Repo Ructions Highlight Failure of Post-Crisis Policymaking
By Karen Petrou
The old ‘Greenspan put’ is now a Powell promise: fear not, the Fed is there for you. A big failure of post-crisis financial policy was laid bare when the US repo market buckled in September. Many have debated why the market went wrong, so fast. The Federal Reserve was so spooked that it did not wait for answers before stepping in. The central bank’s gross cumulative support for the market — which allows banks and investors to borrow cash in exchange for Treasuries and other high-quality collateral — will top $11.5tn by the end of January, according to our sums. The Fed did not just stabilise the repo market. Now, it is the repo market. Repos were once the liquidity-providing “plumbing” of the financial system. Now, they have taken on another role because post-crisis rules demand that financial institutions hold far bigger balances of safe assets — at a time when yields on such assets are low or even negative.