[onlyrealcuzzo]

Taking a step back - "repo" is short for "Repurchase Agreement".

Financial Institutions put collateral into an overnight market and receive cash, and then they "agree" to "repurchase" / give the cash back (plus some fee) for the collateral the next day - right?

This is the "opposite" in that Financial Institutions put cash in and get collateral (treasuries) out - right? The transaction is essentially going in the "reverse" direction it traditionally went - which is why it's the "reverse repo market".

It's interesting because "having too much cash" is not usually a problem. Now it is.

[Judgmentality]

What's really weird is they're getting interest to park their money overnight now (it's been zero interest for a while until today).

This is really smoke and mirrors though. Moving the cash into the repo market doesn't change anything, other than now it's an "asset" instead of a "liability." Yes, there are obviously legal differences here, but it's still the same amount of cash owned by the same entity, except now they're getting paid just to park it overnight.

I'm not saying the reverse repo market is nonsense. I'm saying the way the government has structured assets and liabilities in this instance is bizarre and seems like musical chairs. I've actually read up on this and am happy for someone to explain it to me further, but it really seems like they're just inventing new ways to kick the can down the road. I don't think they're actually solving anything; they're just making the problem worse and hiding the symptoms.

[jkhdigital]

> they're just inventing new ways to kick the can down the road

Yes, even mainstream voices are starting to say things like this. Hard to imagine that this doesn't end very, very badly.

The fundamental contradiction is that the Fed wants to goose economic activity with money printing, but simultaneously imposes capital adequacy requirements on banks to prevent systemic risks. You can't have your cake and eat it too; or, in the parlance of classical economics, there's no free lunch.

[imtringued]

It's not just the central bank. It's literally every market participant kicking cans down the road. Everyone is saving at the expense of everyone else.

[runbathtime]

So the banks are lending their cash to the Fed or (repo market), and holding the treasuries (making interest) to let other banks or the Fed borrow the cash for some reason overnight.

The only thing I get from it is that banks are flush with cash and overnight rates should go lower because there is an abundance of cash being lent.

Seems like a game. Must be nice to be a banker.

[jkhdigital]

The whole point of this charade is to prevent negative rates. The Fed can put a floor on interbank lending of reserves by paying interest on them, but it also wants to keep a floor under the non-Fed overnight money markets. Reverse repo is the answer, as it can always offer a positive rate even when market participants refuse to.