YouSaid · the spoken record

Daniel Neilson

lines on the record: 89
first: 2022-10-28
most recent: 2022-10-28
sittings or episodes: 1
sources: podcast

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“What series of events or what series of economic conditions over the next six months could lead to a change in that arrangement where all of a sudden to save the global monetary system, the big central banks have to coordinate in a more upfront, more visible, more forceful way to actually manage the system into shape. That's something that was done between even during the gold standard that was that happened on a routine relatively routine basis between World War II and 1973. There were modes of coordination around the operation of the global dollar system. That kind of coordination has broken down since then. And I wonder if this system gets strained to a high degree or in particular ways over the coming months that it could be that a closer level of coordination becomes”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“A floating exchange rates and coordination between central banks, you know, the swap lines, that's highly coordinated. But otherwise, they kind of watch each other, but they don't ever like sit down and make a global agreement. So I guess my big question on this is.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Well, I'm looking forward to finding out the answer to your question. But here's what I can say right now. What I'm seeing, and everything we've been talking about today leads me to say that I think the Fed probably has got what it needs for now to get through with the US financial system. Banks, security dealers, even U.S. households are probably set for the time to come. The thing I'm watching, and a lot of people are watching this in our different ways, and so this is an ongoing conversation, is what's going to happen in the global system because we're moving to a new set of exchange rates with a dollar valuable, but at the same time, other things are breaking down the global structure of production is changing. And so the global monetary system is going to change in response. So here's the real question. We've been managing the international system in a pretty loosely, relatively loosely coordinated way since the breakdown of managed exchange rates in the 1970s.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“There's broadly three things the Fed does interest rates, balance sheet, so QE, QT, and then special type stuff, facilities, reserve requirements regulation, but also swap lines. Do you think that door number three, i.e. the other stuff, will be sufficient to solve whatever liquidity problem that you foresee on the horizon, however far away that might be? In other words, what do you think the odds are that the Federal Reserve can make it through the storm by still hiking rates to 4.75% and not cutting them for a very long time and still doing $95 billion of QT, even though it's actually less for reasons we don't get into? In other words, like, can it just do, oh, a little swap line here, a little swap line here? I'm going to pass this little facility, this little regulation here, or is there something like, you know, if you have tuberculosis, no matter how much Adville you take, you're not going to get better. You need to do a little QE. You need to do cut rates.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“I am not going to go on the record with a prediction. If you want predictions, I'm going to have to suggest you go elsewhere. My job is to point out the structure of the system when it breaks, then I will be right there with you to figure out what it was and what it means. And my general predictions I'm giving you, but in the end, I find that not the most revealing way to go about it. So what I'm trying to do is understand and share that understanding with anyone who wants to listen. And I'm trying to learn. You know, I've learned a lot over the last couple years. Some of my views have evolved. And if you read everything I wrote, you'll see where that is. I try to be upfront about that. But mostly I'm curious and I want to make sense of this and I want to share that with other people as best I can. And I love the fact that it's always different, you know, like one day it's a Swiss National Bank and the next day it's the Ethereum merge and then it's tornado cash and it's always and every day it's the Fed.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Conditions within the US are pretty stable. Reasons that we've said already. But a Minskan perspective says that stress is building up somewhere. And it's definitely going to break somewhere because the Fed is going to keep tightening until something breaks. That's the feedback loop that exists in the system. The only question is what is going to break? And I guess a question that goes with it, a second, a subsidiary question is when we're going to find out.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“And that's not something that central banks can really eliminate. That's a feature of capitalism. It has to do with the structure of money itself, really, and it's built into finance on a very deep level. And so the conceptual twist to this is that the longer the stability goes on, the more you suspect that some kind of financial stress is building up somewhere in the system. And that's exactly the perspective I'm using right now. Mainsky, I think, was essentially right, was basically right, but the details change. Times change, structure of the global economic system changes, the kinds of instruments that people use change. So you can't just, Minsky doesn't just have the answers. He gives us a way to think about it. And it's our job to adapt to that by reading what's happening now and seeing where the stress shows up. So this leads me to say, I think right now.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Minsky said as you're indicating, Jack, Minsky said, financial crisis is an inherent part of capitalism. He said capitalism is essentially flawed and the flaw is that it's unstable. But he also said, you know, central banks can limit the fluctuations by providing liquidity in a crisis. And he also said that governments like treasuries can provide can limit the real economic consequences of a financial crisis, for example, through unemployment insurance. But can they eliminate these cycles? Minsky said, no, and he said no for a fundamental read, which you're getting at, which is that when times are good in capitalism, money gets, people are willing to extend more and more credit. And they don't, it's harder for people to perceive the risks in that credit. The risk that they won't get paid back. And so they push it further and further.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So that's inherent in the business cycle in capitalism is boom and bust. Central banks can play their part and have tried to sort of temper that volatility. So right now there are in general fewer recessions in there there were in the 1870s when there was no federal reserve, for example. Some people can say Fed has nothing to do with it. How successful do you think there's a limit on how successful? Because I mean, the Fed can't banish the business cycle. Do you think there's a limit on how the effective they can be? And yeah, what were Minsky's thoughts on central banks in that regard?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Subject of my book, you know, really helpful way of thinking about how markets work and how central banks can intervene and what's happening during a crisis. And Kindleberger, who Minsky knew about, they worked together a little bit. And Kindleberger really had the global dollar perspective very clear. And so his work is great. And I'll trail Perry Merling's book, Money and Empire on Kindleberger, which is out now, in some places coming out, and others. Check it out. But Perry talks about Kindleberger from a global dollar perspective. And so look, these guys are not going to win Nobel Prizes because that's the way the economics profession works. But if you're interested in understanding the system, that would be a great place to start. And that's where I've started.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“There are theories of liquidity that help you unpack exactly what happens. And 2008, we can write a pretty complete post-mortem of 2008 and follow these liquidity issues all the way through. And I've done that in my short way. And I cite plenty of other people who've done it in their way as well. So it's not just me, right? But in my book, Minsky, which you showed before, one thing that I do is read 2008 and follow these liquidity issues all the way through. And I think it's important that we do that. It's not going to happen again in exactly the same way, but it is going to happen again in some way. The story doesn't change all that much. And two, there are a couple of people who are doing this the right way and give us theories. They're not going to win Nobel Prizes, but they give us theories that actually do help us understand. It's a simple way of thinking about liquidity that actually shows you how markets work and they work in lots of different circumstances. And I find that super valuable. Minsky.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Right. No, you're correct. In the end, it wasn't treasury. It was the opposite, actually. Everyone's trying to get out of other things and into treasuries. So the problem was that those illiquidity showed up in those securities markets, not in the treasury market. Let me be clear. That in 2008, the problem wasn't illiquidity in the treasury market. It was general illiquidity. Because of securities dealers' inability to make markets. So I think we could dig a long way into this. And so let me say instead of doing that right now, let me say two things quick. One is that.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sorry, weren't those securities? It was like toxic private label mortgage-backed securities. It was not treasuries. Correct me if I'm wrong. Like when I'm used to hearing a liquidity squeeze, almost always, like it's the left tail, right? So when there's a liquidity trouble in stocks, stocks go down. Stocks rarely like melt up because, I mean, maybe they do on an intraday basis. So I know that treasuries rallied treasury bonds up, treasury bills up, yields down in 2007, 2008 as we went into this crisis. So, was there a liquidity problem in the treasuries themselves in addition to all the sort of private label crap?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think that's part of it. I think that's part of it. I think really, I think Bernanke probably learned, did already learn the lesson around 2008 because this works from the 1980s. So by the time he was fed chair, I don't think he had the luxury to keep thinking that the world was as simple as he might have thought at the time he wrote the paper. So I suspect that he learned that during 2008 where there were big liquidity shortages that showed up and they and they did eventually get all the way to the center through, as you said, through instruments that maybe were unfamiliar to central bankers. But then in the end, it was the securities dealers, the big Wall Street securities dealers that had problems. And the Fed had to create liquidity for them. So I think it would be hard for anyone at the Fed to not recognize that after that point. But what's weird? But sorry.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“But the inside doesn't because the inside is inherently liquid, whereas now in 2019, September 2019, March 2020, and perhaps now, like the call is coming from inside the house. It's like the treasury markets and the government sovereign bond markets that are really seeing the big liquidity squeeze.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Dan is part of the reason why, like, let's just say there's a series of concentric circles of like, I guess, the hierarchy of money where the Federal Reserve and the Treasury are the center of the circle. And then outside of that are commercial banks. Outside of that are corporations, individuals, outside of that are foreign corporations, foreign central banks, and sort of a series of concentric circles. Oh, and by the way, and as you go outside, instead of treasuries, it's corporate bonds. Instead of corporate bonds, it's stocks. You know what I mean? farther and farther from like the center do you think it's because bernanke's framework a lot of the financial crisis he saw particularly in 2008 were from outside of the central so it's oh it's these asset batch commercial paper crap it's sub it's uh you know collateralized debt obligations that are synthetic or they're cdo squares they're backed by all of this you know dubious paper very outside of the circle so he's like oh the outside of the circle needs liquidity”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Know we saw some big hiccups in 2019 and in 2020. We saw some big hiccups around 2008 kind of under older arrangements, but like we know that this market can blow up. And if that happens, that would be a huge deal for the entire global monetary system. So can we try not to let that happen? And the central bankers are working with them and trying to come up with proposals. And there's a lot of actual concern. But it happens without an intellectual, like there's not a theory that they can point to to help them solve those problems because the theory doesn't speak to those issues at all.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Know like right now we're thinking about treasury markets, right? And so the Fed has gone out and surveyed all these treasury dealers and they're thinking about pushing more people into central clearing counterparties, so changing the market structure for the way Treasury securities are traded. But in Bernanke's paper, Treasury securities are inherently liquid. So there's no way to think about market dysfunction or concentration of certain kinds or bumps on the yield curve. There's no way to think about any of those questions. And so that would lead you to think like there's nothing to do here, right? How could we, there's nothing, we want to make changes to the structure of the treasury market in the framework that's written down in that work. It doesn't have any effect on liquidity. There's no way for liquidity to be affected by that. Whereas market practitioners are saying, hey.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So, I'm gonna ask a question in two ways What is a current phenomena or over the past year or even past decade that using Bernanke's incorrect framework you would reach an incorrect conclusion versus using your framework that you have, you would reach a different conclusion or another way to say it, I guess, is more actionable is like let's say if I was the chairman of the Federal Reserve, God forbid, and what's a mistake that I would make if I was following Bernanke's framework that I wouldn't make if I was following your framework.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“The Nobel Prize. I think that's just adding to the narrow perspective. It's choosing a really limited way to think about this and putting that up on the highest pedestal that economics has to offer when the practical implications of those theories are almost non-existent and central bankers who are in the markets or the bankers or traders that they talk to have a very different way of thinking about these same things which doesn't have the same intellectual legitimacy. It's very hard to publish academic papers from a practitioner's point of view, but they do tell you a lot more about what you need to do when liquidity conditions dry up suddenly. So, you know, look, congratulations to anyone who wins the Nobel Prize in any subject. Absolutely. It's a huge accomplishment. But in terms of understanding what is happening on a day-to-day basis, the way I'm trying to do and the way you're...”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Because these papers and the economics discipline give a lot of legitimacy to central banks. This is the academic qualification that you need to have for one of these top decision-making positions at the Fed. Fed governors can also come out of business, you know, that kind of thing, but economics is the intellectual structure for central banking. But the business, the day-to-day business of central banks buying and selling securities, quantitative easing, quantitative tightening, thinking about overnight markets, or the crisis business when everybody's suddenly looking at the Fed for a guide or relief or a solution to the problem, all of this stuff depends on ideas of liquidity that are really different from what the academic economics profession says. So when the Nobel Committee awards these folks with”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So the fact that So, this is interesting, right? Because I'm faulting Bernanke for this mistake. But Bernanke has also been Fed chair, and I don't want to discount that, right? He's also been Fed chair, which is a really funny contradiction because in 2008, financial markets break down and liquidity vanishes for the same assets that were being traded the day before, right? So the Fed under Bernanke's leadership had to create liquidity for all of these assets, mortgage-backed securities, for example, that had been liquid every day until then and suddenly became illiquid. So Bernanke knows this on some level, but the fact that liquidity can vanish, the fact that central banks job in a crisis is to create liquidity, all of that stuff is absent from the 1983 paper that he was recognized for in the Nobel.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“You can buy and sell treasuries all day. Very liminal bid ask spread, but you're going to buy your house on one year and then you're going to sell it eight years later with no transactions in between. Oh, and by the way, you're going to have to get a real estate agent and they're going to get 2% or 5% as what. So it's hard to transact. But you're saying, yes, that is the case in the world that we live in, but theoretically in a world where central banks don't exist to sort of make money in Treasury securities, there's much less of government debt as well. And also, there's some sort of, I don't know, service or maybe it's on the blockchain. Like people are like buying and selling housing like they're doing with stocks in that world. Housing would be more liquid than treasuries. Now, obviously, there are some characteristics about, you know, some are things more liquid than others, but you're saying that the characteristic of liquidity can change and that the static, the view that liquidity is sort of an eternal static characteristic.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“That's where liquidity comes from. And if they stop doing that, Because they're afraid or because they're uncertain or because something breaks in the system that they use, then the liquidity disappears. It's not a characteristic of the assets.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Their theories bear almost no relationship to what we would understand as the basic mechanics of liquidity in financial markets, the way that central bankers think about it, and the way that financial market practitioners think about it, which is right. And I think the practitioners are right in this. This is what I mean when I say liquidity. And I think that's the way we should talk about liquidity. In Bernanke's paper, liquidity is an aspect of financial assets that doesn't change, right? So you think about treasuries, they just are liquid in Bernanke's world by definition. That is a characteristic of all treasury bills that they are liquid. But in reality, we know that they're market makers and there's a system which creates liquidity in that market and some days it stops doing that. We're just talking about this, right? Some days the market breaks down and there isn't any more liquidity even in treasuries. So it's not a characteristic of treasury securities. It's the work that all these people are doing to buy and sell them to make those markets.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“To finance as everyone who's in the markets or even just watches the markets knows some days you want to sell something and nobody will buy it and it doesn't matter what the price is because there's no buyers at any price. And that day is September 2008 or even 2020 had that character to it for different reasons. Those are the days that big financial events happen and those are the days that really matter. The theories that were recognized with the Nobel, which I call the liquidity Nobel, because that's the thing that ties these three people together.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“All three of these papers are about banking and financial. So, what should we make of this? Well, I think the thing to say is that if people come to this subject through watching financial markets, watching central banks, reading the news, maybe reading things that the IMF or the BIS put out, so you're curious about how does this system actually work? Economics is all over the place in there, but if you go and read academic economics journals like those like the papers that Bernanke and Diamond Adivig wrote, you actually see something pretty different. And I recognize that people, a lot of people aren't close enough to the academic field to see that. I try to show it in certain ways because it actually does have an effect on the world. So here, for example, right, these theories of liquidity, banking and these papers, both of the papers that were recognized with the Nobel Prize are about liquidity in some way. Liquidity is an absolutely essential concept.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“I disagree with the consensus. Let me start there. And I feel like most of the people who read my stuff are looking for that. And I'm not really making a secret of it. I don't want to be too mean to these folks who won the Nobel Prize for doing what they do. But let me give you the way that I think about it, right? Nobel Prize in Economics went to three people this year. Ben Bernanke, as you said, and also Douglas Diamond and Philip Digbig, if you say to a monetary economist, Diamond Divig, you're talking about a specific contribution to theory of monetary economics from the early 1980s. Bernanke, we think of as Fed chair, and that's obviously correct, but also Bernanke at a similar time to Diamond and Digbig in the same kind of intellectual world, you know, they were kind of the three of them were working on similar issues at a similar time, also put out a paper.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“75 basis points next week, maybe another 75 by the end of the year. Now we're pretty, we're into the 4 or 5% range. How much more beyond that before the Fed starts to see results? And in the meantime, there's going to be financial strain everywhere else, everywhere other than these short-term dollar rates where there's more dollars than anybody needs.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, right. Yeah, exactly. The problem is where is the liquidity? So I agree with you. I think you're not wrong. And the reason we should all be thinking about this is because the Fed is going to need a reason to stop hiking. They're going to hike until they have a good reason to stop, right? And that's going to be best case U.S. consumer price inflation or U.S. PCE inflation comes down gently to a level that the Fed can live with. The target is 2%. Worst case something breaks maybe something big. And the problem with too much money is that it makes it less likely that anything in the core of the US financial system is going to show the results of the Fed's rate hikes. What that means is that stuff is going to break somewhere else. And so my concern is the overnight US dollar rates show that things are pretty stable there, so the Fed is going to keep cranking, keep cranking.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Dan, I understand for the very smart people working at the Fed, let's say there's someone working at the Fed and it was this person's job to make sure that the blue line didn't go below the red line. I understand that they're judged based on that and they might not get a good performance review if the blue line goes below the red line. But in terms of the actual economic system, I'm going to just repeat what I said. And if I'm wrong, definitely put me in my place. You're the professor. But what's the problem of too much money? Because I see problems of not enough money already in like the mortgage market, let's say particularly mortgage-backed securities, like the spread between mortgage-backed securities and treasuries has widened significantly. I mean, perhaps that's the Federal Reserve goal. You're hearing rumors of asset-backed securities deals not being able to get done. So there's illiquidity in certain parts of the market that need liquidity. There's just too much liquidity in the part of the market that doesn't need liquidity, right?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Broader liquidity conditions change. That's why I'll be watching for this in the Fed minutes next week, not in the minutes, but in the set. They put out a main statement and a couple, usually a couple other documents right after the meeting. And if something happens with the overnight repo facility, it'll show up there. I will look at that. And if there's any change on that, I think that might be an indication that we're going to see something different in the plumbing over the next few weeks. Maybe the Fed will choose instead just to wait and wait for things to get better.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“You repo it out at something below the overnight repo facility rate because that's the best you can get and the underlying problem is that there's too much money in the system. I think there's also some other things going on like if you're what you're actually doing is not depositing money, but you're trying to get the securities in, trying to repo in treasuries to do some other trade with, then you might be willing to take a lower rate because it's not really the cash interest rate that you're interested in, but you're interested in getting the security because you have some bet that you want to place with it. So that would be another reason that someone would take a rate lower than the floor. And this situation has gone on for some months now. I think it's an inconvenience for the Fed. I don't think it's an immediate financial stability problem, but it lessens the grip that they've got on financial conditions. It's leaky, as I've said. I think that this situation will change when”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. I think that's a big part of it. The Fed tries to set low rates, but they don't, you can't, not just everybody can deposit money at the Fed at that rate. They have the reserve accounts, which are open to commercial banks, and they have the overnight reversary pro facility, which is open to money market funds. So for you and I to take advantage of that rate floor, we got to get our money into one of those places. Banks have been turning away deposits over the last couple of years. They've got too much in deposits in some cases, and so they're telling their customers, go somewhere else. A lot of that money has gone to money market funds, but money market funds are not making any, they're not making any profit right now because they've got too much money in. All of their rates are at the floor at the overnight repo facility. So they're not really doing any business. So they are turning away funds as well. So now you're left with money. The bank won't take it. The money market fund won't take.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Think they would probably prefer. But so far, this hasn't led them to do anything to try to fix it. I'm really struggling.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Right. True, that's true. It's a problem if you read the Fed minutes, for example, they're thinking about this. And I've been surprised at how little they've been thinking about it, honestly. But it gets a mention in the minutes. It gets about a paragraph in each in the minutes that come out after each FOMC meeting. And so they know that this is out there. And what it means for them is that, you know, the Fed sets interest rates and they're trying to get all of the overnight dollar interest rates to move together. So when they hike by 75 basis points, they want all of the interest rates to rise by 75 basis points. And the fact that there's all these rates below their lowest rate means that they're not totally successful in that. They are getting rates to move it hike.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I would not consider that a problem. If you ask why are interest rates lower than this repo floor, again, the plumbing is really complicated. I would say, yeah, sure, because there are too many dollars, too many bank reserves in the system that are results of quantitative easing. Yes, that's going down because of quantitative tightening, but not fast enough. There's still close to $3 trillion in the reverse repo facility. Yes. But when you say that's a problem, it's not a you can't have a financial crisis because of too much liquidity, right?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Was not enough dollars. And right now, it's too many dollars is the problem that we have. So it has a very different implications for financial stability. When there's not enough dollars, then we're close to breaking. When there's too many dollars here in the US financial system, right? That's a different kind of problem. You're accepting less interest than you want, but we're not going to explode, right? We're just looking for better channels for the dollars.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yes, it's an interesting question. I have some thoughts and I wish that I had a precise answer, but what it seems to be is that there's just a huge amount of dollars in the system and the overnight repo facility has gotten big, but there's still money lying around and it's going in various places, but people have so much cash, money market funds and banks have so much cash that they still have to put it in a variety of places where interest rates are still lower than what you would get from the Fed, which really should be the lowest. Nobody should accept lower. But there's just too much money and the Fed can't take it all for various reasons, right? And so I think that the plumbing is a little bit strained in that sense. But the strain is not like in 2008.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, exactly. And reserves are that too, but you're right that the reserve deposits still exist, but that's not where the key interest rates are being determined. The overnight repo facility should be a floor for interest rates. It should be hard to have interest rates which are lower than that. Why would you accept lower interest on your deposits when you could put them at the Fed for a higher rate? Right now, those financial conditions are a little bit broken. People are getting interest rates below the overnight repo facility rate. And I would expect that to change at the same time as broader financial conditions in the global dollar system change, because that's all one system.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“In this overnight RRP facility, and because it's repo, the Fed posts Treasury collateral with the depositors overnight. Fed got plenty of treasuries”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“They don't make it easier. You're exactly right. And you're also right to think of it as a deposit facility, which if we all called it that, it would be, I think we would all understand it a little bit better because it's on the liability side of the Fed's balance sheet. And you think of that as a loan, but that steers you in the wrong direction because if you're a bank, then you put your deposits on the liability side as well. And that feels different from a loan, but it still goes on the liability side. So the Fed's got reserve deposits, which we understand. It's also got this overnight repo facility, reverse repo facility on the liability side, but calling it a repo deposit facility makes it much clearer what it is. Money market funds have extra cash and they can deposit it at the Fed.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“In that transaction where it's over $2 trillion, the Fed is doing repo and the commercial markets are doing reverse repo on the other side of the transaction, but the Fed very confusingly calls the reverse repo facility, even though they are doing repo. And the thing that they launched out in 2019 where they're doing reverse repo and the market is doing repo, they call that the repo facility. So that's extremely confusing and it literally took me like three years to understand that.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sorry to interrupt. Maybe I'm unnecessarily clarifying, but what that system is essentially a deposit mechanism, I mean, the Fed doesn't call it that, but the Fed is supplying its collateral to financial institutions so that they can lend to the Fed. I mean, it's not that like the Fed needs money. I mean, it doesn't. Fed prints money. And then they get a rate that is generally commensurate to the Fed funds rates. It's somewhere in between the lower bound and the upper bound. And if that breaks for the ceiling or the floor, that is very significant. I actually think Dan...”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Trillion, they've said in different ways, they've said that they want to be out of that business, but the number really has continued to climb not to fall. So I'm curious to know if there's going to be any technical adjustment to the overnight repo facility to start to steer that number back down, which I think is what they want, but they haven't had any luck getting it with.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think. So agreed completely. There's no reason to think the consensus is wrong. 75 basis points is likely. And the Fed doesn't want to create surprises, so they're probably not going to create surprises. We saw GDP was high. We saw inflation was high. So we're going to get a big hike 75 basis points. Is it going to be an extra large hike, 100 basis points? That would be a surprise. Seems unlikely. What am I going to be watching for? Two big things. The first that we can see sooner will be if there's any change to thinking about the overnight repo facility. So big liability on the Fed's balance sheet. This was a way to get cash into the system. Banks' balance sheets were tapped out so the Fed made a way for money market funds to hold Fed liabilities. And there's $2 trillion outstanding. This is overnight repo. The Fed rolls it over every single day to”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Whenever that happens, we're going to have to get into this in a lot more depth. I thought it was a nice opportunity when the pressure's off a little bit to take it out unless, okay, let's remember how this works so that on the day when they really use it, we still have it fresh in our minds. So too soon to panic. This is interesting and worth understanding, but this is not the big crisis that will probably eventually come, but I couldn't say what.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Waiting for, right? This is not it. But that said, the central banks are a little bit swap lines are a little bit abstruse. And so it is worth spending a few minutes understanding them. And when they're turned on, that's usually a binary event, right? It's either off or on. And so when they're on, I want to understand what that means. And we know that we know that the Fed can get $300 billion out the door in 10 days. So that means if the door is open, then you just want to have that in the back of your mind. Is that going to happen? I would not bet on it right now. But when we think ahead to what a global financial event might look like, I would expect these swap lines to be activated. That is a very likely event, a likely feature of whatever the next global financial liquidity crisis is.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Yeah. Well, so there's actually a few, if you look really close, actually all of those six central banks have actually activated their swap lines during this year, most of them for tiny amounts, as you can see. The ECB seems to keep its swap line open all the time. It's not a big number. I mean, it would be big for you or me, but it's not big for these central banks. But the news was that the Swiss National Bank had gone from zero to up to 10 or 11 billion. I thought that was news, and that's why I wrote about it, because these things are mostly zero. And when they're not zero, that usually means something is happening. I actually still can't figure out exactly what it is that's happening, but I am comfortable saying that there's not a reason to conclude. I like this chart in comparison to the other one because this looks big if you do it this way, but if you put it next to 2020, it looks tiny. And so I think that I just want to say to everyone that I don't think that this is the liquidity. This is not the big one that we're.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So you write in your piece on Steven Party, which I remember. You said it's still too soon to panic because the Swiss National Bank has activated its swap line, but you don't see this as part of a wider dollar liquidity crunch. Do you think the, is there a real need for this, or do you think the central banks are just sort of getting ready so that the chart doesn't go up so much if they need those hundreds of billions again?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT