrane and Jon Hilsenrath penned a piece about a new tool for controlling short term interest rates. I do not think it is new;it is just a wrinkle on a tool very common when I worked at the Open Market Desk. In those days we called these transactions “matched sales”. I commented on the article at the comments section of the WSJ. Here are my comments:
There is nothing novel about this as in days of yore we called this a matched sale. In those days the Open Market Desk (when necessary) would sell a very short dated T bill from its portfolio and simultaneously agree to repurchase it the next day. The dealer community got T bill collateral and the Open market Desk got “funding”. The desk also paid interest on that overnight funding and that level of interest was an important indicator of Fed policy to market participants.
The entire process is Money and Banking 101. When the Fed takes money from the street there is less money sloshing through the system as the Fed in the parlance of the day had “drained” reserves from the system. That drain would place upward pressure on the funds rate and other short rates. So this transaction was quite regular and familiar for many years through the 70s 80s and 90s….
Across the Curve
John Jansen
2 comments:
The program is partially about setting repo rates and draining reserves but it also alleviates the month end collateral shortage. Last minute window dressing for regulators, accountants, and trading partners makes for a high level of fail-to-deliver trades in the treasury market.. the mad dash for posting collateral never settles out unless the supply is increased temporarily.
This is what I am talking about.
The banks rig the libor to win the CDO credit swap game while Detroit loses and the police & firemen lose their pensions which go to the banks.
While my Line of Credit in early 2008 should have had it's interest rate lowered due to the Prime rate drop, it did not.
Instead in November 2007 Bank of America issued a change of the margin in the interest rate ( total interest is prime rate + margin of 4.5% ). The margin was doubled and turns out to be an exact fudge factor to fill in the gap after ALL THE PRIME RATE DROPS occurred during the forth coming 18 months from 2008 to late 2009.
Did they know ahead of time ?
Did they rig the libor to go down to win the deals with credit unions and detroit ?
Did they also rig their customers' lines of credit to have the overall interest rate unchanged throughout the crash with a rigged & falling prime rate by increasing the margins ?
WIN / WIN - they win/win with all their products
LOSE / LOSE - customers and detroit and USA
But it's OK - MMT says we can print a bunch of funny money.
It's OK - Austrians love gold and the banks can do no harm.
Chicago school - not even registering a pulse.
Keynesian - Krugman is too busy apologizing for ObamaScare but not realizing the MMT behind.
Obamacare is a stimulus for all people who make less than $92,000 which is the 400% percentile mark.
Whether you get a direct check of $1000 from George Bush or a subsidy of up to $8000 for Obamacare ... which do you think will help the USA more in a MMT way ?
MMT has said nothing of Obamacare and how it is a stimulus.
I guess now we can start talking about it.
It is important to support Obama whenever he inadvertently stimulates the economy with what is MMT so that Krugman cannot take the credit to the Keynesian and Chicago or whatever school he is at.
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