By today’s definitions, the Founding Fathers were far right or even worse.

The situation is indeed very similar to the US. 43% said they didn’t vote Labour because of the leadership according to an Opinium poll. Yet instead of rationally analysing why they lost, the radicals have already started blaming the “racist ignorant working class” for “voting against their own interest”. On both sides of the Atlantic, it’s always someone else’s fault and because voters are not “pure” enough unlike them. These radicals have zero capacity for self-criticism and are a political losing machine.

Mish,

I think that you have this wrong. Whilst Jeremy Corbyn is a bit left, I don’t think that it was that which did for him. It really was Brexit.

At the previous election, he had pledged to carry out Brexit. When it came down to it, he didn’t. As a result, very few people trusted him this time around. He was particularly hammered in the north where working people who would have voted for him and his other policies remembered his Brexit pledge and voted Tory. They were right too, cos it doesn’t matter what you stand for, how can anyone vote for you if you don’t do everything in your power to carry out your electoral pledges?

The LibDems suffered from this same problem when they reneged on an electoral pledge when they went into coalition with the Tories.

Boris got away with it because he rightly calculated that kicking out the remainer Tories would restore his party’s credibility.

This development of not voting for politicians who renege on their manifesto policies is an encouraging development.

If you mean a wake up call for Dems to support brexit ummm….NO. if you mean Dems should become more right wing & pro war ummm….NO. You should check out the comments at Naked Capitalism. Lots of UK posters there. Corbyn lost because he wouldn’t take a stand on brexit and because he projected he didn’t want to be PM and voters pick up on that. Like you said – it was all corbyn.

Sorry for hijacking this thread:

Repo Madness

A very good friend called me and asked if I could explain the ongoing repo situation to him. Admittedly, I too have been a bit confused, just as I was when I first learned about sub-prime. How big is the problem? What’s its source? Is the problem what it seems to be, or is something far larger brewing? Is it a consequence of the Fed letting their account balance roll off? Is it due to regulations? Is something happening offshore? Is it a non-event? I believe it’s an issue we must keep on our radar, so I’m going to try to explain some of it here.

Let’s start with a definition. “Repo” is short for repurchase agreement. A repurchase agreement is essentially a short-term loan. Imagine you are a bank and you have clients who need to make payroll, but you don’t have enough cash on hand to cover the withdrawal. So you pledge a portion of your holdings (typically government securities) via a repurchase agreement with another bank. Bank B loans you the cash, you pledge your collateral, and you pay Bank B back tomorrow with interest. Bank B makes a little more money on the loan, picking up the yield on the government security and the interest you paid them.

There are all sorts of players who enter the repo market to solve various short-term needs. The big banks are the major ones and provide much of the liquidity. So why did rates spike from 2% to 10% in September? Why did the liquidity disappear? The simple answer is that there are not enough lenders willing to lend. The Fed has stepped in to put a Band-Aid on the problem, but the problem remains. They’ve now injected over $320 billion, and some estimate it will be over $500 billion by the month’s end. That’s a big Band-Aid, and there are no signs just yet that they will be able to rip it off.

Let’s get a little deeper into the details of repos. Repos are typically used to raise short-term capital. It’s a short-term loan; you need cash, so you pledge collateral to me and agree to pay me back tomorrow with interest. Some repos can be for 48 hours, but most are overnight. The implicit interest rate on these agreements is known as the repo rate, a proxy for the overnight risk-free rate. Repurchase agreements are generally considered safe investments since most agreements involve U.S. Treasury bonds posted as collateral. Repos are classified as a money market instrument. They are also a common tool of central bank open market operations.

Repurchase agreements can take place between a variety of parties. The Federal Reserve enters into repurchase agreements to regulate the money supply and bank reserves. Individuals normally use these agreements to finance the purchase of debt securities or other investments. Banks may use the liquidity for short-term funding needs.

The primary risk to the lender is counterparty risk, meaning that if Party 1 and Party 2 enter into an agreement and Party 2 defaults, Party 1 loses money. Party 2 may have posted collateral, but that collateral could become worthless if Party 2 goes bust, or if someone Party 2 loaned money to goes bust. Ultimately, if you lend money to your brother and he defaults, you’re screwed. Even though collateral is posted, there may be unknown risks to that collateral.

In these arrangements, a clearing agent or bank conducts the transactions between the buyer and seller to protect the interests of each. It holds the securities and ensures that the seller receives cash at the onset of the agreement and that the buyer transfers funds for the benefit of the seller and delivers the securities at maturation. The primary clearing banks for tri-party repo in the United States are JPMorgan Chase and Bank of New York Mellon.

Like prime rates, repo rates are set by central banks. The repo rate system allows governments to control the money supply within economies by increasing or decreasing available funds. A decrease in repo rates encourages banks to sell securities back to the government in return for cash. This increases the money supply available to the general economy. Conversely, by increasing repo rates, central banks can effectively decrease the money supply by discouraging banks from reselling these securities.

Well, something is wrong. The patient is bleeding. The doctor keeps applying more dressing, but the situation hasn’t improved.

From Bloomberg’s Liz McCormick on December 8, 2019:

Reserves — or cash that banks stash at the Fed — are the easiest asset for banks to tap when they want to quickly move money into repo. And it would’ve been logical for banks to pour cash into repo to get those 10% returns from an overnight loan.
The four banks that dominate the market hold about 25% of the reserves in the U.S. banking system, but 50% of the Treasuries. That mismatch likely slowed the movement of cash into repo, the BIS researchers postulated.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back.
Some analysts have also pointed to a new corner of the market, which has seen immense growth: sponsored repo. This allows banks to transact with counterparties like money-market funds without impacting their balance sheet constraints. The downside is that it’s only available on an overnight basis, and as a result has further concentrated funding risk.
Not only did the spike in the repo rate come as a surprise to the New York Fed, but they also haven’t been able to normalize it as quickly as they thought they could.
Bloomberg Opinion columnist and chief economic adviser at Allianz SE Mohamed A. El-Erian said Monday on Bloomberg TV, “It hasn’t proven to be temporary. It hasn’t proved to be reversible without massive injections of liquidity. Which means that structural issues are playing a role.”
“Temporary” keeps extending! The following chart shows the Fed has provided $322 billion in liquidity support to the repo market since the crisis first spiked in September.

Just what are structural issues? This from fishing friend David Bianco:

In its simplest form, the repo market is a collateralized loan. Post securities (mainly government securities) and get money. Even though the loan is collateralized, no one wants to be stuck with a default. So these loans have a credit component where premiums or over-collateralizations are required by some borrowers or others. This is not always important, but it is when markets get volatile and liquidity issues arise. The Fed views all banks as equal. Everyone that is a designated primary dealer can get the same terms, no questions asked. For now, this is not a problem. The repo market has been medicated into submission by the Fed’s support. But the longer the Fed goes this way, the greater it becomes a potential problem. After three months, the Fed should be discussing a way to return this market back to normal, back to the banks making a credit decision in handing out repo loans. Instead, they are still studying the issue, which means they still don’t understand the problem. They are also getting in deeper and deeper as the private sector seems to be withdrawing.

This market is too important to remain in this state. None of this is a problem now, but should Fed support become more permanent, there will be issues the next time the market undergoes a stressful period. Jim concludes, “The repo market is under control as long as the Fed controls it.”

But can they control it? The BIS noted the European repo market escaped the crisis, but added that it has become fragmented and poses a long-term risk. When banks no longer trust banks, they position to protect what they’ve got. It’s not the lion we see that might get us. It’s the three hiding in the bushes, away from our view.

The bigger picture concerns me: The central banks may be losing control of the economy with their ability to manipulate short-term rates. Rates sit near zero percent and $12 trillion is yielding less than zero in much of the developed world. That number is down from $17 trillion. Near or at zero, nonetheless. And what time bomb may be triggered if rates spike higher? Can the central banks control the economy? A lot of the time, yes. All of the time, no. We sit late stage in one of the greatest central bank experiments of all time. This is now a question of confidence. As Martin Armstrong said in a recent blog, “The biggest danger we face is waking up to the realization that central banks can no longer control the economy. Once that is understood in the market place, the fun and games will begin.”

This is not Quantitative Easing like what we got in QEs 1, 2 and 3. This Fed intervention has zero impact economically, though you could argue that it does, as it is supporting short-term liquidity needs to keep the repo market functioning. I believe this may really be about the Fed trying to prevent short-term rates from rising. If they fail to do that, the issue may spill over into other markets. That would be bad news in a world awash in debt—much of it short-term. If that debt rolls over at higher interest rates, it stresses already stressed government budgets.

I’m not sure we know all of the issues behind the repo crisis, just like I underestimated the size and global scope of the sub-prime issue when it first surfaced. I can tell you my smart friends are battening down the hatches. Keep stepping forward, but do turn your lights on. The party rolls on for now, but have your stop-loss exit triggers firmly in place. Another storm is brewing.