I think this is wrong, think so

For example, the overnight bank repo markets would cease to exist if there wasn’t government debt. For some bizarre reason some MMT proponents may wish to create massive instability in the banking system, but I don’t. In that case we need that to provide security for large-scale overnight deposit taking and that requires that there be significant quantities of government debt in issue.

Well, it’s possible to do repo without govt bonds, however convenient they might be to do it. But I thought that repo was the alternative to deposit taking, not the form of it? Anyone?

6 thoughts on “I think this is wrong, think so”

  1. Seriously Tim, what do you think the chances of Murphy getting something right really are???

    O/N Depos are unsecured. So Repo has nothing to do with that at all.

    The repo market would be less liquid without government debt, but at it’s core repo is just a mechanism to lend (any liquid) assets to manage liquidity, enhance return or leverage or from the other side cover shorts. Wouldn’t call it an alternative as such, more an addition.

  2. Obviously what he says is rubbish but government debt will tend to be the assets most frequently lent out for obvious reasons, amongst which quantity and marketability. At times, the Fed has stepped in to provide funds to keep the market functioning, but this was done through short-term loans. Since the 2008 crash and subsequent central bank insanity, the extent of Fed involvement in the repo market has escalated hugely in order to manage short-term interest rates. But government debt is not an intrinsic part of the market. Try asking streetwise professor: it’s in his area of interest

  3. And of course central bank deposits are still used. Don’t know about the UK but they are probably more important than repo

  4. I know a couple who are retired bankers (not sure exactly what), but they tell “war stories” of driving a secure van with boxes of tenners to other banks to do reconciling. So overnight loans don’t have to involve government at all, any form of liquidity will suffice.

  5. Repos are one way to provide security for overnight deposits – but the mere existence of LIBOR, a composite of the different rates that banks had to pay (or imagined that they would have to pay) for overnight deposits, demonstrates that the bulk, by value, of overnight lending between London Banks was unsecured.

    With apologies to jgh – cash transferred between banks to balance books at the close of business is a smaller order of magnitude and related to the rule applicable, in my youth, that banks had to have cash and deposits with the BoE equal to 8% of deposits.

  6. Can use pretty much any security as repo collateral. Mortgage bonds, corporates, etc. One theory of the financial crisis (Gorton-Metrick) is that the crisis was brought on by a “run on repo” secured by CDOs, etc. You can even repo finance commodities (e.g., metal in an LME warehouse).

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