Odd Lots Zoltan Pozsar and Perry Mehrling On The Historic Crisis Of Financial Market Plumbing
Mar 30, 2020
Zoltan Pozsar, a strategist at Credit Suisse with deep expertise in financial markets, teams up with Perry Mehrling, an international political economy professor at Boston University. They discuss the unprecedented strain on financial market plumbing and the critical role of the Federal Reserve in these turbulent times. Topics include the challenges of the repo market, the necessity for government intervention, and how the Fed's expanding role could reshape the monetary landscape. Their insights shed light on the complexities of today's financial reality.
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Conflicting Early Signals
- Early in the COVID-19 crisis, market participants like Japanese and Hong Kong bank treasurers offered conflicting views on dollar liquidity.
- Some, involved in trade finance, saw decreased dollar demand, while others experienced dollar shortages due to corporate client cash bleeding.
Supply Chain as Payment Chain
- James Sweeney's observation, "the supply chain is a payment chain in reverse," provided a framework for understanding the COVID-19 crisis's impact on financial markets.
- Disruptions cause some entities to have dollar surpluses while others experience deficits, stressing the banking system's clearing role.
Dash for Cash and Fed Intervention
- The recent dash for cash involved liquidating treasury bonds for spendable cash, stressing the dealer system.
- This breakdown prompted the Fed to intervene as a dealer of last resort, stabilizing the dollar funding system's core.