Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Isn't all Joe? I
Speaker 1: feel like in our current period of high inflation, bond
Speaker 1: market volatility, tension between you know, central banks, and UH
Speaker 1: fiscal stimulus, all of that, I feel like people tend
Speaker 1: to have their favorite historical analogies that they reach for
Speaker 1: to try to explain what we're experiencing now. Everyone, whatever
Speaker 1: it is, always says this is just like this, and
Speaker 1: like I get it kind of, you know, like naturally
Speaker 1: this say is what we do. But I also think, like,
Speaker 1: you know, there's that danger of like knowing too much history,
Speaker 1: which is if you know your history, you think it's repeating.
Speaker 1: That's right. I mean the one that everyone seems to
Speaker 1: reach for is the seventies, right, like, oh, this is
Speaker 1: just like the seventies, We need a Paul Vulcer to
Speaker 1: come and really tamp down inflation. And then the other
Speaker 1: one that I'm kind of partial to this one the
Speaker 1: nineteen eighteen Spanish flu. Who can forget the period after
Speaker 1: that in World War One ended up with the high
Speaker 1: inflation and then it flipped into deflation. You know, the
Speaker 1: other one that I think about. Two is the Euro
Speaker 1: Area crisis and the tensions. You know what they had
Speaker 1: to do sort of like plumbing wise, what Mario drag
Speaker 1: had to do in terms of like sort of recreating
Speaker 1: the European sovereign bond structure on the fly to improve
Speaker 1: the transmission of monetary policy. I think some of these
Speaker 1: issues are also coming up. We really see it in
Speaker 1: the UK specifically. Yeah, that's a good one. I hadn't
Speaker 1: considered that. But today, on that note, we are going
Speaker 1: to be speaking about a historic parallel that hardly ever
Speaker 1: gets mentioned. It is the year one specific year ninety three.
Speaker 1: I don't know anything that happened in I would never
Speaker 1: you could have guessed, asked me any year in the
Speaker 1: nineteen hundreds and I would not have Yeah, what happened here?
Speaker 1: All right? So it turns out nineteen fifty three was
Speaker 1: actually a seminal year for global finance for reasons that
Speaker 1: I will not get into right now, but specifically because
Speaker 1: it ended up with a policy decision that still has
Speaker 1: relevance today. So not only was the US specifically in
Speaker 1: the nineteen fifties facing high inflation, tension between employment and prices,
Speaker 1: things like that, but we also had an outcome that
Speaker 1: has sort of like echoed across the decades ever since
Speaker 1: I want to learn more. I'm ready. All right, Well,
Speaker 1: we really do have the perfect guests to explain nineteen
Speaker 1: fifty three and it's relevance to today to us. We
Speaker 1: are going to be speaking with Josh Younger. He is
Speaker 1: the global head of Asset and Liability Management, Research and
Speaker 1: Strategy at JP Morgan. He has also a repeat all
Speaker 1: thoughts guests. He's no getting up there like this is.
Speaker 1: He's become not quite in the lead, but getting close alright,
Speaker 1: one of our favorites. So Josh, welcome back to the show.
Speaker 1: That's great to be back in studio, which is more exciting.
Speaker 1: So this is just your hobby now it's researching financial history.
Speaker 1: I needed to know hobby basically, Um, yeah, it's it's
Speaker 1: just for fun. And there's so much you can do online,
Speaker 1: Like it's sin's weird to say that the internet's a
Speaker 1: wonderful thing. Like you can pull up basically anything, and
Speaker 1: the Federals, your bank at St. Louis, has been very
Speaker 1: kind to provide like an enormous quantity of documents and
Speaker 1: data so you don't have to get Dusty and archives.
Speaker 1: You can just search it. This is what I should
Speaker 1: be doing instead of just scrolling Twitter at night and
Speaker 1: playing playing chess online. I need to go on the
Speaker 1: New York Times way back machine and see what bond
Speaker 1: market volatility was like in the early nineteen fifties. Well, okay,
Speaker 1: on this note, Josh why nine specifically, he has a
Speaker 1: lot of relevance in general. So that's the year where
Speaker 1: the European country start opening up their imports to to
Speaker 1: the dollar zone. It's the lended debt deal with the
Speaker 1: Germans after the war around German debt um. But it's
Speaker 1: also one of the years where the Feed is really
Speaker 1: forced to make a really important decision. So it's where
Speaker 1: a lot of their desire to get out of the
Speaker 1: bond market. I'm sure we'll talk about what they did
Speaker 1: during the Second World War. It's a very controlled market.
Speaker 1: It's very heavily um managed by the Fed at an
Speaker 1: active basis. They really pegged yields on the long end,
Speaker 1: and getting out of that is complicated. And in fifty
Speaker 1: three is when the market really tests them. So we
Speaker 1: didn't have to don't fight the Fed mantra quite quite yet.
Speaker 1: At that point But this is like a really interesting
Speaker 1: philosophical question right here, because there's always this question today
Speaker 1: or in any period, to what degree is the rate
Speaker 1: that we see on a ten year, on a thirty year,
Speaker 1: on a two year a policy rate verse a market rate.
Speaker 1: Before we get to fifty three, specifically, can you just
Speaker 1: talk a little bit more about what you're what you
Speaker 1: said about how rates across the curve were essentially policy rates. Yeah,
Speaker 1: there's when we think about a tenure rate, like you
Speaker 1: could do one of two things. You can roll treasury
Speaker 1: bills every three months for ten years, or you can
Speaker 1: buy a tenure bond. So in a perfect world, those
Speaker 1: two things are connected through expectations. Uh. And then there's
Speaker 1: this question of should I involve some a little premium
Speaker 1: on top of them, right, the term premium, which is
Speaker 1: unlocking my up my money up for ten years. I
Speaker 1: might be wrong in my expectations, and so I should
Speaker 1: probably be paid for that at least little excess over
Speaker 1: the expectations. And so they're connected. Most of the tenure
Speaker 1: eight is an expectation. Those expectations are often wrong, but
Speaker 1: you know that's a that's a separate issue, um. But
Speaker 1: there is a policy lever and on the on the
Speaker 1: other hand, there's the market level, which is a term premium,
Speaker 1: their demand to actually buy the bond in the first place.
Speaker 1: So talk to us then about the state of the
Speaker 1: bond market. You know, coming out of World War Two
Speaker 1: into the nineteen fifties, you mentioned that the Fed had
Speaker 1: imposed yield curve control um basically to finance the wartime deficit.
Speaker 1: They were trying to move off of that. Again, these
Speaker 1: are all sort of familiar themes to anyone in two,
Speaker 1: But why was that difficult for them? Well, so let's
Speaker 1: get a sense of scale, right, So in in ninette,
Speaker 1: there's about forty billion dollars with the treasury outstanding. There's
Speaker 1: about two and forty billion dollars where the treasury is outstanding.
Speaker 1: So that's about double the pre war p GDP. If
Speaker 1: you scale that, say, okay, COVID expenditures on the scale
Speaker 1: of World War two, that's about forty trillion dollars in
Speaker 1: net treasury issuance. So we're talking about a lot of
Speaker 1: debt um and the question is who's gonna buy yeah um,
Speaker 1: And what we're dealing with is kind of nothing we
Speaker 1: got in that context, and so that's where I guess
Speaker 1: the analogy breaks down, not to start there for the episode,
Speaker 1: but like, it's a very difficult problem, which is who's
Speaker 1: going to buy the equivalent of forty trillion dollars today
Speaker 1: in debt um, and one of those participants is the Fed.
Speaker 1: So what the Fed says is in in further into
Speaker 1: the war effort, we're gonna peg gields uh specifically the
Speaker 1: front end, the one year point, and the long end.
Speaker 1: So every tenure bond, for example, yields two an a
Speaker 1: half percent or less because I'm willing to buy it
Speaker 1: to an alf percent um. Every Treasury bill yelds three.
Speaker 1: That's roughly where the curve was at the beginning of
Speaker 1: the war. It was no like particular thought given to
Speaker 1: that in terms of like fair value pricing. It was
Speaker 1: just saying, wherever it is is where it's going to
Speaker 1: stay until until conditions allow real quickly. How much actual
Speaker 1: buying did they have to do versus the declaration of
Speaker 1: the price essentially taking care of most of it. Yeah,
Speaker 1: not that much. I mean they thought about twenty billion
Speaker 1: dollars the Fed did over the course of that period.
Speaker 1: Most of those were in bills actually, because bills at
Speaker 1: three eights are not very appealing. Tenure bonds at two
Speaker 1: and a half or a lot more appealing. So what
Speaker 1: the market did was they extended. And actually the FED
Speaker 1: was a net seller of long and boughts towards the
Speaker 1: end of the war because deals were dipping below their
Speaker 1: target m so, so it wasn't all buying, but they
Speaker 1: owned something like the bill market by the end of
Speaker 1: the war. Um. And they didn't really have a chance
Speaker 1: to get out so easy because when you get out
Speaker 1: of that situation, like, you can't just turn it off. Um.
Speaker 1: And so there was this outstanding question, which is how
Speaker 1: are we going to get out of the market and
Speaker 1: not completely blow up bond markets in the in the
Speaker 1: first instance, Like, how do we do this in the
Speaker 1: right way? Well, so, how how did they try to
Speaker 1: undertake that transition? I mean, nowadays you think about the
Speaker 1: FED trying to wind down its balance sheet embark on
Speaker 1: quantitative tightening. There's a lot of communication that comes ahead
Speaker 1: of that. Was a similar thing, trying to broadcast to
Speaker 1: the market this is how we're going to do it.
Speaker 1: Please don't freak out. It was really fraught um So.
Speaker 1: Ken Garbage has done a ton of work on this
Speaker 1: and they really didn't fits and starts and very slowly,
Speaker 1: so no one ever really imagined they do cold turkey
Speaker 1: like that was never really considered. So what they said is, well,
Speaker 1: let's start with bills um. And then the Treasury said, well,
Speaker 1: we don't want to big bills. We like bills at
Speaker 1: three eights uh. And and there was a back and
Speaker 1: forth over a couple of years, and by I think
Speaker 1: it was forty seven. Essentially the committee went to the
Speaker 1: Treasury and said, we think this makes sense. We'll figure
Speaker 1: it out for you, but we're going to do this
Speaker 1: in two days. And so it was a kind of
Speaker 1: unilateral decision by the committee. There was some sweet nurse
Speaker 1: for the treasury, but the Fed basically told the Treasury
Speaker 1: we're doing this whether you like it or not. Uh.
Speaker 1: And then the debate moved on to the certificates of
Speaker 1: indebtedness was roughly the one year point, so he said, well,
Speaker 1: can that be released? And by around the fifty yearly fifties,
Speaker 1: the front end of the curve out to the one
Speaker 1: year point was free to float, so billy yields came
Speaker 1: up into the one rate one one and a half
Speaker 1: percent range, So it was kind of a market rate,
Speaker 1: but the long end was still a two and a half,
Speaker 1: and they hadn't figured out how to stilt that, and
Speaker 1: that was most of the market um, even though the
Speaker 1: FED to own most of the bill markets, so that
Speaker 1: made it a little more straightforward. But um at the
Speaker 1: long end, you know, that was most of the outstanding
Speaker 1: debt at the time. So I'm just trying to understand
Speaker 1: a little bit more. How much of the challenge of
Speaker 1: for the Fed, of extricating itself to some extent from
Speaker 1: the bond market was about the rates specifically, and what
Speaker 1: that would do to the economy were rates to jump up,
Speaker 1: versus who, um, whose balance sheet these assets would beyond?
Speaker 1: It was both. So the Treasury just doesn't like the
Speaker 1: idea of paying more, which is test of all. I mean,
Speaker 1: they have a deficit to fund, and by the late
Speaker 1: forties early fifties, the deficits standing again, so they paid
Speaker 1: on their debt pretty fast. And then by the by
Speaker 1: the early fifties you've got the Korean War, You've got
Speaker 1: a tax bill that actually Truman vitas and has passed
Speaker 1: over his objection to cut taxes, and so there's a
Speaker 1: fiscal expansion going on. So that that's the treasuries and incentive. Now,
Speaker 1: a lot of their documents suggested were also sensitive to
Speaker 1: the feds concern around inflation um and inflation was under
Speaker 1: control for about a year after the war because the
Speaker 1: Office of Price Administration basically fixed the price of things.
Speaker 1: They tried to renew that that organization to keep price
Speaker 1: fixing in place. Truman decides it's not a strong enough bill.
Speaker 1: He vetos it, but they can't come up with saying
Speaker 1: that can pass the vetos, so it just expires. So
Speaker 1: all prices are released at the same time. So shock therapy.
Speaker 1: But I don't go well, okay on that note, I
Speaker 1: mean the inflation of the late nineteen forties, early nineteen fifties,
Speaker 1: how much of that was sort of supply chain issues,
Speaker 1: you know, the transitioning of the U. S. Economy from
Speaker 1: a wartime footing to one of peace, and then I
Speaker 1: guess they went back to war relatively quickly given the
Speaker 1: Korean situation versus actual debt monetization, because you know, the
Speaker 1: FED was in the market buying back trudge, Yeah, it was.
Speaker 1: It was. It's hard to make an attribution. I haven't
Speaker 1: seen a good attribution. But you know, the other thing.
Speaker 1: The FED bought twenty billion dollars worth of worth the
Speaker 1: treasuries during the war of commercial banks bought se so
Speaker 1: commercial banks are the real price fixtures in the treasury
Speaker 1: market during the Second World War. And when when a
Speaker 1: commercial bank buys the treasury bond, they create deposits on
Speaker 1: the other side of that. So they didn't let loans
Speaker 1: roll off and replace them with treasuries. They had new assets.
Speaker 1: So the leverage in the banking system doubles in three years.
Speaker 1: This is new money because deposits or money, right and
Speaker 1: and some will talk about money's a spectrum, so deposits
Speaker 1: are very close to the real paper money side of
Speaker 1: that spectrum. Uh. And so there's a view at least
Speaker 1: at the Treasury and the FED that that because banks
Speaker 1: are so heavily supporting the market and market debt, that
Speaker 1: that expansion of their balance sheets, expansion of the money
Speaker 1: supply has generated a lot of inflation. So that's on
Speaker 1: the demand side. Too much money. Um, we can debate monitorism,
Speaker 1: I guess on a different episode, but they said there's
Speaker 1: a big expansion of them to supply it at the
Speaker 1: same time, like you go from guns to butter and
Speaker 1: back and and that that's disruptive. So that's that's where
Speaker 1: analogies come in. You're really moving the economy from a
Speaker 1: very different production model UM in the year, and then
Speaker 1: you're trying to bring it back and these things don't
Speaker 1: start up that quickly. This is all so familiar. So okay,
Speaker 1: so the FED doesn't want to be UM fixing the
Speaker 1: price of all these assets. There's also this concern about
Speaker 1: too much commercial bank leverage and valid or not. So
Speaker 1: who else is there where where? What's the next step
Speaker 1: here in terms of who enters the market. Yeah, so
Speaker 1: the non bank investors are really domestic. So something like
Speaker 1: less than one percent of the market for treasuries at
Speaker 1: the end of the war needs to the late fifties
Speaker 1: is owned by international investors. So you have to find
Speaker 1: insurance companies and you know other there's not a great
Speaker 1: deal of granularity in the old data, so it's basically
Speaker 1: like it's a bank, it's an insurance company, it's the FED,
Speaker 1: it's an international or it's somebody else. And so you
Speaker 1: know that we don't have Pimcoes and black Rocks in
Speaker 1: the world time UM and corporations are very important. Corporation
Speaker 1: is very cash rich. Um, they have a lot of
Speaker 1: money to invest, and so to find a place to
Speaker 1: put it. But ultimately to an a half percent in
Speaker 1: worldward inflations at ten is not particularly appealing. So what
Speaker 1: happens in the bond market? I can imagine that, you know,
Speaker 1: the combination of two and a half percent being not
Speaker 1: that appealing, plus the Fed basically you know, making it
Speaker 1: fairly clear that they would like to step back from
Speaker 1: the market. I imagine that's a recipe for some drama. Yeah,
Speaker 1: there were the what became the Accord of the Fed
Speaker 1: Treasury Accord the Treasury Fed a cord. I'm not sure
Speaker 1: what the order we're supposed to put in, but that's
Speaker 1: in uh. And that's the result of a lot of
Speaker 1: congressional pressure in the early fifties. So in nineteen fifty
Speaker 1: the Banking Committee the Senate condads a hearing and make recommendations.
Speaker 1: You know, that's thanks for being helpful kind of thing. Um.
Speaker 1: And and the President gets involved, and there's just a
Speaker 1: lot of concern that monetary policy is worsening a very
Speaker 1: disruptive inflationary environment. And by early fifty one there's just
Speaker 1: enough pressure on the the Treasury to get along that
Speaker 1: they figure out. And one of the most important characters
Speaker 1: in this debate is Bill Martin. So Bill Martin used
Speaker 1: to run the York Stock Exchange in the thirties, so
Speaker 1: he comes from a dealer background, he comes from the street. Um,
Speaker 1: he goes in and runs the XM bank for for Truman,
Speaker 1: and then he's brought into Treasury by by Snyder, who's
Speaker 1: the Secretary of the Treasury at the time, initially as
Speaker 1: an assistant Secretary for international affairs, but he quickly becomes
Speaker 1: kind of a fixer. So he's kind of doing everything
Speaker 1: and he's tasked by Snyder with liaising with the Federal
Speaker 1: Reserve to figure out a way to get out of
Speaker 1: the market. Um that it's amenable to both parties, Like,
Speaker 1: what's the best way to do this? Because we kind
Speaker 1: of have to do it now? So what did what
Speaker 1: did he do? So he broke here it an arrangement
Speaker 1: that came out as a very vague commitment. So they
Speaker 1: basically just say like we've we've reached a full accord.
Speaker 1: They don't say what that accord is other than to
Speaker 1: say we're gonna stop monetizing the debt. So then us is,
Speaker 1: how are actually gonna do this, but they do put
Speaker 1: that up publicly and make a public commitment to free
Speaker 1: the bond market UM and a couple of days later,
Speaker 1: Martin is actually nominated to Chair of the FED because
Speaker 1: mcape's deaths down, so he switches sides UM and he's
Speaker 1: confirmed pretty quickly, and by by early April he's the
Speaker 1: Chair of the Board of the FED and he's very
Speaker 1: he's very committed to this inflation fighting thing, and in
Speaker 1: his oath of office statement he says inflation is the
Speaker 1: greatest threat, including the enemies beyond our borders or something
Speaker 1: to that effect, which you know in in April one,
Speaker 1: three days earlier, the Rosenbergs have been convicted. H you
Speaker 1: don't get Joe Welsh saying, you know, have you no
Speaker 1: decency sir to McCarthy until fifty four, So this is
Speaker 1: the red Scare, and he's saying inflation is worse than
Speaker 1: communism or implicitly and so like he's he's very much
Speaker 1: committed to the cause, but the commitment is out there.
Speaker 1: It's just the question of like how we're going to
Speaker 1: execute this in practice, and that's where you know, the
Speaker 1: changing of the guard at Treasury, the Eisenhower election, like
Speaker 1: people have to get into the seat for the next
Speaker 1: administration to actually affect the change in policy, because they
Speaker 1: ultimately need to agree. Snider didn't like the idea of
Speaker 1: ission above two and a half percent, So the Treasury
Speaker 1: kept flooding the market with short term death uh and then,
Speaker 1: and that was partially for regular debt management purposes. They
Speaker 1: do some things around non market all to debt, to
Speaker 1: get the bank debt bank holdings down, but ultimately there's
Speaker 1: just a lot of institutional tension. At one point, Truman
Speaker 1: takes Martin's side at some event and says, you're a trader, right,
Speaker 1: gets very much in his face. Um. So it's it's
Speaker 1: a very like fraught situation. I feel like I'm listening
Speaker 1: to a really good, like campfire story. This is good.
Speaker 1: I just wanted to just I don't even want to
Speaker 1: ask any questions. I just want to hear what happens next? Okay, well,
Speaker 1: what happens? What happens next? I mean, on that note,
Speaker 1: you can imagine at some point the Treasury goes back
Speaker 1: to selling longer term, right, and how does the market
Speaker 1: take that? So that's an Eisenhower administration thing that they're
Speaker 1: part of. Eisenhower's election is about inflation. Actually, one of
Speaker 1: the first television commercials ever got sent to a general
Speaker 1: audience is about inflation. Is Eisenharer saying, my grandmother doesn't
Speaker 1: like the inflation. That's why I say it's time for
Speaker 1: a change. There's a central plank of his presidential campaign.
Speaker 1: Eisenhower answers, America, you know what things cost today? High
Speaker 1: prices are just driving me crazy. Yes, my Nami gets
Speaker 1: after me about the high cost of living. And he
Speaker 1: nominates not only Humphrey, who's committed to fighting inflation, but
Speaker 1: a bunch of x FED people. So he brings them
Speaker 1: people in from the New York FED and other places
Speaker 1: to be senior advisors under secretaries. And so, you know,
Speaker 1: the news media at the time speculates the FED is
Speaker 1: like one this argument as to the relative benefits of
Speaker 1: low cost of debt service versus inflation. So inflation is
Speaker 1: the priority. So the changing of the administration changes the priorities. Uh,
Speaker 1: And they come and they say, we need to find
Speaker 1: non bank investors. We need to find a way to
Speaker 1: sell long term debt that doesn't inflate the size of
Speaker 1: the banking system. And by extension, the money supply and
Speaker 1: by extension the price um price pressures. And and their
Speaker 1: solution is to reintroduce the bond. They hadn't issued long
Speaker 1: term debt since forty five uh and and they want
Speaker 1: to bring back the bond uh And the question is
Speaker 1: how do you figure out the right way to do
Speaker 1: that because the market is not used to buying I
Speaker 1: think it was supposed to mature in eighties free or
Speaker 1: something like that. So it's like a thirty year bond
Speaker 1: and they haven't done third year bond a really long time.
Speaker 1: So who's gonna buy it? How are you going to
Speaker 1: price it in a way that brings in brings in
Speaker 1: interest from non banks specifically. I mean this point is
Speaker 1: interesting because when politicians talk about fighting inflation today, they're
Speaker 1: talking about fiscal various fiscal policy levers and we need
Speaker 1: to cut spending here, or we need to you know,
Speaker 1: expand oil oil drilling or something like that. But it
Speaker 1: sounds like in the Eisenhower administration it was like they're
Speaker 1: trying to solve it via the financial system or via
Speaker 1: plumbing and something. Everything was basically well, there was a
Speaker 1: fiscal lever as well, I should say, um, but that's
Speaker 1: always a little hard thought to say, oh, higher taxes
Speaker 1: because inflation is higher, and that doesn't feel great for anybody,
Speaker 1: but it's today. Yeah. But the but the debt management
Speaker 1: strategy of the treasury when the when the Feed is
Speaker 1: buying get it fixed price, debt management is money manage
Speaker 1: because they're in the market to buy at any price.
Speaker 1: They buy treasuries. When the Fed buys treasuries, they print
Speaker 1: new money with which to do so. Um. And so
Speaker 1: those two things are connected, and this becomes a technocratic problem.
Speaker 1: There's not there's actually quite a bit of public debate
Speaker 1: about debt management, more so than you would expect given
Speaker 1: the current current climate, or at least focus on, you know,
Speaker 1: how much, how big the twenty years sector is and
Speaker 1: things like that. Um. But you know, it's not like
Speaker 1: a political story all the time. But then it would
Speaker 1: have been. Um. But you know, I think that the
Speaker 1: key here is there's an alignment of interests. And so
Speaker 1: Snyder comes to the market and he said, sorry, Humphrey
Speaker 1: comes to the market and says, we're going to bring
Speaker 1: back the bond and by the way, we're pricing it cheap,
Speaker 1: so get involved. So we're gonna price it about a
Speaker 1: quarter of a point sheet to where you would have
Speaker 1: otherwise expecting given where like the Victory two and a half,
Speaker 1: we're trading and Victory two has we're issuing forty five.
Speaker 1: Uh so everybody's interested, right, so they're saying, we want
Speaker 1: to blow out reception. They get five times the over subscription,
Speaker 1: so they get five and a half billion of orders
Speaker 1: for roughly a billion of paper, and they're feeling really
Speaker 1: good about it. The problem is, it turns out that
Speaker 1: a lot of that five and a billion was speculative.
Speaker 1: So people were trying to buy cheap bonds and flip
Speaker 1: them for half a point um. And so they called
Speaker 1: them free riders back then, which I haven't heard, but
Speaker 1: it's it's kind of a fun, fun analogy. And so um,
Speaker 1: we could I ask you who did they think they
Speaker 1: were going to flip them to? Unclear somebody else? Um.
Speaker 1: And so it's it's just a question of you know,
Speaker 1: if if you think the bond is trading fundamentally cheap,
Speaker 1: then there's probably someone else at what you think the
Speaker 1: par value should be um. And so their bet was
Speaker 1: the expectations of the market were at for a lower yield,
Speaker 1: they could buy it a slightly higher yield, they could
Speaker 1: flip into someone with different expectations, and it's as long
Speaker 1: as you got filled, you'd be happy, as only you've
Speaker 1: got your order insufficient size to make that interesting. The
Speaker 1: Treasury also makes a mistake in in filling orders on
Speaker 1: a proportional basis. So if you put in an outsized order,
Speaker 1: for example, as part of the fixed rate um placement,
Speaker 1: then you've got a big allocation. And the problem is
Speaker 1: if you're a spec account, that's not necessarily what you
Speaker 1: want it to happen. Um, So a lot of the
Speaker 1: bonds get sold almost immediately. Yeah, this sounds familiar. This
Speaker 1: is like big bond funds patting their order books with
Speaker 1: like corporate issues nowadays. Yeah, it was actually so concerning
Speaker 1: that they delayed allocations which had never really been done
Speaker 1: or at least for a long time, so the Fed
Speaker 1: could go through the orders and make sure that they
Speaker 1: all made sense, you know. So they were a little
Speaker 1: nervous from the start. But the von eventually prints in
Speaker 1: in I believe it was late April. Initially it's trading
Speaker 1: okay um, but it starts to weaken pretty quickly, and
Speaker 1: in particular, the market starts to become pretty dysfunctional. And
Speaker 1: you know, one of the fun things about the New
Speaker 1: York Times and the fifties is they published bits spreads
Speaker 1: for every treasury issue on a daily basis. So imagine
Speaker 1: the poor reporter that it was after the sports section,
Speaker 1: so they had their priorities straight. But it was actually
Speaker 1: the whole business section was after the sports section. Any
Speaker 1: papers that even have stocks anymore, probably not, probably not.
Speaker 1: But they had fex forward pricing in Europe they had
Speaker 1: so three month forwards and sterling they had. They had
Speaker 1: on a roughly weekly basis. They had daily bond market priceing.
Speaker 1: So I mean this was the only source, right, you
Speaker 1: have nowhere else to go. Okay, so the bond starts
Speaker 1: treating week then what so they're faced with a choice.
Speaker 1: So inflation is still pretty high. This is gonna sound familiar.
Speaker 1: So you have market functioning issues, right. So the solution
Speaker 1: of market functioning issues is to buy bonds. Uh. And
Speaker 1: there's two problems. The first is the fet is committed
Speaker 1: to buy only bonds in the short end. That was
Speaker 1: part of the agreement. When they came to the accord,
Speaker 1: they said, we're only an interview in the market in
Speaker 1: the short end. And that's specifically to provide reserves, So
Speaker 1: it's not about target prices for long term bonds um.
Speaker 1: So we're gonna let the market fund the price. So
Speaker 1: I have to decide if they're going to buy long
Speaker 1: bonds because that's where the pressure is. Bit that spreads
Speaker 1: are widening, volatilities picking up um. And then they've decided
Speaker 1: if they want to increase the size of the money
Speaker 1: supply at a time when inflation is running hot. So
Speaker 1: you have you have a you have a discrepancy in
Speaker 1: the policy goals, which is fighting inflation, you should be tightening,
Speaker 1: but to fix market functioning, you you have to ease.
Speaker 1: And so that they're faced with this like really existential choice,
Speaker 1: and ultimately the world kind of bails them out in
Speaker 1: the sense that these the business cycle turns made a
Speaker 1: year right around when this is happening. So they buy
Speaker 1: a bunch of bills, They do a bunch of repo,
Speaker 1: which we'll talk about I'm short shortly, but did a
Speaker 1: bunch of financing, offer financing to dealers, UH, and they
Speaker 1: lower the reserve requirement and banks they grow the size
Speaker 1: the banking system, and they buy a bunch of treasury
Speaker 1: bonds in the second half of the year, banks increase
Speaker 1: their holdings by two billion dollars. So they buy the
Speaker 1: long end though, or just they bought the long end
Speaker 1: as well. Yeah, so they they banks were sort of
Speaker 1: interested in not the long end long end, but like
Speaker 1: intermediate type paper, you know, three to five years, and
Speaker 1: they also buy bills um. And ultimately the question is
Speaker 1: can we take the excess paper out of the market,
Speaker 1: which doesn't have a home and dealers can't wear a
Speaker 1: house um and resolve the functioning issues and kind of
Speaker 1: come at the problem again another day, extremely boe in
Speaker 1: terms of what's going on right now of this dual
Speaker 1: tension of like, we need to maintain financial market stability,
Speaker 1: but also we're in an anti inflation dans until any
Speaker 1: perception of balance sheet expansion is seen as working cross
Speaker 1: purposes totally. And also, I mean just the idea of
Speaker 1: we need to expand the buyer base for US bonds
Speaker 1: as well, that's kind of familiar. There's been a lot
Speaker 1: of chat recently about who is going to buy bonds
Speaker 1: giving given interest rate volatility and you know, a backdrop
Speaker 1: of higher inflation and all of that. Okay, back to
Speaker 1: the story, So the market tests the accord, the FED
Speaker 1: kind of backs down, and then then what does it do?
Speaker 1: Does it try to like go back to the period
Speaker 1: of the accord or does it try out some new
Speaker 1: solutions to this problem? So they have two problems, what
Speaker 1: is it going to buy the bonds? Uh and the others?
Speaker 1: The dealers are clearly not capable of interweting a market
Speaker 1: that large, right, So they clearly are not able to
Speaker 1: wear house securities enough shot size to really damp and volatility,
Speaker 1: which is what dealers is supposed to do, right. They're
Speaker 1: supposed to find a buyer and a seller and if
Speaker 1: they can't find each other the same day, they hold
Speaker 1: that thing in their inventory. A big problem the dealer's
Speaker 1: had was financing. So most for most of the prior
Speaker 1: seventy years, UM dealers have been funded most about what
Speaker 1: we're called call loans. Call loans are kind of this
Speaker 1: intuitive concept, which is, if I'm a dealer, I need
Speaker 1: a certain amount of money barred every day, I'll post
Speaker 1: collateral against it, but I'll probably borrow it from a
Speaker 1: bank and I'll just change the balance on a daily basis,
Speaker 1: and I'll pledge whatever bonds I have as collateral to
Speaker 1: back that loan. So uh, that was the call loan market. Um.
Speaker 1: The problem with the call loan market is was kind
Speaker 1: of expensive, and when bill yields and treasure yields were
Speaker 1: below the call market rates, it meant the inventory was negative.
Speaker 1: Carry carry means it costs you money to hold inventory.
Speaker 1: You don't make interesting comb at least to hold the inventory.
Speaker 1: So it becomes very expensive to run a dealer when
Speaker 1: you have interest rate and expense on top of the
Speaker 1: salaries and infrastructure and things like that. Uh. And so
Speaker 1: this has been a problem to forties as well, and
Speaker 1: that's when they brought back the repurchase facility. Repurchase facility
Speaker 1: dates back to v when they used its support the
Speaker 1: First World War effort, and they were concerned that there
Speaker 1: wasn't a market for treasuries back then, and so they
Speaker 1: used repurchase agreements, which are the buying and selling of
Speaker 1: a bond at different prices. That kind of mimics alone,
Speaker 1: but in two transactions. Um. And so that allowed the
Speaker 1: Fed to do two things. One is allowed them to
Speaker 1: lend money to non banks, which is critical uh. And
Speaker 1: the second thing is allowed them to do that below
Speaker 1: the discount rate in principle, so they could do it
Speaker 1: at a rate that was consistent with where bills were
Speaker 1: trading if they were below the policy rate. So this
Speaker 1: is kind of a legal workaround, right, because I imagine
Speaker 1: the FED isn't really supposed to be lending money directly
Speaker 1: to non banks. I mean, the whole reason that banks
Speaker 1: have regulations and things like that is so that they
Speaker 1: can interact directly with the FED and they have that
Speaker 1: sort of safety backstop. Is that right? Yeah? Carter Glass
Speaker 1: of Glass de Eagle was instrumental in the original Federal
Speaker 1: Reserve Act, and he said this is not intended for
Speaker 1: non banks, but in the depression they find out that,
Speaker 1: like sometimes you need to write. So the thirteen three,
Speaker 1: which becomes Section three, which becomes very famous in two
Speaker 1: thousand and eight, that's the authorization that allows them to
Speaker 1: do all kinds of interventions. It specifically allows for the
Speaker 1: lending or extensions of credit to non banks, um so
Speaker 1: to thousan eight that includes you know, primary dealers, that
Speaker 1: includes a variety of real economy participants. In two twenty
Speaker 1: they do the same thing. So like the main street
Speaker 1: lending facilities in principal thirteen three facility. The problem with
Speaker 1: thirteen three is it's only allowable under exigent circumstances. So
Speaker 1: this is not a business as usual facility. This is,
Speaker 1: if it really comes to it, you can do pretty
Speaker 1: much whatever you want, but you need to be at
Speaker 1: least a of the opinion that the world's about to collapse,
Speaker 1: and b you have to be able to demonstrate that
Speaker 1: credit was not otherwise available. So it's clearly not the
Speaker 1: case where dealers in the fifties. The workaround is, well,
Speaker 1: this is a repo, it's a purchase and a sale.
Speaker 1: This is an open market operation. This isn't Section three
Speaker 1: at all. Is this section fourteen which allows me to
Speaker 1: transact with primary dealers, and so yes, this at the
Speaker 1: economic features of a loan, but it is fundamentally a
Speaker 1: purchase and sale. Um, they had to do a little
Speaker 1: bit of jimmying with it, and it's money is to
Speaker 1: make it consistent with legal opinions, like I think it's
Speaker 1: it's putable as opposed to like specific maturities, and they
Speaker 1: try to work around some legal interpretations. But fundamentally it's
Speaker 1: just a way to lend money to non dealers in
Speaker 1: a format that gives the committee a lot more flexibility.
Speaker 1: Just a brief like sort of theoretical question, is there
Speaker 1: ever really a limit to what the FED can do
Speaker 1: beyond the creativity of lawyers. Well, that's anything, basically, that's
Speaker 1: what I mean. And you know, we look at these documents.
Speaker 1: It's true, you know we look at these documents and
Speaker 1: their debates about what they didn't. Right, It's like, don't
Speaker 1: lend the banks. But actually, I'm sorry, don't learn to
Speaker 1: non banks. But you totally count the constraint. Yeah, creativity
Speaker 1: in Congress. So Congress can give you very specific constraints
Speaker 1: and and the courts can, in principle stop you. I
Speaker 1: think it's tough with the FED because the question is
Speaker 1: what's the cause of action, Like who's going to soothe
Speaker 1: them and say you shouldn't have lent this dealer money. Um.
Speaker 1: So I'm not sure how much this has been tested
Speaker 1: in court. This is where my lack of a law
Speaker 1: degree is probably worth noting. Um. But but ultimately, the
Speaker 1: interpretation of these rules is ultimately is an interpretation. FET
Speaker 1: has a general council, they write opinions, and there's an
Speaker 1: internal process, but they can do whatever they think to
Speaker 1: be ultimately legal. So the fence Repot facility is created
Speaker 1: in nineteen seventeen, but then in the nineteen fifties, as
Speaker 1: you just described, it presumably gets a big boost because
Speaker 1: they've settled on it as a way to solve this
Speaker 1: problem of how do we sort of settle the debt
Speaker 1: market without sparking debt monetization and another bout of inflation.
Speaker 1: So what's interesting here is the FT doesn't do a
Speaker 1: ton of repo, But what they do is they demonstrate
Speaker 1: their willingness to use it. They have a big internal debate,
Speaker 1: they write a bunch of memos and they say this
Speaker 1: is something we're committed to doing at the bill Raider
Speaker 1: higher so basically saying we are here for the market
Speaker 1: to provide repo to primary dealers at this specific administered
Speaker 1: rate and industry meeting. We're just gonna say what it is.
Speaker 1: It's not an auction. We're just gonna tell you where
Speaker 1: we'll lend to you. Um And so that's important as
Speaker 1: a backstop. So it's not so much that the FETE
Speaker 1: is financing dealers, it's they're providing a liquidity backstop at
Speaker 1: a specified rate that gives other market participants willing willingness
Speaker 1: to participate in the repo market. So most funding and
Speaker 1: repo by the end of the fifties comes from corporations,
Speaker 1: and those corporations had bank deposits. Bank deposits were limited
Speaker 1: by red Q as a depression year regulation saying we
Speaker 1: don't want banks competing with each other for funding. That
Speaker 1: leads to bad outcomes. And so they don't like their
Speaker 1: bank deposit yields. They go the repo market. They get
Speaker 1: wholesale funding rates, they get much more attractive yields, and
Speaker 1: so the FED gives the market confidence that they can
Speaker 1: participate in this in this sort of money like or
Speaker 1: deposits substitute. Actually, the New York Clearinghouse is really worried
Speaker 1: about this in the late fifties. So consortation of banks say,
Speaker 1: you're cannibalizing our funding, Like, we don't want people doing repo,
Speaker 1: we want people keeping deposits with us, So sorry, can
Speaker 1: you just walk through or make a little marked clearer.
Speaker 1: So this is sort of what plays the call loan market.
Speaker 1: What what does the gap in terms of like financing
Speaker 1: costs between these two things, and what did that open
Speaker 1: up in terms of you know, how much balance sheet
Speaker 1: or how much capacity the dealer community had. It wasn't
Speaker 1: always a lot, but it was predictable, and the FIGHT
Speaker 1: could control it, and and the call in market was
Speaker 1: prone to they call them call in panics, so like
Speaker 1: you'd call your New York bank and the wouldn't have
Speaker 1: money on hand, and and so you'd call it someone
Speaker 1: in Midwest or something like not non New York, other
Speaker 1: city bank or you know. I don't think the rural
Speaker 1: banks were participating in this, but it was. It was
Speaker 1: just hokey in a lot of ways and somewhat unpredictable,
Speaker 1: and they ultimately ended up going to FED funds markets
Speaker 1: often to a plug intraday liquidity gaps and and repo
Speaker 1: was better than that for that purpose. Um, but the
Speaker 1: price could just be maintained by the FED specifically, and
Speaker 1: that was key. So UM, if the FED can control
Speaker 1: the price, and they can make sure it's profitable to
Speaker 1: run a dealer, and they can expand their balance sheets,
Speaker 1: so we don't have there's some data on dealer balance sheets.
Speaker 1: I think turnover is a better measure. So turnover as
Speaker 1: a fracture of the overall market, which you got to
Speaker 1: scale it to the whole market. Between nineteen fifty, I
Speaker 1: guess fifty five might be the earliest day we have
Speaker 1: to the late sixties goes up by multiples um, so
Speaker 1: the dealers are able to move move the debt around
Speaker 1: much more easily. That's important because they're a distribution mechanisms.
Speaker 1: You want non banks buying treasuries, you have to find them,
Speaker 1: and dealers of the mechanism by which to get them
Speaker 1: the paper. Uh. And so that's when non bank ownership
Speaker 1: starts going up a lot. Banks or go from half
Speaker 1: the market to thirty percent. By two thousand and five,
Speaker 1: two thousand and six, they're like three or four percent
Speaker 1: of the market. So it's a very successful policy. Like
Speaker 1: dealers are able to do a lot more volume, a
Speaker 1: lot more turnover bits, spreads stay relatively tight until relatively
Speaker 1: recently and and by the two financial crisis. Like not
Speaker 1: US banks are not a huge fraction or even a
Speaker 1: dominant fraction of of the of the treasury market. They
Speaker 1: have a lot of non bank participation. So this is
Speaker 1: the amazing thing because I think nowadays we're accustomed to
Speaker 1: thinking about the repo market as like a source of
Speaker 1: potential instability and a big component of the shadow banking system.
Speaker 1: So you think back to two thousand and eight, the
Speaker 1: repo market was kind of ground zero for a lot
Speaker 1: of the problems that that occurred in a mortgage backed securities.
Speaker 1: And then in the decade since two thousand and eight,
Speaker 1: all we've heard from the FED and the Financial Stability
Speaker 1: Board is, Oh, we need to get a handle on
Speaker 1: shadow banks, we need to reform the repo market, we
Speaker 1: need to make everything better. But as you're describing it,
Speaker 1: this was a direct policy decision made in the nineteen
Speaker 1: fifties to solve a specific problem. Yeah, it becomes saying
Speaker 1: it's really entrenched. So the repo market is are the
Speaker 1: solution to their problem in lots of ways. But by
Speaker 1: the time the solution becomes very effective, now they're committed
Speaker 1: to the repot market. So you know. Great example of
Speaker 1: that is an eighty two when a bankruptcy court finds
Speaker 1: that the collateral associate with repo is subject to an
Speaker 1: automatic state. What does that mean. It means if a
Speaker 1: dealer goes bankrupt, this court will seize their collateral and
Speaker 1: hold it until the bankruptcy is resolved. And that doesn't
Speaker 1: take a day or two. That takes a long time.
Speaker 1: People have just sort of assumed that that wasn't the case,
Speaker 1: because like, oh, this is a purchase in a sale,
Speaker 1: like why would this be subject to a day I
Speaker 1: just have like a bond that I sold you, and
Speaker 1: you're gonna sell it back to me. We'll just do that.
Speaker 1: Uh And And the FED panics basically in eighty two
Speaker 1: they lobby Congress aggressively to get specific protections for REPO
Speaker 1: and other similar instruments and basically legislated. So there's a
Speaker 1: bill in eighty four that's meant to reform the judicial
Speaker 1: nomination process that actually has within it a protection for
Speaker 1: REPO that exempts it from the automatic stay. So the
Speaker 1: preferential treatment for REPO specifically in bankruptcy um and and
Speaker 1: that is necessary. Vulcar argues directly, it's Bob doll at
Speaker 1: the time, like to stabilize the whole financial market, you
Speaker 1: need to do this. Um. So it's just an example
Speaker 1: of where you sort of find a good solution. Now
Speaker 1: you're now it's entrenched, and the more it presents issues,
Speaker 1: the more you have to like step in to provide
Speaker 1: other protections or specifically that market. So it is a
Speaker 1: shadow banking system in the sense that is treated like
Speaker 1: a money alternative, like a deposit alternative, and it's sort
Speaker 1: of wrapped with successive layers of protection. First, as the
Speaker 1: FED liquity back stopped in, there's bankruptcy protection. You know
Speaker 1: banks for example of different treatment under bankruptcy. Now REPO
Speaker 1: has different treatment under bankruptcy. And by the time you
Speaker 1: get to two thousand eight, and especially in the FED
Speaker 1: is doing both sides of the real market, right, So
Speaker 1: the FED is doing the standing REPO facility and the
Speaker 1: reverse REYBU facility. And so now it's very much a
Speaker 1: policy lever in lots of ways. Um whether or not
Speaker 1: that's desirable as a separate question, but but ultimately REPO
Speaker 1: becomes the plumbing because it's so effective in facilitating the
Speaker 1: initial policy goals of the Martin Fat. So this is
Speaker 1: really interesting, and I guess just to sort of piggyback
Speaker 1: on Tracy's last question, I mean, we do seem to
Speaker 1: have these recurring bouts of instability today in this part
Speaker 1: of the market. The market that exists solved a certain
Speaker 1: problem at the time, Like what is the trade off
Speaker 1: is that we're still living with today because it seems
Speaker 1: like the sort of like old regime, while maybe it
Speaker 1: had issues with sort of like inflation, etcetera. Um, the
Speaker 1: sort of the less market based regime, so to speak,
Speaker 1: at least it was more stable. Yeah. I think that
Speaker 1: there's different phases of cognitive dissonance here. So you know,
Speaker 1: if you can pull dealers in and say you're gonna
Speaker 1: in your the critical intermediation mechanism for the treasure market,
Speaker 1: and not only critical to intermediating it, but getting things
Speaker 1: out of the out of banks and into non banks
Speaker 1: is like critical to financial stability and and and more
Speaker 1: important than the enemies beyond our shores, right, And that's
Speaker 1: what they're saying. Um So to fight the Soviets, we
Speaker 1: need REPO basically and again relevant to today. Yeah. Uh
Speaker 1: so the problem with that is you need a regulatorriticism
Speaker 1: that recognizes the relative importance you're placing on dealers. And
Speaker 1: that took a long time. So dealers are regulated by
Speaker 1: the SEC. It's a it's an investor protection mandate. So basically,
Speaker 1: if and when a dealer goes bankrupt, we wanna have
Speaker 1: funds on hand to resolve all outstanding trades. Banks are
Speaker 1: safety and sound is mandate, which is like, you can't
Speaker 1: go bankrupt, so let's make sure you don't because you're
Speaker 1: critical to the functioning of the economy. And so those
Speaker 1: two things don't entirely mesh. And by two thousand and
Speaker 1: six seven there's a series of changes to how dealers
Speaker 1: are regulated, and all of a sudden they have a
Speaker 1: ton of leverage UM forty times leverage is one that
Speaker 1: everyone always quotes. But like turn over, the treasury market
Speaker 1: skyrockets because not only is it uh not as only
Speaker 1: our dealers allowed to take more leverage, but also treasury
Speaker 1: specifically in treasury rebo like don't really count torture the
Speaker 1: space capital requirements, and so there's just a lot of
Speaker 1: capacity to intermediate treasury bond trading and repo trading. In
Speaker 1: two thousand eight, everything gets stuck back into the banking system.
Speaker 1: So all these independent dealers, with the exception of the
Speaker 1: smaller ones, but like you're rather out of business or
Speaker 1: you're part of a bank holding company. So Leaving goes
Speaker 1: out of business, bears absorbed by JP Morgan, um, you know,
Speaker 1: Mary all goes to Bank of America, and all of
Speaker 1: a sudden, they're all subject to that bank safety and
Speaker 1: soundness requirement or at least within the context of the
Speaker 1: holding company as a as a whole, uh, And so
Speaker 1: the market gets consolidated behind the bank regulatory perimeter, it
Speaker 1: becomes like formally associated with banks. Um, that's fine as
Speaker 1: long as treasuries don't consume a lot of you know
Speaker 1: what we often call the industry like resources, meaning capital
Speaker 1: and liquidity. Treasuries are risk free, treasurys risk free or
Speaker 1: at least nearly risk free, and so depending on how
Speaker 1: it's haircutted and so forth and so like, if it
Speaker 1: doesn't add to your risk weighted assets, which was the
Speaker 1: binding constrainting banks for a long time, you've got a
Speaker 1: lot of elasticity. You can grow and shrink and treasury
Speaker 1: bounty pretty straightforwardly. Leverage constraints come later and they are
Speaker 1: inconsistent with that, or at least into some circumstances. Well,
Speaker 1: this is exactly what I wanted to ask about. So
Speaker 1: today there is this big question mark over the treasury
Speaker 1: market about who is going to buy and also intermediate
Speaker 1: the bonds. So we have a lot of interest rate volatility.
Speaker 1: Dealer inventories are lower um than they have been historically.
Speaker 1: Like what exactly is going on there? Like the repo
Speaker 1: market exists, it experiences spasms from time to time, but
Speaker 1: the FED comes in and for the most part, seems
Speaker 1: to fix them or at least set up new programs
Speaker 1: aimed at fixing them. Why is this still happening? Why
Speaker 1: do we have that concern? So it's it's a little
Speaker 1: different every time, which is unfortunate, but but ultimately that's why. Yeah, yeah,
Speaker 1: but you're seeing banks to buy more treasuries now, right,
Speaker 1: So like there's a there's a certain amount of increased
Speaker 1: monetization of the debt through the commercial banking system, not
Speaker 1: necessarily through the Federal Reserve um and and so that's
Speaker 1: helping where it was helping for a while, it's not
Speaker 1: so much helping anymore. UM. But I think the issue
Speaker 1: is repo is a form of money substitute that has
Speaker 1: the implicit backing of the Fed, but is not really
Speaker 1: wrapped in the same kind of cloak as deposits. And
Speaker 1: so deposit funding is stable and sticky funding at low cost.
Speaker 1: Repo funding is fine until there's an issue, and then
Speaker 1: it's sort of more prone to instability than than more
Speaker 1: traditional forms of bank funding. And as you go further
Speaker 1: out the spectrum, you know, we're talking about treasury, but
Speaker 1: then you can talk about mortgage repot in two thousand
Speaker 1: and seven could have talked about non agency mortgage repo,
Speaker 1: and then there's a question of the collateral credit quality
Speaker 1: as well as access to liquidity and so like repo
Speaker 1: is is just not money in the sense that deposits are.
Speaker 1: And so if banks are being called upon to interveeding
Speaker 1: at treasuries as a core banking activity and effect, um,
Speaker 1: they're still funding it with with a form of funding
Speaker 1: that's reserved for dealers, and that's the investor protection world.
Speaker 1: So there's a little bit of cognitive dissonance there. Um,
Speaker 1: But what the FED is doing is their backstopping both
Speaker 1: sides of the market. So so repo's perceiving those kind
Speaker 1: of controls. And there are other central banks where repos
Speaker 1: the primary policy. Right, So this is not you know,
Speaker 1: particularly unusual. Um, whether or not it's desirable as a
Speaker 1: separate question, and whether or not those facilities are effective.
Speaker 1: There is another one. You're talking about dealer inventories. Now
Speaker 1: I think there's I think I was on to talk
Speaker 1: about this pretty recently. Um, I remain relatively sanguine, I guess,
Speaker 1: and you know, prices are moving around, but the world
Speaker 1: is moving around like the world is as volatile as
Speaker 1: the treasure market is. Volatile and so like that's necessarily
Speaker 1: I wouldn't say it's a good or bad thing, but
Speaker 1: it's certainly not unexpected. Um dealer inventories being low off
Speaker 1: the run, trading not being particularly high as a fraction
Speaker 1: of total, Like, you don't see a lot of the
Speaker 1: monetization of treasuries in the form of sales to source
Speaker 1: cash in the way that you saw. So could that happen? Sure? Um,
Speaker 1: if the in inventories were going to rise rapidly and
Speaker 1: we had the same kind of dash for cash dynamic like,
Speaker 1: I think we've run into similar problems. Ultimately those issues
Speaker 1: have not been fixed, um, at least on a fundamental basis.
Speaker 1: But um, you know, the market is functioning even if
Speaker 1: it is a liquid I might have said precisely that
Speaker 1: a few months ago, but I still believe it's the case.
Speaker 1: We've come full circle then, and I gotta say the
Speaker 1: idea that the treasury market is as volatile as the
Speaker 1: world itself. That's a good quote. Yeah, all right, well, Josh,
Speaker 1: that was amazing so much. Yeah, I can't believe this
Speaker 1: is what you do you know for fun um in
Speaker 1: your evenings, But absolutely fantastic, super educational and I think
Speaker 1: you're one of the few people who can draw a
Speaker 1: direct line between you know, something that happened in ninety
Speaker 1: three and a lot of what we're experiencing today. Yeah, yeah,
Speaker 1: and I should. I should thank Levin and as Wealth
Speaker 1: has been really helpful with this, and he he does
Speaker 1: this for a living, so you know, I'm yeah, I've
Speaker 1: watched some of his like lectures on YouTube and stuff
Speaker 1: really interesting. You want to understand the banking system and
Speaker 1: there it comes from, and like why we have certain
Speaker 1: roles in the way they are. Okay, we'll make that happen,
Speaker 1: all right, thanks so much, Thank you very much, so Joe,
Speaker 1: that was fantastic. I mean I actually feel like I
Speaker 1: kind of sat down and listened to like a narrative story.
Speaker 1: I love that, you know what this although it confirms
Speaker 1: this like long view that I've had about all these
Speaker 1: questions about how many of the solutions to problems are
Speaker 1: about recreating the exact same thing under a new language
Speaker 1: or when it's like it's still the same thing, you know,
Speaker 1: and so like it always like sort of driving me
Speaker 1: crazy where it's like okay, well we want the FED
Speaker 1: to backstop it, but we don't want it to increase
Speaker 1: the money supply measured this way, so it's on someone
Speaker 1: else's balance, but it's still like economically the same thing.
Speaker 1: Like all these conversations, like they kind of drive me
Speaker 1: crazy just because it's like I don't just have to
Speaker 1: fed by it all it solves a problem. Okay, Um,
Speaker 1: well that's a little extreme, but you get I agree
Speaker 1: with you on the branding, Like, never underestimate the power
Speaker 1: of branding and giving something a different name. Right, So
Speaker 1: this is now a money like deposits really, but that's
Speaker 1: the point, Like so many different things in the end,
Speaker 1: when you like work it back, are still just some
Speaker 1: sort of like either fed back implicitly or explicitly like
Speaker 1: fed determined instrument. It's just like how many layers of
Speaker 1: pretend do we want to have so that it looks
Speaker 1: like it's just some like thing out in the market. Okay,
Speaker 1: so we've discovered that Joe doesn't want free markets. There's
Speaker 1: no there's just there's no such thing. There's no such thing.
Speaker 1: It's all creating the illusion that there's like these like
Speaker 1: real markets, when in the end, it's like that's my
Speaker 1: it's it's always my ticure. I mean, the central bank
Speaker 1: at a very basic level is setting interest rates? Right,
Speaker 1: So like, okay, alright, well on that very high level
Speaker 1: of philosophical note, shall we leave it there? Let's leave
Speaker 1: it there. This has been another episode of the Addoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can
Speaker 1: follow me on Twitter at the Stalwart, follow our producer
Speaker 1: Carmen Rodriguez at Carmen armand follow all the podcasts at
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Speaker 1: T T T thing to me to