Re: Fed open market operations, reply-comment on Mossler

[Warren Mosler <mosler@xxxxxxxx>]

"ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" wrote:

> Warren Mosler wrote:
>
> > Currently, in the US, the Fed limits it open market 'adds' such that
> > the banks must borrow a few $ at the discount window to meet their reserve
> > requirements.  Because there is a 'stigma' for banks that borrow from the
> > window, banks would rather buy funds from each other than from the Fed.  By
> > keeping the banking system net short (by the bank's calculations) they begin
> > bidding for fed funds from each other at higher and higher spreads over the
> > discount rate until some banks decide to borrow at the window at the lower
> > rate rather than pay the higher rate from another bank.
>
> Or the banks go to the repo market.  The repo market reduces the relevance of
> the discount rate.

Repo within the private sector may move reserves (clearing balances) around
but the net stays the same.  Repo with another private sector agent is not
a substitute for 'getting' reserves from the Fed.

>
>
> > It ususally works out that a given net short position results in a given
> > spread of fed funds over the discount rate.
>
> Warren, vis-a-vis our discussion a while back, you have just laid out the
> logic of an arbitrage paly between the ff rate and the discount rate.
>

?  You had ended by stating that was not what you had meant.  Now you
are back to that point?  Anyway, there still is no such thing the way
you previously introduced it.  And, at the macro level, the above is
not a profitable arbitrage, but more like a game of 'chicken' for the
banking system.

w