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Cos's avatar

A bit off-topic, but I asked GPT-4 for a one paragraph summary of your last three posts:

In a series of posts, the author discusses the issues surrounding the U.S. financial system, highlighting the impacts of Silicon Valley Bank's failure and the subsequent actions by the Federal Reserve. The author argues that the Fed's focus on interest rates rather than balance sheet policy has left the financial system vulnerable to liquidity stress. Since the pandemic, Quantitative Easing (QE) has driven money growth, while Quantitative Tightening (QT) is now causing liquidity problems in the banking sector. To address these issues, the author proposes "Operation Squeeze," which involves forcibly reconnecting money market funds and banks by reducing the Reverse Repo facility counterparty limit, allowing the Fed to continue QT while maintaining or improving bank liquidity.

I, for one, feel like I have no choice but to welcome our new AI overlords

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John Comiskey's avatar

"The best solution is the simplest: forcibly reunite money market funds and banks"

That mechanic is already occurring naturally through the FHLBs. Why did RRP significantly drop 3/9 -> 3/14? Because FHLB issued a couple hundred bil of debt (to fund advances to probably mostly smaller banks looking to replace fleeing deposits). MMFs bought that debt (at the expense of RRP). Of course RRP has risen again since due to the inflows of new deposits/reserves into MMFs (117b last week) overwhelming any reallocation from RRP to FHLB debt

Mechanics aside.... I heartily disagree that there are too few aggregate reserves in the system, even when you just look at bank reserves (excluding RRP). Before SVB and the deposit runs on smaller banks there were 3T in bank reserves (~3.4T today). In Sept of 2019, when system legit snapped imo due to lack of aggregate reserves (given regulatory intraday liquidity constraints etc.) there were ~1.5T in aggregate reserves (and 0 in RRP). Sure, 30% money growth since then but also some auto-reserve printing capabilities like SRF as well. Anyways we shouldnt need x2 the bank reserves (again not even considering the 2.2T reserve tank we also have in the RRP). Bottom line, its not an aggregate reserve problem imo, its a deposit/funding problem for banks with problematic asset profiles and a collapse in trust from their depositors (particularly their uninsured ones) intermixed with a desire of those depositors to not get basically 0 on the bank deposits in excess of their operational liquidity need.

Regardless, still love this article and how it explains the setup, just disagree with what i think is a fundamental premise behind your conclusion and thought you might find my perspective thought provoking.

Anyways keep up the great work! It is much appreciated.

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