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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: yard_man who wrote (51585)12/27/2000 3:02:49 PM
From: pater tenebrarum  Read Replies (4) of 436258
 
i see...a repo is a repurchase agreement, in which the Fed buys government securities held by banks to inject temporary liquidity into the system. you will have noticed that there's always a term attached to a repo, like 28 days, or 2 days or whatever. after the term expires the institutions involved have to buy the securities back from the Fed. a coupon pass by contrast is a permanent liquidity injection.
once the money from these open market desk ops. is deposited with the banks in question, the fractional reserve banking multiplier effect kicks in and transforms a mere billion at the repo stage into an eventual almost 10 billion in new credit sloshing about in the system when everything's said and done. works like this (in simplified form): once deposited, 90% of the amount can be lent out, 10% have to be kept as the fractional reserve. so 900m. of 1bn. lands as a deposit in the next bank, on the account of the borrower. now, again 90% of the 900m. can be lent out, and once deposited at the next bank, the process repeats, until the money has magically multiplied into a huge surge in outstanding credit and liquidity.
it's a modern day form of day-light robbery basically.
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