by David Kranzler
Investment Research Dynamics
To the extent that some analysts reject the Fed/Wall St/Perma-Bull narrative that the Fed’s repo operation is needed to address “temporary” liquidity issues or was caused by the newer regulatory constraints, the only explanation offered up is that the financial system’s “plumbing” is malfunctioning. But there has to be an underlying cause…
…The underlying cause is abject deterioration in credit instruments – largely subprime right now – is causing an ever-widening chasm between the value of these securities and the funding used to finance those asset values. The banks have reduced their willingness to fund the increasing demand for overnight collateralized loans because they see first-hand the degree to which some of the collateral has become radioactive (CLO bonds, for instance). The Fed has had to plug the “gap” with its repo operations, several of which have maturities extended up to a month. This is de facto QE, which is de facto money printing.