Wednesday, September 23, 2009

Reverse Repo? What's That?

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system. Bloomberg

Has it been so long since the Fed drained liquidity that the terminology must be preceded by "so-called" and followed with an explanation?

More to the point, I can remember (and I'm not that old) when the idea of the Fed discussing, pre-emptively mind you, liquidity withdrawals with primary dealers to make sure no damage would be done would have been considered absurd. The point of liquidity withdrawal is to do damage to primary dealer balance sheets, to force them to more efficiently ration the flow of funds.

The Fed, of late, has been urgently defending its need to keep secrets, from Congress and even from the Treasury. 20 years ago the secrecy the Fed wished to maintain was from the Primary dealers. To wit, here's an excerpt from the NYTimes in December 1989: Apprehension about what the Fed will or will not do is a more or less constant condition among credit market participants. But the worry seems to have a sharper edge now because it is generally perceived that over the last month or so dealers have taken on big inventories of securities in expectation of another easing move.

Back then, before our financial system became so wonderful, the Fed was actually trying to regulate money. They knew that the element of surprise was a useful tool to keep primary dealers on their toes. Would you want your local health department to announce surpise inspections of local restaurants? A quarter century ago large banks had Fed watchers, who sifted the tea leaves trying to predict the size and direction of Fed interventions in the money market. Those days are now gone.

The transparency of Fed actions Greenspan provided to the primary dealers turned that body from regulator to lobbyist.