Why the Repo Markets Went Crazy (Odd Lots, Bloomberg)

Summary (You can listen to the podcast by clicking here)

• Credit Suisse’s Zoltan Pozsar, one of the leading experts on money markets, speaks on September’s repo market volatility.

• He believes the repo crisis was largely due to Fed’s quantitative tightening and the resulting loss of market liquidity.

• He argues that the post-2008 regulations have encouraged the formation of an unhealthy distribution of reserves across US money markets. An illiquid repo market can have negative effects on businesses, so the Fed’s eventual response was needed.

• The anchors and Pozsar also explore how foreign primary dealers may suffer losses during the such events, and why the Fed should be less ignorant about this part of the market.

• Finally, Pozsar expects more repo volatility in December if the Fed doesn’t act more aggressively or release another round of QE.

Why does this matter? The unprecedented level of unconventional monetary policy since 2008 still lives with us today. The Fed tried to unwind these but has seen unintended consequences in repo markets. At one level, this shows how much we don’t understand which markets are being propped up by central banks. It also suggests that the Fed could restart QE (to save repo markets) even if the economy is not in recession.

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