Monthly Archives: September 2019

Did Bankers Cause the Repo Crisis to Get Rich?

   The recent crisis in the Repo market last week may have been because the banking industry had gotten used to having only one or two of the big six banks provide last minute loans (Repo transactions) to their peer group and then suddenly these one or two banks simply weren’t available because they found other interesting things to invest in. Perhaps the banks decided it was worth it to temporarily pay an exorbitant interest rate to buy a two year Treasury Note yielding about 1.7%. The reason: if yields drop to zero then the banks borrow for free while earning a 1.7% yield (actually the yield about 10% more, about 1.9%, since it's free of state income tax) from

2019-09-23T19:04:52-07:00September 23rd, 2019|mayflowercapital blog|Comments Off on Did Bankers Cause the Repo Crisis to Get Rich?

“Repurchase” Market Crisis

         This week from Monday, Sept. 16 to Wednesday the 18th the banking system had a bank and bond market “repurchase” (repo) market crisis. The repurchase market (repo) is where a bond dealer buys a Treasury bond and then finances the purchase by selling it and agreeing to immediately repurchase it (allowing the dealer to get cash), somewhat like a loan. Normally the interest rate for these is about the same as the Fed funds rate, about 2%, but on Monday it spiked to 9.5%. The problem was caused by unwisely written overly strict rules such as the Liquidity Coverage Ratio which is a stress test based on extreme hypothetical conditions like the crash of 2008. Even though there has

2019-09-20T16:45:37-07:00September 20th, 2019|mayflowercapital blog|Comments Off on “Repurchase” Market Crisis

Debt Jubilee Led by Central Banks

   Perhaps central banks will decide to simply print up money and donate to those who have too much debt, which is a debt jubilee. This would be a way to stimulate the economy without hurting savers with negative interest rates. Unlike Fed rate cutting that lacks believability and effectiveness, this would be highly credible as consumers could feel the benefits and get emotional about it, thus stimulating demand. To make this work it would have to be similar to the tax code where those who are neediest get the best outcome. If someone is truly wealthy they shouldn’t get to benefit from debt forgiveness.    If done in a harsh recession it might not cause that much new inflation,

2019-08-27T10:51:38-07:00September 10th, 2019|mayflowercapital blog|Comments Off on Debt Jubilee Led by Central Banks

Negative Rates and the End of Central Banking

   Negative interest rates will act as a deflationary force that will reduce consumption and reduce investment in productive capital assets, as well as reducing consumer confidence. It will act to weaken the confidence of stock market investors thus resulting in a sell off of stocks. The central banks gambled and lost regarding their policy of negative rates. Their credibility has been diminished. Once people realize that central banks and their rate cuts can’t stimulate the economy then investors will stop believing in the myth of the central bank put option. This will exacerbate the stock sell off. The U.S. central bank bailouts and stimulus of 1998, 2003, and especially 2008 acted to create Moral Hazard (where the availability of

2019-08-27T10:23:24-07:00September 5th, 2019|mayflowercapital blog|Comments Off on Negative Rates and the End of Central Banking