What are repo operations?
Typically, banks lend to each other, in overnight loans. Banks have capital requirements, meaning they have to keep a certain amount of money to comply with federal rules. But because banks like to eek out as much profit as possible, sometimes they fall short of their capital requirement and have to borrow those funds from other banks at the end of the day.
Well…….something happened. Banks stopped lending to each other. Well, technically, they stopped lending to each other at low rates. So they were requiring upwards of 10% interest and beyond for these overnight loans.
So the Fed stepped in and started making these overnight loans at lower rates.
The Fed and banks will describe repo operations as “liquidity, or oil, that keeps the cogs of the banking system running smoothly.” But a more honest definition would be: “some banks are irresponsible and greedy and don’t have the self control to comply with capital requirements. The more responsible banks don’t trust these irresponsible banks so they stopped loaning cheap money to them. So the Fed had to step in, create money out of nothing via the Mandrake Mechanism, and loan money to these banks.”
If you’ve been keeping track, Fed said they’d stop making these loans very quickly. But they’re still making them. And the loans are getting bigger.
In the last two days alone, the Fed has made $281 billion in overnight loans. This is a record, by far. We will soon have a week where weekly repo operations consist of $1 trillion in loans.
Follow repo operations here. The repo amounts are the bold numbers under the “Accepted” column.
Who is requiring these loans? Fed won’t tell us until two years from now.
Last note: read “The Creature from Jekyll Island” if you want to learn more about this terrific, faultless, wonderful institution called the Federal Reserve.