Wall Street Martin St Amant

Why did the Fed just inject $165 billion into the overnight repo market? PBI Chair Ellen Brown, writing in Truthdig, explains that the action was triggered by JPMorgan’s 57% drawdown of cash held on deposit at the Fed. Why? JPMorgan has been propping up its share prices (and bank exec payouts) by diverting federally insured deposits to fund buybacks of its stock. Ellen comments:

“The whole repo rigmarole underscores the sleight of hand on which our money and banking systems are built, and why it is time to change them. Banks do not really have the money they lend. To back their loans, they rely on their ability to borrow from the reserves of other banks, generated from their customers’ deposits. If those banks withhold their deposits in the insatiable pursuit of higher profits, the borrowing banks must turn to the public purse for liquidity. The banks could not function without public support. They should be turned into public utilities, mandated to serve the interests of the people and the productive economy on which the public depends.”

Ellen also explains why the repo market is a big deal:

“The repo market allows banks and other financial institutions to borrow and lend to each other, usually overnight. More than $1 trillion in overnight repo transactions collateralized with U.S. government debt occur every day. Banks lacking available deposits frequently go to these markets to fund their loans and finance their trades. … Overnight repos are just an advance of credit, which must be repaid the next day. While $165 billion per month sounds like a lot, repo loans don’t accumulate; the Fed is just making short-term advances, available as needed up to a limit of $165 billion.”

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