Joseph Wang on the Fed’s Impact on Money Markets

Joseph Wang is a former senior trader on the open market desk at the Federal Reserve Bank in New York and the author of the book *Central Banking 101.* He also blogs at fedguy.com and is active on Twitter. Joseph joins Macro Musings to discuss what has happened at the Fed from the operational side, and we consider its implications for money markets. Specifically, Joseph and David discuss recent events from the perspective of the Federal Reserve trading desk, Joseph’s conception of a two-tiered monetary system, continued dollar dominance in global money markets, whether the Fed’s overnight repo facility is truly a temporary facility or trending towards a permanent one, and much more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Joseph, thank you for joining the show.

Joseph Wang: Hey David, thanks for inviting me. I'm a big fan of your show and I'm really excited to be on it.

Beckworth: Well, it's great to have you on. I've been following your articles you've been posting over at the fedguy.com. I highly recommend folks check it out if you are interested in the plumbing of the monetary system and how that interacts with the money markets and you'll see in today's show we're going to get into that. So Joseph has a really great understanding of that. And moreover, Joseph worked on the front lines of this, right? You were at the trading desk from 2016 up until recently. I mean, you were the front line troops for the Federal Reserve System in the money markets. Is that fair?

Wang: That's right. I was there in the morning of the repo spike in 2019 and all throughout the COVID crisis. So it was definitely very much on the front lines.

Beckworth: And so what was it like during those times? Let's go back to September, 2019, for example. I mean, were you there when the repo market froze up and did you have long hours, sleepless nights? What was it like to be someone on that desk during that time?

Recent Events from the Fed Trading Desk

Wang: Yeah, I was actually the first person on the desk at that time. I arrived at 7:00 AM and immediately, which is that's when the repo market opened, immediately I received a call from a dealer telling me something about the repo market reasonably high. It's not very normal. And so I sat down and I logged into my computer to take a look. It could be something serious or it could be just another dealer complaining. For those of you who don't know, the market has basically open lines of communication with all the primary dealers. And just as I was logging in I immediately received another call from a dealer. I picked it up and I was able to hear what he was about to say and then the phone line started ringing again, two more people were calling. The phone was basically lighting up like a Christmas tree.

Wang: You had people calling and saying, "I've been in this market for 20 years and I've never seen anything like this. You guys got to take a look at this." And so for context to people, rates it's like day before about two, a little bit more than 2% and they were doubling. And so that was not normal. A repo market is normally kind of a sleepy market. You can see it move around let's say five, 10 basis points on a day to day but it's not supposed to double. And so that really was a big thing. And when I opened the screens and I saw what they were saying was true, then I knew that something big was happening and I had to escalate it. And as you know, eventually the open market sys came in and we did an operation to try to put some downward pressure on the rates. But that was probably a couple hours later.

Beckworth: Yeah, I remember that incident well. There was news about why is the Fed taking so long to respond? In the morning by 9:00 AM or so you guys intervened. And what's interesting also, I'm glad to have you on the show, is you effectively were doing these temporary repo operations, which is now formalized in the standing repo facility. So you're doing a temporary version of it. And maybe we could even say a trial run of something similar to that. So when we get to that I want to ask you a little bit more about the operational details how the now permanent facility is set up and what you think about that. But you were there so you were on the frontline. So just to flesh the story out a little bit more, and I know maybe you can't share all the details, but what authority do you have? Do you have the authority to go ahead and do the trade or you got to get permission from above? How does it work?

Wang: No. No. So at that point in time the Fed hadn't done any repos since the crisis in 2008, right? So for the Fed to suddenly start intervening again it takes, I think, approval from the very highest level. So at that time, seven o'clock everyone was asleep. And so it takes some time to escalate, get all the important people online prism of the situation. And it's a discussion between the New York Fed and the board of governors as to whether or not they should intervene and the exact level that they should intervene at. So it's see 50, 100 billion and so forth. So it's a discussion. And basically it really has to be proved at the very highest level. And so that takes time. The Fed is a big-

Beckworth: Sure.

Wang: ... large bureaucracy. So eventually they did come in, like you said, around after 9:00 and at that time ... The repo market is a very early market so at that time it ... It did help but it would have been a lot helpful if it was earlier. Most trades in repo are done before let's say nine o'clock.

Beckworth: Okay. And that's why we have the standing repo facility, I guess, for future events like this should they occur. So again, we'll come back to the repo facility, the standing repo facility in a bit. Now you also survived and endured the March 2020 dash for cash, as they say, where the treasury market, the supposedly safest, deepest market in the world came under stress. So you witnessed that as well, correct?

Wang: Yeah. That was a very exciting time on the desk. I hate to say this, but usually money markets is kind of a sleepy place and it only becomes exciting when something big is happening in the markets. We do these calls with the board of governors but we brief them everyday on conditions in the money markets. And if you look at something like LIBOR or Fed funds, usually it's kind of a snooze fest and no one really calls in. No one really pays attention. But I remember that time in March you had so many people calling in to hear a briefing that the system literally couldn't handle it.

Beckworth: Wow.

Wang: And that's an overflow. And so you had people from, you had Fed presidents, you have members of the board of governors all calling in. So it was a very exciting time. And you got to, I guess, see the Fed in action in real time. So it was really, from my perspective, it was a really interesting experience.

Beckworth: So you're involved in the money markets directly. You execute trades. Is that fair to say?

Wang: Yes, that's right.

Beckworth: Once you got the approval from above you execute the trades. And you mentioned already repo, you're involved in the repo transactions. I'm curious about the dollar swap lines and all the other facilities that were set up. Were you also a part of that?

Wang: So the desk does that, but I did not participate. Those are different teams. So we have teams at international markets who operate the fixed swap lines, we have people who do the QE purchases in treasuries and MBS. But for me I was on the money markets desk and I studied the financial system, banks and money markets.

Beckworth: Yeah. And that's what's reflected in your writing and it's very clear you have a deep understanding of the US money markets and very much informed by experience. You had to learn through the school of hard knocks firsthand how these things work. So a lot of great wisdom you carry into your writing. So very fascinating. Maybe we'll come back to some of these experiences that you lived firsthand as we walk through these topics. But you have a series of posts I want to talk with you about, and I encourage listeners take a look at this really fun stuff at fedguy.com. And I want to start with what's been happening to the Federal Reserve over the past year, a little over a year actually now, but what's happened since March 2020. And you could maybe argue all the way back to September 2019 things were changing then as well but really things blew up in March 2020 since then.

Beckworth: So if we just look at the size of the Fed's balance sheet, total assets went from 4.1 trillion to 8.3 trillion. So more than double the size of the Fed's balance sheet. We look at treasury's 2.4 trillion to 5.3 trillion. So Fed's been a big purchaser of treasuries, reserves have gone from about a one and a half trillion to four trillion. It's a lot of reserves in the banking system. And then everyone knows that every month the Fed is purchasing $120 billion worth of assets, which means $120 billion worth of reserves being pushed into the system again. And we'll get to some of your posts where you talk about the pressures this is creating and how they've had to turn the overnight reverse repurchase facility into something that wasn't originally meant to be a more permanent than temporary facility it seems like at this point. But they've been very busy and now there's talk of tapering coming on. Maybe they'll dial this down a bit. We are recording this August 25th.

Beckworth: Just in a few days chair Powell will be giving a speech at Jackson Hole, and maybe he'll announce tapering, maybe he won't. There's some debate about that. But we think maybe by the September FOMC meeting maybe they'll make some announcement then. I think the show will come out by then. So we're speculating at this point. But a lot has been happening and it's, again, created these side effects, maybe unintended effects in money markets. And I want to begin our conversation with the post you titled “QE Zombifies Money Markets.” So QE is turning money markets into a zombie market. And you begin with the two-tiered money system. So maybe start with that. What do you mean by a two-tiered money system?

A Two-Tiered Monetary System

Wang: Yeah. So one of the key things in understanding our monetary system is to realize we actually have a two tier monetary system. We have one tier which is reserves, which is basically money held by banks; and another tier, bank deposits, which is the money held by non-banks. So when you and me talk about having money, what we're really thinking about is bank deposits. It's the stuff that we have in our checking account. Now, for a bank though money are reserves, and reserves are created by the Fed when they purchase an asset or maybe make a loan. And in a similar way, bank deposits are created by commercial banks when they either make a loan or purchase an asset. And these two tiers of money markets are ... These two types of money are connected to the commercial banks who own reserves and owe bank deposits.

Wang: So one of the things that QE does, and QE is intended to put downward pressure on longer-term yields. But another way you can look at QE is that when the Fed does $1 of QE purchases, because the Fed transacts with reserves, it creates a reserve to make that purchase. But that reserve at the end of the day ends up on the commercial bank's balance sheet as an asset and it's balanced by bank deposit liability. So $1 QE actually creates $2 of money window of reserves, and $1 of bank deposits. Now, so when you're doing like a trillion dollars of QE you're actually creating $2 trillion of money. Now, the interaction between this two-tiered system and Basel III creates a dynamic that essentially zombifies money markets. So Basel III is a set of regulations that came out after they did the GFC.

One of the key things in understanding our monetary system is to realize we actually have a two tier monetary system. We have one tier which is reserves, which is basically money held by banks; and another tier, bank deposits, which is the money held by non-banks...the interaction between this two-tiered system and Basel III creates a dynamic that essentially zombifies money markets.

Wang: The GFC was widely viewed as a banking crisis or a run on the entire financial sector. And in order to make the bank safer the regulators came up with a set of regulations known as Basel III, which essentially limited the size and composition of a bank's balance sheet. There was something called an SLR, supplementary leverage ratio that limited the size of a bank's balance sheet. And you also had regulations like capital requirements and liquidity coverage requirements that limited the composition of the assets and liabilities. So one of the regulations, the LCR, mandates that banks hold a very large HQLA portfolio, a portfolio of high quality liquid assets. This portfolio was intended so that the bank could have enough liquidity to cover any one situation. And there's a set of assets so that banks can hold a qualifier, and among those are treasuries and reserves. So post-Basel III banks are required to have very large HQLA portfolios that are essentially kind of like money market fund assets. So they can hold reverse repo backed by treasuries, they can hold reserves, they can hold treasuries and they can hold slightly lower quality HQLA, it's agency MBS but in practice it tends to be the highest quality level one HQLA assets.

Wang: So what happens is that when you do QE and you really expand level of reserves in the system and the level of bank deposits, then these two portfolios, the HQLA portfolios and the portfolios of money held by non-banks overlap the most in the money markets. So when the Fed does QE the non-bank sector has a lot more money, right? For every $2 trillion of QE there's roughly about $2 trillion in bank deposits. Not exactly, but usually. And that money can be used to re-balance the portfolios. Maybe they buy more corporate bonds, maybe they buy more equities. And that's part of the mechanism of the portfolio re-balancing impact of QE. But the banks gets stuck with a trillion dollars of reserves as well. And because of Basel III banks are very limited in the assets that they hold, but the only segment of the market where the commercial banks and the non-banks overlap is in the money market space. So that is why QE has a very large impact on money market rates. And essentially when you have a large QE money market rates all become pushed to lower bound as we've seen not just in America but throughout the world, in Japan or Portugal and so forth. So banks which have HQLA portfolio basically in a way adjoin government money market fund with hurdle rate of IOR, which right now is 15 basis points.

When you do QE and you really expand level of reserves in the system and the level of bank deposits, then these two portfolios, the HQLA portfolios and the portfolios of money held by non-banks overlap the most in the money markets.

Wang: Whenever money market rates poke up above IOR banks become lending in large scale in the money markets. And you saw that in 2018 to 2019 when repo rates rose above IOR. You saw JP Morgan in particular lending hundreds of billions of dollars into the money markets. And at the same time you have the surge in bank deposits and people don't really ... If you have a lot of bank deposits usually people put them somewhere safe, especially if you have more than the FDS insurance limits. So that causes a surge in money market finances. The money market finances also invest in the same assets as HQLA assets, except that they have a hurdle rate of the ORP four. So what you end up is a situation where above IOR you have trillions of dollars of the engaged create portfolios looking to invest.

Wang: And below IOR, oh sorry, above ORP you have trillions of dollars of money market funds looking to invest. And so inevitably that leads to money market rates floored at the lower bound. The converse of that of course is that when you do QT, when you start drawing out, you start reversing QE, that the impact is strongest in the money markets because for every $1 of QB you take out you're taking out $1 of reserves and $1 bank deposits. And when the Marshall bank deposit is in a money market fund you're essentially drawing $2 from the money markets. And so that's why what you saw at the outcome of QT, the biggest impact wasn't in let's say long-winded rates but what happened was in the overnight money markets.

Beckworth: Yeah, that's fascinating. So the two-tiered money systems, so banks have access to reserves and only banks do themselves. And then all the non-banks have, you and me have access to deposit, my bank created money. And what I think I heard you say is that since QE is creating so much of both and banks are limited in what they can ... Banks go into the money market space but so are a lot of the deposit dollars. So there's demand for money market assets from both sectors. Is that right? And so that's helping push down the yields.

Wang: Yeah. Yeah. Exactly right. So pre-crisis reserves are mostly used to make payments, but post-crisis and postmaster three, the level of reserves is so high and the demand for each goal is so high that reserve stakes are all beyond just suddenly payments. They are basically a pool of capital that is allocated into investments. And that can only be-

Beckworth: Interesting.

Wang: ... allocated to money market fund investments because of the HQLA regulations. And so you create a huge pool of assets held by banks that can only buy money market fund assets. And then at the flip side you also create a whole bunch of non-banks who take your deposits and invest them into money market funds who also didn't have money market fund assets.

Beckworth: That's interesting. So that puts a new spin on the other name that's often given for reserves. Like if you go to Canada they call them settlement balances, right? What you just said is, well, they're really not settlement balances anymore. They're just an asset they're trying to allocate across the high quality liquid assets. They are settlement balances between banks but they're playing this much bigger role in QE. You have another post that tells a similar story, “The Gravitational Pull of Zero,” how these G-SIB, these big systematically important banks because of all these regulations they're going into money markets. Now walk us through the story that I think ultimately will lead us to the overnight reverse repurchase facility. But as this push for funds and money markets grows, again, it's coming ultimately from QE. QE is creating this pressure, it's going through banks, it's going through the non-bank and the demand for money markets. What are the mechanics of actually pushing down interest rates? And maybe bring in money market funds and then you can weave this, I guess, into the overnight reverse repo facility as well.

Money Markets and the “Gravitational Pull of Zero”

Wang: Yeah. So it's the connection between the overnight markets and the longer day markets. One of the mechanisms that connect them is bank HQLA portfolios that I've been talking about since there are large pools of capital that can only buy basically treasuries reserves or reverse repo. So in general it's many things drive longer day to day rates, right? But one mechanism is these HQLA portfolios. And what happens is that you have a captive pool of capital here held by banks that can only buy so many assets. And when they see that reserves are yielding let's say 15 basis points, reverse repo five basis points, well, in the past when repo was higher than IOR you will see them allocating reserves to reverse repo. Now that reverse repo is lower than IOR we don't really do that anymore. But what is higher than IOR that they can buy are treasuries and CMBS. So one of the things that you see as a consequence of these just massive QE in very low levels of IOR is a shift in some decent portfolios towards longer daily treasuries. One of the ways you can clearly see this is by looking at the regulatory filings. Every quarter the G-SIB banks file their regulatory filings and they show the level of treasuries and agency MBS holds.

Wang: And over the past year you've seen a very significant shift in how they [G-SIB’s] manage those HQLA portfolios. In the past commercial banks usually don't buy treasuries, longer day treasuries. They usually stay probably in the two to five year segment and they don't have very many treasuries to begin with because they usually have better investment options. But you've seen that the G-SIBs, as a whole, are buying a lot more treasuries and agency MBS, and Bank of America in particular over the past year I think they've increased their portfolio by about $400 billion. So not all G-SIBs are behaving this way, but some are. And you can see that downward pressure, see that chase for yield pushing down treasury yields because it forces them to go further out into curve to get some more return. And the technical way that they're implementing this, the Bank of America at least, and they talk about this in their earnings call, is that they see they have a lot of cash and so they're buying treasuries but they hedge the interest rate risk. And so that protects them a little bit in case there are changes in the interest rates. But that's another way that these HQLA portfolios combined with Basel III and massive QE can eventually actually endure some downward pressure along the rates curve. 

You've seen that the G-SIBs, as a whole, are buying a lot more treasuries and agency MBS, and Bank of America in particular over the past year I think they've increased their portfolio by about $400 billion. So not all G-SIBs are behaving this way, but some are. And you can see that downward pressure, see that chase for yield pushing down treasury yields because it forces them to go further out into curve to get some more return.

Beckworth: So you would say at least some of the sustained low values and say the ten-year treasury yield, at least some of it can be traced back to this story where were these G-SIBs and other investors are crawling gradually marginally up the yield curve and just through arbitrage that is lowering the entire term structure?

Wang: Yeah. It's definitely a part of the story. You can see that very clear in the regulatory filings. But the thing is you have these investors who are constrained in what they can buy. So even though we might look at let's say a 1.2% tenure below the rate of inflation is unattractive, if your constraints are such that you can buy that or you can have five, 15 basis points at IOR, then maybe that's more appealing. But it does vary though. So if you look at, for example, JP Morgan on their earnings call and under regulatory filings you don't see them doing this as much. They want higher rates before they start doing this. But eventually they'll probably have to buy short deals as well though. So this mechanism does kind of put downward pressure on the longer deals. And maybe that's one of the mechanisms that QE is supposed to work.

Beckworth: So Joseph, this is all very fascinating. And one of the points you mentioned about, I believe it was the Bank of America that purchased $400 billion worth of securities, treasuries and agencies. Is that correct?

Wang: Yeah. That's what they show in their regulatory filings.

Beckworth: Yeah. And that's recently, right? That's within what?

Wang: Over the past year.

Beckworth: Over the past year. Which is interesting because I've had these conversations with people, who's buying treasuries now? Because if you look at the foreign purchases of treasuries they've slowed down. Now, I saw a tweet just the other day that they're picking back up in Q2 but so they fell down, foreign purchases fell down now so more domestic purchasers and particularly these big banks are buying them up. So it's interesting. And again, it flushes out the story that you're telling one reason why yields continue to remain low on treasury notes and bonds is because of this QE, this indirect story. This story, as we mentioned earlier, isn't the traditional story but one that is definitely working to keep it yields low.

Wang: It's definitely a new development. Banks historically don't really hold that many treasuries and definitely not very far out of the curve, but that's change that's been happening over the past year.

Beckworth: So what would it take then to reverse that, to have overnight money markets go up and other assets then, so they would start pulling out longer treasures into shorter term ones, you'd need something like that to occur.

Wang: Yeah. Well, if you think of this as a portfolio re-balancing story for the HQLA portfolios of commercial banks and if you raised the overnight rate there'd be less of an interest. The trade-off wouldn't be as stark so they might move a little bit back towards the night space.

Beckworth: Yeah. So I'm going to step back and make a meta point here if I can. So what's fascinating, I guess, Joseph, is that this is happening and again the Fed is contributing to it. The story here is all this liquidity is going in and it's driving yields down short and increasingly up the longer end of the yield curve. But here's I guess the big question or what's puzzling or maybe fascinating about this, is yields are going down. So the cost of funding or borrowing, depending on where you are in the economy, they're dropping, dropping, dropping. Now, if there were a huge productivity boom, and maybe we're in the midst of it now, a big surge in productivity gains such that the return on capital began to surge, you could think, man, hey, I can borrow really cheaply, borrow short or even longer borrow and then invest in the real economy.

Beckworth: Best in America Inc, right? There's a nice spread there between the return on capital. And at some point if this persisted you would begin to see inflation takeoff, begin to see the real economy. We see some of that. I think we can debate whether the inflation has more supply side driven bottlenecks due to demand shocks. But the fact, I guess what I'm trying to say, the fact that rates are going down so low and we don't see really, really high inflation tells me that there's something else to this story. Yeah, the Fed is pushing rates low but there's maybe a vacuum there. The return on the real economy may not be what it was to get those rates back up. Ultimately the Fed can't force rates higher without causing a recession if there's no support in the real economy for that. Fair?

Wang: Yeah. Well, I think inflation is where you look when you mentioned low rates and why people ... People are actually borrowing a lot because those rates are low, but they're just not investing into the things that would cause a real inflation. If you look at, for example, corporations, corporate bond issuance, at all time high. It has been growing quite steadily. And it seems like they take that money and they buy back stock, which makes stock prices higher. But so that is, I think, a form of inflation as well.

Beckworth: Yeah. I guess my question is why aren't they investing those funds in like new plants, new physical capital, right? It must be because the return isn't there to do it relative to what they're getting from pleasing their shareholders. There's something missing. I get the standard story would be, and again, this maybe gets down into what your theory of interest rates are, what ultimately drives interest rates. But if the real return in the economy is going up, up, up, up, and rates are kept low and sustained low, then at some point you see imbalances emerge and you're saying, well, maybe the imbalances are emerging in asset prices. I guess maybe what I'm hearing you say. And I guess what I'm saying is I would like to see more inflation takeoff, the overheating of the economy.

Beckworth: Now, again, some might say, "Well, it's right in front of you, Beckworth. Look at the inflation numbers." But still those to me are, they're high but they're not hot and they're not growing at say double digit pace. The outlook seems to be like inflation is going to be coming down in the future. So I agree that there's this downward pull of yields and the Fed has a part to play in it, but is it only the Fed, I guess, is my question. Or is the real economy not doing its part to get the fundamentals up and running such that they would pull rates up and pull Fed policy to higher levels of interest rate.

Wang: Oh, I see.

Beckworth: And here's another way of looking at this. The Fed's doing QE, right? And it will dial back QE as the recovery takes off, right? That's the hope. And based on what you've just outlined QT, quantitative tightening, should reverse this downward. But the fact that the Fed hasn't done it yet, it's a little concerned, there's something missing from the real economy I guess that's driving. And I guess you look around the world you see low yields everywhere. This has been not a new phenomenon, the safe asset shortage story. But the story you're telling, which I think is important flushes the south that the central banks have a big part to play in that, in the mechanisms of getting rates down.

Wang: I think you're right. It does depend on the theory of interest rates. If you think that the bond market, for example, is a reflection of let's say a lot of people having a view on the productivity and things like that and that forms prices, and I think that'd be right, but prices, many things from prices, if you look at let's say EMC, EMC issues more shares than they sell tickets and yet it goes higher. And you can say the same thing about Tesla. And if you apply the theory of let's say more fundamental evaluation, that wouldn't make sense. And I would just think that, well, is the bond market really that different? Once upon a time when you had something let's say valuable into investing in the 80s and 90s, they were playing a similar fundamental view as to what drives asset prices. But if you follow that view you would be very wrong and things that were cheap became cheaper and things that were expensive became more expensive. And when you switch to the bond market, I agree that there's a lot of people who look at things and put their view of productivity inflation into bond prices. But fundamentally it's just another financial asset and it goes up because people buy it.

Wang: And people buy bonds for many different reasons. And you can have people like the Fed buying 180 billion a month because that's their mandate, and you can have people like let's say foreign reserve managers buying it because they need to have a rainy day fund. You have banks buying it because it's better than IOR. So it's hard to, I think, look at bond prices and infer fundamental things about the economy. I know that's probably theoretically how it's supposed to work, but if you look at the stock market obviously that's not how it works. And maybe the bond market has some elements of that as well. And another way you can look at this is that if you look at actually the flows of what's in the bond market, you have huge flows in the bond market. And part of that has to do with our aging population, right? So if we have more retirees then they're going to put their money in more conservative assets. Another way you can look at this is if you think about what happened in the past year basically the Treasury printed and gave away literally trillions of dollars to the people, right? That was funded by the Fed. And you can see this in M2 as well. The government gave a lot of people a lot of money. And that money flows into cars, it flows it to stocks, it flows into the houses, but it also flows into the bond market as well. So, there are mechanical things that drive bond prices that are in addition to, let's say, fundamental views on productivity and inflation. It's hard to say which is more important. Like I mentioned before, once upon a time in the 80s and 90s if you were a value investor you did very well, in the past 20 years not so much.

What happened in the past year basically the Treasury printed and gave away literally trillions of dollars to the people...and that money flows into cars, it flows it to stocks, it flows into the houses, but it also flows into the bond market as well. So, there are mechanical things that drive bond prices that are in addition to, let's say, fundamental views on productivity and inflation. It's hard to say which is more important.

Beckworth: Yeah. It is hard to make sense of stock prices right now using fundamental theories and stuff. I guess I'll leave it at this, if the mechanism is more important, if the Fed can just push yields down to zero, let's say the Fed keeps this up and lets say the entire yield curve goes to 0%, just for the sake of argument. Imagine the Fed keeps it up no matter what. And if we don't see inflation take off, if we don't see all these things that I'm saying that should be there, then there's a free lunch. The financing costs go down, down, down. The government can finance instead... Why not go down to negative, right? There's going to be a free lunch there. At some point wealth prices go up so much.

Beckworth: There's a wealth effect that kicks in. At some point people will start spending. You keep sending cheques the household at some point they'll be satiated with money balances and they'll start buying more real goods. Otherwise there's just this as free lunch sitting there. But I agree that the mechanism is very important. And I guess the way I reconcile this, because really what we're dancing around here is, as you mentioned, the theory of interest rates, do you have a savings investment view of desired savings, desired investment view of interest rates versus a money market view of interest rates being determined solely there. And I think the two can interact, but I think at the end of the day what matters is what the central bank, what the body politic wants. If they want price stability, then that's going to, I think, connect the two theories. But let's move on because you've got plenty of other interesting stuff we want to get to. So let's move on to the overnight reverse repo facility. And you talk about that, you have a post called “RRP At The ZLB.” Very cleverly titled by the way, I like that.

Wang: Thank you.

Beckworth: Three letters on both of those terms. And as I mentioned, we're over a trillion, last I checked $1.1 trillion. And in my understanding of this, Joseph, is this facility originally supposed to be a temporary one, very small use, the caps real low, but now the caps have been enlarged and the counterparty list is growing or new counterparties have been added to it. So it very much feels like it's a more of a permanent growing facility. It might be used on a more regular basis. So I like to hear your sense of it, especially as a former Fed insider, and then also what you think is going on there.

Overnight Repo Facility

Wang: Absolutely. No, it's definitely going to be here. It's a necessary tool to control interest rates. I mean, without the ORP over there dollar short rates would definitely be a negative. So what's basically happening right now is you can think of the RP as basically a way for non-banks to place deposits at the Fed. So big picture, Fed is doing a lot of QE, right?

Beckworth: Yeah.

Wang: And that is creating a lot of money. Now, the thing is, going back to restriction under Basel, there's a leverage ratio that restricts just how, well, not restricts, it makes it costly for banks to have very large balance sheets. And so for you and me, we can basically go to our local bank and put in as much money as we want and we never get turned down. But when you have a lot of money sometimes banks don't actually want to accept your deposits because one it's costly for them from a leverage ratio perspective on a Basel III, and two, depending on the type of deposits you're at that also incur some extra costs. If you are, for example, an institutional investor and your deposit is actually more costly under Basel III than retail depositor. And so because it's costly for banks to hold all this money what they're doing is that they're pushing it out into a money market fund. So a big bank would basically call up some of their clients and say, hey, you're a great client and have you heard of this great product called the money market fund that we have? So can you put your money there? And so as banks push out the QE created deposits into money market funds, money market funds then get stuck with a lot of money. Right now they have $4.5 trillion and-

Beckworth: Wow.

Wang: ... they need to buy something. And what they're finding is that there's actually not a lot of things to buy. So what they end up doing is basically just investing in the ORP facility. Now, one note of course is that this again goes to our two-tiered monetary system where when the money funds participate in the own ORP that decreases the reserve balances in the banking system as the bank settle that payment with the Fed on behalf of the money market funds. So in that sense it's draining liquidity out of the banking system and is giving banks more room under the regulations. And so things like that. But from the non-bank perspective, the people who hold the liquidity, there really is no difference. Basically instead of having a deposit at a bank they have a deposit at a Fed that's structured in the form of a reverse repo agreement.

Because it's costly for banks to hold all this money what they're doing is that they're pushing it out into a money market fund...as banks push out the QE created deposits into money market funds, money market funds then get stuck with a lot of money. Right now they have $4.5 trillion and they need to buy something. And what they're finding is that there's actually not a lot of things to buy. So what they end up doing is basically just investing in the ORP facility.

Wang: So what you're seeing there in the ORP is just a consequence of large-scale QE. It's one of the side effects of QE is just having this enormous quantity of money and the ORP makes that more variable for the banks. And of course it puts a floor on dollar rates in a sense. It's not a very firm floor. The ORP has never been a very firm floor on dollar rates. What it does is puts a floor on tri-party repo, which is a very big part of the US money markets. But the truth is the dollar system is a global system. You have people using dollars throughout the world and you have people who need to put their dollars somewhere even when the US markets are closed. And so the ORP is never going to be a floor for US dollar rates but it's a good enough floor that you can prevent a lot of the money markets from dropping to zero at the moment.

Beckworth: So what you're saying is it's firming up the lower end of the Fed's target.

Wang: Exactly. Yes.

Beckworth: Without it we would be outside that target. I know the past few years we were going above target a few times at the end of the month, September, 2019 we bounced above. And this is the case where we were actually drifting below had the Fed not made this more actively open and used. Now, you mentioned two ways of looking at this growth, this surge, this 1.1 trillion. And I have a colleague, I think you've met Chris Russo, he also used to work at the New York Fed-

Wang: Yes.

Beckworth: ... on the market desk. And he's forecast, he thinks it could get as high as 2 trillion, unless the Fed begins to quickly dial down. But whatever it may end up at it's huge and I like the way you ... There's two ways of looking at it. I liked the way you frame this. If you're a bank, from a bank's perspective you can think of the Fed as the Fed is injecting reserves into the system, they're also pulling reserves out. So they're taking the pressure off bank balance sheets that way. So on one hand the Feds put in, the other hand it's pulling out. But from a non-bank perspective you're just swapping the form of your assets. So it hasn't changed anything for the non-bank sector. And particularly the zero lower bound. This is the key, I think key qualifier. At the zero lower bound these are almost perfect substitutes, whether you hold a treasury or cash. So they're just-

Wang: You're getting 0% on bank deposits.

Beckworth: Yeah. So you're just swapping one government liability for another government liability, which is something I think many people also miss when they get worked up about the Fed and QE. I do think there are problems I'm going to speak to in a minute, but I think it is important to note the reserves now pay an interest rate on them, as do treasury so you're swapping. What you're really doing is changing the debt maturity structure. But I do want to step back and do provide a critique here, I guess, and I want to see how you feel about this. But you mentioned, for example, that there overnight reverse repo facility there's more counterparties, more people have access to it. You mentioned it's a way for non-banks to access the Fed's balance sheet. Another way of looking at this, right?

Wang: Yes.

Beckworth: They can have deposits. So you can think of the Fed slowly opening up this balance sheet. And as you know there's huge push right now to have Fed accounts in the extreme rate like ... That would be the extreme case where you open the Fed's balance sheet up to everybody. But this is a step in that direction in that it's gone beyond just ... Banks used to be the only ones who have access. Now there's GOCs, now there's these money market funds. So you're growing the number of people who have access to the Fed's balance sheet. And if you approach it from that perspective and then you look how big, again, this is facilities usages, is it fair to say that the Fed is becoming the money market or it's becoming the dominant counterparty in the money market to one side of every transaction? And should we ... Is that okay or should we be worried about the Fed being so dominant? This goes back to what you're saying about the zombie features in the money market. Is this something we should be thinking about long-term? Is this the optimal strategy? What are your thoughts there?

Fed Dominance in the Money Market

Wang: Yeah, you're right. I think the Fed is becoming an increasingly dominant player in the money markets, not just from the borrowing side but also increasingly opening up, say, the standing repo facility to other counterparties. I think that's probably a necessary thing if they want to control short rates. The thing is the US dollar system is basically ... It's a very large capital markets component to it and it's a very global market, right? So without more access to the Fed as a place to put liquidity, it's very hard to control dollar rates. Right now, treasury bills are below the RFP floor, right? So, you have people who don't have access to the US repo facility who have to store their dollars somewhere, not just here, but throughout the world as well. If you look at the BIS data you have about say $10 trillion in US dollar department, just our liabilities booked in foreign banks outside of the U S. And so, without greater access I think to the Fed's balance sheet it's very difficult to have good control over the dollar rates. Simply because just relying on intermediaries is not I think ... It works well. Look at where the five basis point floor is at.

If you look at the BIS data you have about say $10 trillion in US dollar department, just our liabilities booked in foreign banks outside of the U S. And so, without greater access I think to the Fed's balance sheet it's very difficult to have good control over the dollar rates.

Wang: A lot of rates are above around five basis points but not perfectly well. And the more you do QE, the more quantity there is to control. I think that it makes it increasingly more difficult to police that forward. And you can have situations like right now where you have the debt ceiling where the level of bills is declining. And so that is also pushing downward pressure on dollar rates. So if you had more access to the Fed's balance sheet, say CBDC or something like that, you really wouldn't have to worry about rate control as much.

Beckworth: So that that's interesting. You raised this observation and I think the implication of what you're saying is given the growth of global shadow dollar funding markets around the world, to the extent that Fed wants to control what's happening in those markets, it's almost forced to open this balance sheet more and more given there's these global dollar funding markets around the world. So in other words, QE is playing a role. As you mentioned earlier, QE is playing a role, is a reason why we need to open up the Fed's balance sheet, but also the growth of global dollar funding markets is another reason. Is that right, that the Fed's being pressured or has to open if it wants to have control?

Wang: I don't know if the option markets are growing as much as they used to, but that is definitely part of the reason. You have all these people who use dollars, who affect dollar interest rates but are not within the purview of the Fed and cannot directly access the Fed. And so broadening access helps control dollar rates.

Beckworth: Yeah. So dollar dominance, which is great for the US in terms of cheap financing and the senior rich flows that come from this dollar dominance privilege. And it comes into private sector as well as the government, but in order to maintain it, I guess what I'm hearing is in order to maintain this exorbitant privilege, in order to maintain dollar dominance, the Fed's going to have to open up its balance sheet more. And it has opened up its balance sheet more, which is an interesting thought for me to chew on.

Wang: Just on the same way, just on the up ... For example, we have the FX swap facilities that basically put a ceiling on dollar rates, right? That's the counterpart that prevents dollar rates from going too high throughout the world. We have soft lines with TCB … on major dollar markets, but you don't have any counterpart on the lower bound. So you can prevent. The Fed has, I guess, enough connections into the financial system internationally to put a ceiling on short-term dollar rates. But the flip side, the lower bound, the ORP is not sufficient to do that. So if they really wanted to have a floor on dollar rates then I think they'd probably have to open up the balance sheet more.

Beckworth: Yeah. You just mentioned another group of entities that have access to the Fed's balance sheet, foreign central banks. Now many of them have already had access for a long time, we can go back to the 1960s, but during this past year in March when you were on the desk, just ... So the existing list was Bank of Canada, Bank of England, Bank of Japan, the ECB and the Swiss National Bank, and then nine other banks were added. So there's, again, going to this broader point more and more entities or counterparties are getting access to the Fed's balance sheet, whether it's money markets. We're going to talk about the repo facility in a minute that right now it's primary dealers but they're going to open it up to the banks. Banks already have access via discount window. But you have all these openings, I guess, on the Fed's balance sheet, and the big question is why? What's the big reason for the growing opening up of the Fed's balance sheet? I think what I hear you saying is in order to control rates on dollar markets if the Fed wants to maintain rates it has to have some influence through out all these different entities that are actively involved in dollar money markets around the world and at home.

Wang: That's exactly right, David. As you mentioned, the dollar is the global currency. So the thing about ... So just to step back, as I mentioned earlier, you have say $10 trillion of liabilities in foreign banks. And so one thing about the offshorte dollar system compared to the onshore is that the composition of the liabilities is a bit different. The quality of the liabilities in the offshore system is not as good as an onshore system. Onshore a lot of people have retail deposits, which no matter what happens people don't really withdraw. We have FDIC insurance. But offshore though that's not necessarily the case. And so a lot of the offshore dollar system relies upon wholesale funding that can disappear very quickly in the time of crisis. And so what happens is that in the time of a crisis that funding disappears in the offshore bid for funding.

Wang: And that drives up interest rates, dollar interest rates. That spills over to the onshore market. So it's basically impossible for the Fed to control short-term rates without also having a footprint in the offshore system. And that is, as you mentioned, the FX Swap facility, that mechanism. But it doesn't cover everyone but it covers an enormous amount. Last March, I think maybe last April you saw the effects FX Swap peak at about around 450 billion. So it's doing a lot of work. There's an enormous amount of demand for dollars bought.

Beckworth: Yeah. So in other words the Fed can't just cover its eyes and only look at the US and that's its only focus. It has to be aware of what's going on abroad. And just to make this story concrete, so in March the dash for cash, people were literally running to get reserves to get money and dollar deposits as well and get out of treasuries. And that included foreigners, right? It included foreign banks overseas. And we saw what happened. Before the Fed stepped in we saw what was ... Treasury yields were spiking. They actually went up. So if let's say the Fed hadn't opened up those dollar swap lines. So let's say the Fed hadn't set up these ... Even the money market facilities, commercial paper facilities, those have some kind of indirect influence on these foreign markets as well.

Beckworth: So if the Fed hadn't done all that we would have seen probably continued spikes in money market interest rates being felt here at home, even if pressure is starting from abroad. So your point is well taken that given the global nature of dollar money markets the Fed has to be mindful of what's happening and therefore keep its balance sheet open to counterparties around the world, which again, moves the Fed more and more in the direction of being the dominant money market participant. Okay. Joseph let's move to the standing repo facility. So this is something that's been near and dear to my heart as someone who has been, and I'm not sure if you're familiar, if you've got this from listening to podcasts, but I'm someone who likes symmetric corridor operating systems. So like the Bank of Canada. So I like the more lean footprint. And the Fed had a corridor system.

Beckworth: They had an asymmetric corridor system before 2008. It wasn't perfectly top and bottom. It was by default zero at the bottom. So that wasn't ideal either but it was more in the direction that I wanted it to go. But in the event, in order to get back to that, and I don't know that the Fed ever will, the Feds made a decision to stick with the floor system, ample reserves system and that may be the way it is. But if there's ever any hope of getting back there, I think one piece of the puzzle is getting a standing repo facility. Now you kind of shoot down this point I'm about to make, but one of the things that standing repo facility does is it makes it easier to view treasuries as more liquid. It's easier to turn treasuries into reserves quickly, and from regulatory purposes that may mean banks have fewer demand for bank reserves.

Beckworth: And if banks want to hold fewer reserves then the Fed can shrink its balance sheet more and not worry about creating problems like we saw, for example, in September, 2019. So I think it's an important piece of the puzzle if we want to get there. Now, I know that's not reason the Sed has brought it online. They're not thinking about going to a corridor system. I hold no illusions. But nonetheless, that's why it's been near and dear to me is one of the pieces of the puzzle. But let's talk about it. So it was introduced late July. What's interesting, Joseph, is there have been many calls for a standing repo facility as well. People at the Fed have and talking about it, the G20 report came out recently, there was a Brookings task force that called for it, a number of prominent people, I believe Darrell Duffie's called for it. And the way I understand, there's a fee of 25 basis points, a $500 billion cap. Is that all right? Are those numbers right? Okay.

Wang: Yeah.

Beckworth: So it kind of puts a ceiling then on the interest rates at the very top, is that right?

Wang: It puts a ceiling on repo rates.

Beckworth: On repo rates, all right.

Wang: Yes.

Beckworth: At the very top. So here's a question I have about it, and this goes back to you and your experience as actually working on the market desk at the Federal Reserve Bank of New York. And that is, if I go to the website and I look this up, this standing repo facility is only open from 1:30 PM to 1:45 PM, 15 minute window there. Now, it does say, "unless otherwise stated." So I'm thinking back to you back in September when it's seven o'clock in the morning, you're getting the calls, would this facility have helped you then?

Wang: Absolutely. It would have put a ceiling on repo rates back then. Like you said, it is a good ceiling on net repo rates which bleed into other money market rates as well. The 1:30 to 1:45 window, so in the beginning, repo, the Fed was doing this in the morning because that is when most repo was done. There's a good Fed blog post I found on this. So when you're going into the afternoon, not a whole lot of repo is done. The intention of moving the repo facility to that 1:30, 1:45 time slot is to emphasize that it's more of a backstop. So just like moving the rate higher to let's say 25 basis points, which is far above market rates. Moving it later in the day is to emphasize it was backstop. But yeah, it hasn't seen very much use.

Beckworth: So I shouldn't worry about it being in the afternoon even though the panic was in the morning of September, 2019. What you're saying is one that you got to signal it's a backstop. It shouldn't be your first go-to. But the other reply I got to this, I mentioned this on Twitter and I got a bunch of blowback. They were like, "Look David, just the mere presence of it being there, even if it's at 1:30. The repo dealers won't panic as much if they know they can go in the afternoon and go to the window. Is that a reasonable interpretation?

Wang: Yeah, yeah. I think you're exactly right. Sentiment is a really important part of the company market prices. And knowing that whatever happens you can always go to the Fed at 1:30 I think does help sentiment. And if you had, like a mentioned, if you had the repo facility back at September, even if it was in the afternoon you wouldn't have that panic bid for funding because people would know that ultimately you could still go to the Fed. Note that the repo facility is only available to primary dealers and banks and so you still have to rely on that intermediation process. And I think back in September you might have had, let's say, smaller dealers who wouldn't have access to that to begin with. So it helps but it helps a lot.

Beckworth: It moves in the right direction. It's not there yet. So hey, here's a suggestion, why not expand the counterparty lists then the standing repo facility over time?

Wang: I'm guessing they probably will do that. I think that was in the recommendation in the G30 report as well, right? To have a repo facility with a broader counterpart. Well, I think in practice though if you look at the financial system it's very much consolidated, right? So the primary dealers have a very big chunk of everything so it works so well, but to get those cracks you would expand it to the smaller dealers as well. So I think that's a really good idea, David.

Beckworth: Is there any fears though about using that? What's the flip side? So the benefit is there's more stability in money markets. Is the flip side that hedge funds take on more risk, they lever up. Is there any downside to the standing repo facility?

Wang: Some of the things that people worry about maybe it encourages moral hazard because you have this cheap funding that basically doesn't go away. But to counter that I would say that just before September, 2019, that having repo rates spike out of control was not on anyone's radar so wasn't in the press to begin with. And I would also say that whether or not your decision to enter into a trade, it's only in part due to … funding costs or other things that matter as well. And one of the ways you can see this is how repo rates have been floored basically at five basis points for the past year but there hasn't been any growth in repo volume. So people really aren't delivering up. So there's a lot of considerations that go into this, of which funding is one aspect but just one aspect. You can always calibrate that in a way depending on not just your counterparties but with the type of collateral that you accept. Right now if you're just accepting treasuries and other credit risk-free assets I think that risk is mitigated.

Beckworth: All right. So that's a standing repo facility for domestic purposes. The Fed also announced they're going to make the FIMA standing repo facility, the foreign internet ... What does the FIMA stand for? I forget now.

Wang: Foreign international monetary-

Beckworth: Authorities?

Wang: Authorities. Basically the foreign central banks, international organizations.

Beckworth: They're standing repo facilities. So they also introduced that one. So you wrote an interesting post on this and you called it quite humorously the China Repo Facility instead of the FIMA repo facility. So walk us through your story there. What's happening?

Wang: Going back to the global analysis that we mentioned and the FX Swap lines that we mentioned, you understand that there's basically countries have enormous dollar needs and that's usually backstopped by the Fed. But as I mentioned earlier, not everyone has access to the FX Swap facility. There are pockets in the world that have enormous dollar needs and don't have access to the FX Swap facility.  And if you look around the world to see who that is, one country stands out and it's China. Now, data on the dollar liabilities of Chinese things isn't that great but the EBIS observes that it's at least a trillion dollars, which is substantial. And that's mirrored in the treasury holdings of the Chinese sovereign. So, if you don't have access to the Fed backstop what you do as a sovereign is you self-insure, you basically have a rainy day dollar fund.

Wang: And that dollar fund is held in the form of treasuries, which are not credit. It has to be money like assets. Now, it's also hard to see just exactly how many treasuries the Chinese sovereigns holds, but you can piece it together. And it's substantial. It's probably at least a trillion dollars. There's TIC data. There's also China's own disclosure of its fund reserves but it's at least a trillion dollars. And so usually if there's a run on dollars needs from Chinese banks, the sovereign can backstop that, even without the effect FX Swap facility, by selling treasuries and using those proceeds into their banking system. And that works as well as long as the treasury market functions. Now, when the treasury market doesn't function like it did last March, then everything breaks. You can think of treasuries as ... It's like people simply deposit their dollars in treasury securities and expect to withdraw them in the same way that we deposit dollars into a bank and expect to withdrawal them any time that we want. However, if we go to a bank and we can't withdraw those dollars, we panic, right? It's a run on the bank. The same thing happened last March.

There are pockets in the world that have enormous dollar needs and don't have access to the FX Swap facility.  And if you look around the world to see who that is, one country stands out and it's China...the EBIS observes that it's at least a trillion dollars, which is substantial. And that's mirrored in the treasury holdings of the Chinese sovereign. So, if you don't have access to the Fed backstop what you do as a sovereign is you self-insure, you basically have a rainy day dollar fund. And that dollar fund is held in the form of treasuries.

Wang: People held treasuries, wanted to withdraw dollars, realized that they couldn't. And so they started selling everything else they could to get dollars. And again, that has financial stability concerns and also rate concerns, right? When you start borrowing, not just selling your dollar assets, but you start borrowing the market and the Fed, might lose control of short-term rates. And so the FIMA repo facility was first announced temporarily at the end of last March. The FIMA, they hold in custody about $3 trillion in treasuries on behalf of the foreign central banking community so they know if someone is selling a lot of treasuries and if they're a foreign sovereign. So you can infer from that. And I think there are speeches given by New York Fed officials that are to that extent. But part of the reason that the treasury market broke last March was that they were selling by foreign central banks. Now, if you have access to the FX Swap facility, you won't be selling your treasuries to meet your dollar needs. Because when you access the FX Swap facilities what you do as a foreign central bank is you create your foreign currency out of thin air and swap it with a Fed. And that's always much easier than just selling treasuries because you can create foreign currency yourself. And that's costless to you.

Wang: So last March you saw the FX Swap facility participation go up to 450 billion but you saw FIMA report participation hover around zero, which is where it's always been. Maybe 1 billion as a test trade. So knowing that if you have access to FX Swap facility you would never use the FIMA repo facility. If you have a repo facility it's really for people who have dollar needs, don't have FX Swap facility access but have sovereign central treasuries. And there's only one country for that and that's China. And so I think the policy goal there is one, to help protect the treasury market such that if we ever have another scramble for dollars you won't have a lot of people selling at the same time. And that way maybe if you could have the option of repoing your treasuries with the Fed to get dollars you won't sell them outright. And I think that protects the treasury market so that there won't be such a panic.

Beckworth: I think that's important to stress that point, that this facility, even if you want to call it the China repo facility, this facility is about preserving the US treasury market. It's not about helping ... It is helping China, but it's not about lending a favor to China. It's ultimately about preserving the treasury market. And I stress that because I could see how this could easily get politicized, right? You get people who are worried about what's happening in China and then they say, "Why are we helping China with this facility, this repo facility?" And I think that the reply is it's about us. It's about our treasury market. We want to keep this market up and running. Do you want the US government to still be able to pay its bills? Do you want to function? And I think that's the way you got to sell this as this could be a very delicate issue. And I think how you market it and sell it and I think you did a great job doing that.

Wang: Absolutely, David. I would also add that the participation in repo is not public. So you can get, on H4 you can see how much it was. So that helps a lot too, but I'm sure that if Congress wanted to they could get access to who's participating.

Beckworth: Well, Joseph, our time is near an end but since we've been focusing so much on money markets and the important role treasuries play in them, I just want to ask you your thoughts on proposals to reform the treasury market. As you've said many times today, the treasury market blew up in March of last year. And a standard package that you hear from different folks, even multiple sources, G30, that Brooken's task force, Darrell Duffie, many others, is threefold ... And they're slightly different but generally three points. One is to get a standing repo facility, which that's now done. Cross that one off the list. The other two though, is to have increased use of central clearing in the treasury market.

Beckworth: And then the other thing would be to make bank balance sheets have more capacity to absorb treasuries and give out reserves if they need to in a crisis or vice versa. And that would mean permanently removing reserves from the supplemental leverage ratio, the SLR, which the Fed temporarily did and then it is now considering it on a more permanent basis. So what are your thoughts on those other two suggestions? Would they make a big difference and would they have solved the problems in the treasury market in March, 2020?

Wang: I think those two proposals go up to the balance sheet aspect of dealers and banks in general. So one of the concerns last March is that maybe there wasn't enough balance sheet for dealers to make markets. So what happens is that a dealer purchases security altered and then sells it to someone else, right? They need balance sheet to hold that. And when you have central clearing it conserves the amount of money that you need to make payments. And if you have SLR relief then theoretically you could hold more treasuries on your balance sheet. And those two both matter. But looking back at last March I think the New York Fed blog post has a very interesting blog post that dealers that were under SLR back then didn't really behave all that differently from dealers that weren't. So one of the things that happens is when you have volatile markets is that dealers pull back as a prudent risk management, right?

Wang: Because market prices are jumping. It's not necessarily a balance sheet capacity issue or not necessarily a funding issue, but when you have markets moving around you could get caught off guard and you can lose a lot of money. So I think that those two measures of everything proposed in the G30 report helps, but last March was exceptional and there was so much selling. And I think probably it might be like a constraint that would ... We have a growing debt market, but you have a dealer system that's not growing in proportion, there's going to be some kind of mismatch. The pipes just aren't wide enough to do all that intimidation if selling is severe. So I think the firms all help but probably would not have been enough to do anything last March. The Fed had to go and buy a trillion dollars and overspend it for a few weeks, a trillion dollars to treasuries to make everything function again. One of the ways we can broaden in our pipes in addition to those proposals is have more dealers.

Beckworth: But even then you're saying probably not a trillion dollars in a few days.

Wang: Yeah. Yeah.

Beckworth: Yeah. It was so big so quick that maybe nothing would have solved it. It's truly a one in 100 year shock to the system that's so hard.

Wang: We see that a lot in 2018 and stuff, but I think it happens more frequently than we care to admit.

Beckworth: I mean in terms of a pandemic. A pandemic, but once every ... Who knows, it could become a regular too. But your point is the shock is just so unprecedented. It's so big, so large and affected by so much and in such a little bit of time that all of these proposals may not have been enough. Well, thank you, Joseph, so much for coming on the show. Again, listeners check out his blog at fedguy.com and his book Central Banking 101. Joseph, thanks for coming on the show,

Wang: Thanks, David. Delighted to be here.

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