Is the Fed encouraging regulatory arbitrage?
Although the public has been encouraged to think of these new pipes as serving as a vital “liquidity lifeline,” the Fed ought to look for ways to provide liquidity in ways that do not layer microeconomic problems on top of macroeconomic ones. Bankers and Fed officials have offered no evidence that risk-based volatility in the fee charged for overnight funding threatens the life of healthy banks or enhances the welfare of society in a specified way. Without evidence that the risks of these transactions are being mispriced, it is premature for policymakers and their client megabanks to think that taxpayers need to hand the Fed yet another instrument with which to subsidize the financial sector.
Repo Madness: Fed Plumbing Gone Awry
By: Edward Kane – INET
The Fed doesn’t understand the financial system that is emerging after the crisis
The BIS says that the rate rise was partly because MMFs pulled back from lending cash for sponsored repos. Rate rises caused by lenders becoming nervous help to limit leverage and prevent markets becoming overheated. Yet the Fed is intervening in the repo market to dampen rate rises. Why are we once again allowing the Fed to provide an implicit backstop for risky non-banks, thus enabling them to misprice risk and gorge on leveraged trades without fear of market penalty? Have we learned nothing from the past?
The blind Federal Reserve
By: Frances Coppola
Time to create a standing repo facility
The lesson from the September repo spike is that unexpected circumstances can arise abruptly at any moment. It is, therefore, important for the Fed to design a monetary policy system that “stands up to the unexpected.”
By relying on a standing facility, the Fed would make the operational response transparent, predictable, and forceful, which would in turn stabilize the behavior of market participants.
Recent Market Turmoil Shows that the Fed Needs a More Resilient Monetary Policy Framework
By: Joseph E. Gagnon, Brian Sack – Peterson Institute
