This was posted to Imgur by a user whose name is less than family-friendly, but (s)he put some good information out there that I wanted to share. If you want to see the original, click here.
I have cleaned up the text a bit for readability and only bowdlerized a few things for family consumption.
I’m not a fan of the current administration, but what they did today isn’t a bad thing and it wasn’t a Wall Street Bailout.
Of the $1.5T available today, $297.55B was loaned out with $125B loaned out as a 1 day contract. I hope this helps simplify some things for you peeps. I know it’s not perfect and I doubt this even makes it out of user sub, but to heck with it. I tried.
$1.5 Trillion Wall Street Injection
I’m seeing a ton of misinformation about what happened today with the Fed “injecting” $1.5T into the market and figured I’d teach a few people about what it actually is. I’ll keep it as simple as I can and know that it is more complicated than I’m making it out to be, I’m just lazy.
Fancy words to know:
Repo – Repurchase agreement
Repurchase agreement – Fancy term for line of credit
Fed – the Federal Reserve
“ThEy COUID hAvE glvEn AmErlcAnS $XXXX InStEaD oF BAILİNG OuT tHe RICH”
“EaT tHe RiCh”
No. Just no.
On average, 2 to 4 TRILLION dollars are traded as Repos EVERY DAY. It’s a short term loan backed by bonds, securities, and other things that have a set value. It’s somewhat similar to borrowing $1,000 on your car that’s paid off and worth $5,000. You get cash immediately, but you will have to pay interest.
You pay less interest the faster you pay it off.
These daily Repos are usually on 1 day contracts.
Ever had a money market account?
Wondered where the interest came from? A lot comes from Repo and Reverse Repo operations. Everyone should have one, it’s free money.
So what happened today?
The Fed saw the stock crashing and how the virus is affecting certain industries, i.e. cruise lines, and said “Welp, these folks are in a bad way… for like, at least a month or two.” So Cheeto-in-Chief and the powers that be opened up a $1.5T line of credit for banks, financial firms, and primary dealers. As I said earlier, these are usually 1 day loans with low interest rates. Longer term loans are available but the interest rates go up with the longer terms
The new $1.5T repo operation has much longer terms with low interest rates.
How does this affect/help the American people?
They are anticipating small businesses struggling in the coming months with quarantines and shutdowns and other things so they want make sure they don’t fail. That small business goes to the bank to get a loan to weather the storm, the bank is then able to draw on the $1.5T and give the small business a low interest rate (and Fed rate cuts) because of the low interest on the $1.5T.
Hate the current administration all you want but this was done to help keep the economy going when this virus gets nasty. Think about Carnival cruise lines. They are doomed for a hot minute but they have thousands of employees depending on their employer that isn’t currently making any money. Carnival needs money for operation costs, insurance, paid sick leave, and debts. With no cash flow, this will be their last hope to make it through as long as they can.
My thanks to this user for making some things clearer for those of us who got “C’s” in Econ 101. I am definitely not a fan of the Orange Screechweasel and his *administration, but what they did here will ultimately benefit many people whose businesses might otherwise have gone down the drain.
The Old Wolf has shared.