The Federal Reserve Bank of New York very quietly handed out $75 billion in cash to the banks on Wednesday in a process known as a ‘repurchase operation,’ or repo.
This emergency measure hasn’t been used at scale for a decade, since the last financial crisis.
It’s a reminder of the central banks’ power to artificially expand the money supply and devalue your money. This is why bitcoin, with its capped supply and strict, predictable output, matters.
What is the repo operation?
In simple terms, the central bank prints $75 billion and makes it available to commercial banks for a 24 hour period.
In exchange, the banks post Treasury bonds and other assets as collateral.
It gives the banks instant liquidity for the overnight money market where banks execute short-term loans with each other. As CCN previously explained:
“Banks get the overnight capital they need by pledging collateral, usually Treasury bonds, in exchange for cash. When the Fed provides the cash, they basically print the money in exchange for the securities.”
Sign of a crisis?
It’s a canary in the coal mine. It means liquidity has dried up in the overnight money markets.
The banks desperately needed liquid cash to trade and lend each other overnight.
The first warning sign came as the overnight interest rate shot up to 10% (up from the typical 2%). The Fed had to step in to ease the liquidity crisis.
Why does this even happen?
German reporter Holger Zschaepitz summed it up with the simple line:
“It looked like banks were suddenly short of cash.”
The New York Fed admitted themselves that the most likely cause is dwindling reserves at the banks.