for more on this now a Beth hammock global treasure at goldman sachs and also the chairwoman of the treasury borrowing advisory committee and you guys off camera we're talking about the latest repo things how was we like viewers therefore we try to do as much on repos as we possibly can because they're clamoring they're clamoring for acts eight is important how was it today and and as would you say that there's anything analogous to what what happened ten years ago or or not know this this is definitely not a credit crisis there's plenty of liquidity
available in the system it's just a matter of getting the cash in the collateral to exchange places and the feds really done the right thing by stepping in here okay it just coincidental that it's happening as as we're here of all the strains and in terms of negative yields and things that you know we're easing at 2% it just seems a little bit strange doesn't pushing on a string they're worried or what's what's the real concern oh no I think the real concern and this is something as Steve said that the Fed has known was
going to happen so they've been watching this market very closely as they've been reducing their balance sheet the amount of excess reserves in the system has been declining and they knew they were gonna hit a point where they'd have to start growing their balance sheet again in line with currency growth and in line with with broader needs and so it feels like we've just at that point we knew it was going to happen somewhere between one trillion and one and a half trillion and on Monday because of the corporate tax payments because of the bill
settlements that happen to the marketplace we had about one point three five trillion and that was really what drove the repo rate higher where there also technical aspects involved with this in terms of yield steeper trades funded by the repo market and with the Fed stepping in are we just funding a popular hedge fund trade that's been put on so I think there is a there is a part of the story that hedge funds have been more levered they've been buying their Treasuries by with leverage by borrowing those funds and that's part of what's driving
this need for the the cash versus a collateral I think what you're finding is that the size of issuance by the Treasury right now the marginal buyer of Treasuries is a levered buyer and not a cash buyer I think worthwhile to take a step back and explain the situation as we're sort of living through an important piece of history here right the Fed has this new massive balance sheet that's on one side in terms of how much is out there also have the new dodd-frank regulations which require banks to keep a certain amount of what's
available over here sequestered away and to use to make regulations nobody knows what the right level of any of this is the Fed doesn't know what the right level of reserves is in the system of the brave new world and nobody knows what the right level of regulations are for the bank so when you think about ways how do we fix this do we is the Fed gonna need to keep coming in and putting 65 billion or can we adjust their regulations are there things that we can do so that I don't have to sit
here at 8:31 every morning and tell people you got to worry about this you don't worry about this when it comes to the repo operations yeah and I don't think the Fed wants you talking about this at 8:31 every morning so I think they do need to put in place a more permanent solution and there are a couple of options out there one is they could grow their balance sheet as they've talked about doing either by buying bills or other types of Treasuries the other which is something the FOMC has been looking at for the
better part of the year is putting in place a standing repo facility something that would be there would be available for the primary dealers in the banks to take advantage of if they needed it but like you saw with today's operation when it's there and you know it's available at all times you tend not to need it quite as much because you have this sense of calm in the system and so I think what you saw with today's operation 65 billion being accepted but 75 billion offered the announcement that they were going to keep being
in the market through the middle of October and in those operations for the rest of the week it would be at least 75 billion gave the market confidence that it didn't need to use because Joe is right nobody wants to talk about repo until they have to know about it right and and it was the it was bigger than a canary right it was like a massive animal in the coal mine the muscle memory it was it was the thing that blew out and and everybody has this natural reaction of well wait a second this
thing's blowing out so but importantly in 2008 the things that were being repo'd were not US Treasuries and so what the concern was in 2008 was there was underlying collateral that was being pledged no one's worried about US Treasury credit in this in the at this moment why wouldn't the Fed create a standing facility at this point I mean it's they've been debating it since June it's just operationally complex I think the facility they're looking at as an intra-day facility and it just I think they got to get the pipes working at that takes time
so address what's gonna be on Twitter right now which is that it's QE again is it quantitative easing they're growing the balance sheet they're buying bonds why is it a quantitative easing the Fed's balance sheet has always grown it grew up to about 800 billion ahead of the crisis then as you got into QE coming out of the crisis they grew it much more significantly they used to operate in a different system for controlling rates back then pre crisis they operated in what they called a corridor system right they've now said they want to operate
in this floor system which means they need to have an abundance of excess reserves so did the Fed get it wrong did they make the balance sheet too tight when they brought down reserves I don't think they got it wrong I think they knew they were gonna hit a moment and as soon as that moment happened they stepped in and supported the market so I think they did everything right in this instance so you would say that central bankers around the world have a good handle on the situation on everything right no one's losing control
no one's pushing on a string everything's great I think we're in a good place I think they are watching things close makes me feel better no I think you're asking a different question Joe I know we probably have to go here but I think you're asking about monetary policy I think Beth was answering a bigger conversation yeah I think that's this is the new normal as Mohammed would say not you know Mohamed el-erian I support it but I mean this is weird is it not I think the repo market is a highly technical not repo
16 trillion negative still headed lower all that stuff yeah that's not a us problem that's a that's a foreign central bank who's Evers problem it could eventually be everybody's problem I've been preparing for a day when US rates are negative we prepare for many different kinds of eventualities and certainly negative rates as one that we think about although I don't expect it to happen in the US about zero we've been to zero before we're prepared for zero really okay we don't like zero but we're prepared for zero you you
