Caitlin Long and Dr. Manmohan Singh: The Real Mechanics of Monetary Policy and the Plumbing of the Financial System

Published on
December 14th, 2020
Duration
65 minutes

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Caitlin Long and Dr. Manmohan Singh: The Real Mechanics of Monetary Policy and the Plumbing of the Financial System

The Interview ·
Featuring Manmohan Singh and Caitlin Long

Published on: December 14th, 2020 • Duration: 65 minutes

If you are one of the few who have studied the mechanics of monetary policy and the plumbing of the financial system, most of what you learned may be out of date—that is, if you haven’t done so in the last five years. In this interview with Caitlin Long, CEO and founder of Avanti Financial Group, Dr. Manmohan Singh of the IMF explains the massive changes that have come about in the past decade and tries to dispel some of the preconceived notions many have about this complex system. In addition to this focus on the true mechanics of the current system, they also discuss the difficulty of trying to make sense of such an opaque and interconnected global system where laws and data reporting are not uniform from country to country. Moreover, Long and Singh zoom in on the tsunami of change that could be brought about by the growth of digital assets both inside and outside of the traditional financial system, and they highlight the intense focus on these developments by the private banking sector and bodies like the IMF. Filmed on December 7, 2020. Viewers can find more of Dr. Singh's work here: https://www.risk.net/collateral-markets-and-financial-plumbing-3rd-edition and https://www.imf.org/en/Publications/Publications-By-Author?author=Manmohan++Singh&name=Manmohan%20%20Singh Key Learnings: The plumbing of the financial system continuously evolves as institutions, regulations, and technology change. Coming from entirely different perspectives, Long and Singh both stress the level of attention digital assets are receiving from the highest levels of global finance and how important they will be to the future development of the financial system.

Comments

Transcript

  • SM
    Sam M.
    14 December 2020 @ 08:42
    The issue with repo rate "hiccups" has been rates spiking higher. By definition this means that there have been "too many" bonds and not enough inter-bank funding (i.e. reserves). The interviewee is arguing the opposite which I think is demonstrably ridiculous... if the issue in the repo market was excess demand for limited bonds (since they are silo'd by QE) ... then borrowers of the bonds/lenders of the cash would be saying take my money and pay me less (eg. 0%) ... which is exactly the opposite of the repo "hiccups". He has a hold of the wrong end of the stick.
    • JA
      John A.
      14 December 2020 @ 14:51
      Rates spiking higher would simply be a function of the risk premium of the borrower. Jeff Snider went over this when he dumped all over SOFR in a video earlier this year. You could have one borrower who can access collateral at near-zero rates during the blowup, while another institution is so untrusted that they need to pay a much higher rate because of the perceived (or actual) risk of lending the collateral to them. Snider also had a view that the Fed was pulling too many T-BILLS out of the market in 2019 in response to the Repo blowout ("NOT QE") and making it harder to get ahold of pristine collateral absent the repo operations they were conducting. This was part of the reason why the Fed transitioned to actual QE and towards buying more on the longer end of the curve in March-April. To leave more of the short end to the dealers who need access to such collateral. Given that we haven't seen a peep about Repo since March and a recent check of Repo operations shows nothing but zeroes and tumbleweeds, there is some cause to think that the system might just be counterintuitive and there is something to the idea that an over-levered system that can create cash out of thin air is more constrained by collateral than any other consideration. Would also explain why the Treasury borrowed more than they need in 2020 and are sitting with a massive account surplus. Now, I'm still not certain myself still and I've made this my hobby since Q4 2019 to try to learn about it, but I would keep open the possibility that no one really fully understands this system because there is no objective transparent view of all of the levers.
    • JA
      John A.
      15 December 2020 @ 04:08
      Here is Jeff talking about rehypothecation and collateral in an interview with George Gammon that hit youtube recently. https://youtu.be/fRyG1WUZDVc
    • SM
      Sam M.
      15 December 2020 @ 07:56
      I disagree. We are talking about repo's between regulated banks using government bonds as collateral. I have practical experience at the central bank/regulator/as a bond trader/in treasury and in providing total return swaps and prime broking to hedge funds so nothing in this interview was new to me except the bits I thought were wrong. You can see from looking at the FRED data that the Fed had to step in and buy bonds to provide additional reserves (not bonds, reserves). Look at what happened to the repo rate last September on the spike ... https://fred.stlouisfed.org/series/SOFR And what did the Fed do for the FIRST time in this data series ... did they buy or sell bonds? ... https://fred.stlouisfed.org/series/RPONTTLD The data suggests the more likely problem has been the Government issuing a lot of debt / so bonds are relatively cheap to futures / dealer banks hedging rate risk with futures and having to fund their physical positions in the repo market in the futures expiry months (there is a reason the problem always happens in the middle of sep/dec/mar/jun). With too many bonds needing to be funded in the repo market banks have been forced to pay over the odds for their overnight funding.
    • SM
      Sam M.
      15 December 2020 @ 10:55
      Please argue anything you think I have said is wrong. I experienced all these things/still have friends on funding/treasury desks to check my thoughts. I am sick of people following YT stars / Snider and not thinking from first principles.
    • SM
      Sam M.
      15 December 2020 @ 11:04
      Or I can flip it ... explain the increase in repo rates as being due to too few bonds (as a staring point)?
    • SM
      Sam M.
      15 December 2020 @ 11:32
      How is something hotly debated when everyone who is wrong doesn't upvote me? How is upvoting me / wtf is the point of the platform?
    • EK
      Emil K.
      16 December 2020 @ 14:40
      I doubt very much that I fall under your umbrella of "YT stars" but if I do please let me know as I would like to tell Mother; she would be very proud I am on par with cats.
    • DN
      Douglas N.
      7 January 2021 @ 22:24
      Money is always created out of “nothing” on the basis of collateral, in the classical monetary theory, at the top of the chain, by the collateral which is the faith and credit of the government that declares it money. Since there can be no money without collateral, they are inextricably linked and in some sense peers. Even so, collateral has to be primary, because you can’t have money without collateral, but you can have collateral without money if you don’t want anything from anyone else. What I HEAR Singh and Snider saying is that in the banking system money is created by reusing Tbill collateral in the same way that the collateral called “commercial bank reserves” are re-used in a fractional reserve system. In this sense, re-hypothecation of T-Bills is analogous to the fractional reserve system in that both systems create money. But only the latter is measured by the traditional statistics. The rest is in the “shadow”. Which is why things like the GFC sneak up on you, and you have no idea how to get out of it. Now I preface this by saying “what I hear”, because I am a beginning student with NO real world experience. But my antennai are activated over the use of words like “ridiculous” in describing the life work of extremely intelligent people. If these arguments are demonstrably ridiculous you need to engage with Snider et. Al. and do so ASAP, rather than engaging with noobs (like me) in the comments.
    • DN
      Douglas N.
      7 January 2021 @ 23:51
      "Or I can flip it ... explain the increase in repo rates as being due to too few bonds (as a staring point)?" Sure, I'll try. If, as hypothesized by Singh and Snider et. al. most REAL money in financial markets comes from re-hypothecation of bonds, if there aren't enough bonds not enough money can be created, and its cost goes up. Under this hypothesis bank reserves are almost irrelevant.
  • BH
    Bin H.
    1 January 2021 @ 12:07
    It is a nice movie!
  • JM
    Jennifer M.
    26 December 2020 @ 21:59
    That was a most valuable interview. Top 3 2020 and it's late December. Thanks. Still buzzing.
  • SM
    Stephen M.
    15 December 2020 @ 23:08
    'Transparency'. Great interview .. Thank You! What I learned in this great interview is there is no transparency; intentional layers of obfuscation by design. As I learn the history leading up to the 2008 crash, this interview makes me think of non-transparency of mortgage back securities and the 40:1 leverage ... are we in the 2020's version of CDO's. It just does not seem the incumbent financial systems can be rehabilitated or reconciled since it require politicians to act. Might one with this knowledge go 'responsibly' long on BTC .. :). I will have to view again; so much to learn. 1). UK does not have leverage limits .. for reals? should we expect the next Bear Sterns and Lehman Brothers to be coming from Canary Wharf? 2) Whether it is CB's or the off-balance sheet, both have miserable transparency. Digital currencies helping the velocity issue one would think also improve transparency. However, transparency is warts and all. I don't grasp how improving the transparency of negative interest rate and debt laden assets will not accelerate the slowing down of money velocity; so many 'M's, not sure which one is correct here. :) 3) For those that choose to get out of the system (i.e.; Bitcoin) they're out. So is this a game of musical chairs as more opt to Bitcoin leaving less appetite for the legacy system?
    • DG
      David G.
      19 December 2020 @ 03:16
      What happens if the world goes electronically dark? The sun will rise on gold, and all the gold bugs, will rejoice with the high pitch ping of their gold eagles. Don't put all your eggs in one out of the system basket.
    • JP
      J P.
      24 December 2020 @ 04:12
      You said should we expect the next lehman to come from CAnary Wharf, hahahaha. The last one came from Canary Wharf. Go look up Lehman International. Took years to straighten out.
  • RT
    Ryan T.
    21 December 2020 @ 06:35
    This interview is one of the most enlightening one that I've come across in RV. Will definitely have to watch it a few times over to absorb it better. Having watched it only once, I am stumped that the global banking system is in such a huge mess.
  • DT
    Douglas T.
    20 December 2020 @ 23:11
    This would be a fantastic one for Steven Van Metre to break down.
  • JY
    Jim Y.
    15 December 2020 @ 01:03
    Jeff Snider mentioned Dr Singh in one of his Eurodollar University podcasts with Emil Kalinowski. Would be great to hear Jeff and Dr Singh also hash things out!
    • AP
      Alex P.
      15 December 2020 @ 05:11
      That would be amazing!
    • EK
      Emil K.
      16 December 2020 @ 14:36
      We'll give it a shot in 2021. We'd like to do interviews of people.
    • AK
      Arthur K.
      20 December 2020 @ 20:49
      Emil, Fan of Eurodollar U. Do you agree with Dr Singh about balance sheet constraints for primary dealers ?
  • BR
    Ben R.
    16 December 2020 @ 11:52
    Can this be done with the framework of the current federal reserve act: 1. Facebook revives their Stablecin, Libra, by first applying for a commercial bank license. 2. They sell their own stock to the existing commercial banks in exchange for bank reserves. 3. The newly acquired bank reserves are collateralized to back Libra coin.
    • KZ
      Konrad Z.
      19 December 2020 @ 23:11
      Can banks sell their bank reserves? Steven van Metre says the banks cannot do anything with their reserves. It only allows them to expand credit, but the reserves stay in their balance sheet
  • SV
    Santiago V. | Contributor
    15 December 2020 @ 16:27
    Play close attention to two important observations / conclusions from the interview: 1. Rehypothecation in segments of the financial system outside of the purview of the Central Bank eventually leads to systemic risk, and this applies to stable coins of any variety (non-sovereign backed money), even 1:1 reserves or algorithmically collateralized stable coins. Eventually it ends in trapped liquidity in the issuers and unknown impacts on M2. 2. Digital assets play a unique role in instant settlement bearer instruments, that negate some of the risks of rehypothecation and are distinct from the necessity of leverage. By their very nature they increase the velocity of value in circulation and hence have the potential of being a more potent instrument of monetary and fiscal policy, or even treasury management schemes, than leverage. Outstanding interview! +100.
    • DG
      David G.
      19 December 2020 @ 02:50
      So what does this all mean for the price of bonds? If the bonds are so much more valuable than the interest they provide, what leads to bonds selling off without banks stepping in to scoop them up for rehypothecation or settlement purposes? I'm trying to understand how to make profit from rocket science lol.
  • LL
    Lucas L.
    16 December 2020 @ 21:58
    Awesome interview! But one thing still puzzles me: how come all this leverage have not created inflation (besides on financial assets!)?
    • DG
      David G.
      19 December 2020 @ 01:01
      The inflation is locked away in vaults. You don't get inflation until money is spent. It has to chase the goods. financial asset are being chased. The people who spend on liabilities(until the stimulus payments) have ever decreasing amounts of money to spend. The wealth gap is limiting inflation. Poor people have limited ability to spend and borrow. Rich people save with assets.
  • MJ
    Marius J.
    18 December 2020 @ 13:50
    More of Caitlin Long please!
  • RS
    Roger S.
    15 December 2020 @ 20:12
    This is the first time I ever heard an explanation of why someone would want to own a negatively yielding sovereign bond other than for the potential capital gain available if rates go ever further negative.
    • DS
      David S.
      17 December 2020 @ 14:50
      In Cypress personal, business and church bank cash accounts were bailed into the bank under Euroland banking regulations. I do not remember the particulars. This made savings in banks more risky especially if you have a billion in the bank.. DLS
  • IM
    Indranath M.
    15 December 2020 @ 23:15
    Phenomenal interview. Definitely need an explainer video from Van Meter or Jeff Snider.
    • pd
      preston d.
      15 December 2020 @ 23:39
      ...or Mark Dow.
    • DS
      David S.
      16 December 2020 @ 06:55
      Mr. Snider please. DLS
    • RC
      RUBEN C.
      16 December 2020 @ 13:38
      Yes. We need a reading list and possibly explainer videos as well on such important topics like this. Some people may want to study the financial plumbing to understand it, and videos like this is like trying to do a complex yoga posture on your first months of training.
  • JW
    Jay W.
    16 December 2020 @ 11:04
    Really fantastic discussion, thank you.
  • MB
    Marc B.
    16 December 2020 @ 09:57
    Exit
  • DG
    Dave G.
    15 December 2020 @ 21:19
    So does this mean that Q.E and repo money is getting to stonks via the shadow bank system?
    • DS
      David S.
      16 December 2020 @ 07:02
      Yes. The Fed's models assume banks only loan to solid business investments like the Brooklyn Bridge. Where Is that bridge salesman? DLS
  • DS
    David S.
    16 December 2020 @ 06:54
    Anything financial that is hidden is a temptation for abuse. DLS
  • NB
    Nabil B.
    15 December 2020 @ 19:54
    An incredible interview,
  • MM
    Michael M.
    15 December 2020 @ 18:14
    Phenomenal discussion. Get Dr. Singh and Jeffrey Snider together to further discuss!
  • PT
    Philip T.
    14 December 2020 @ 13:57
    Here we go again; the over-levered money taking home the gains with the Central Banks being their backstops and the public picking up the losses. We will continue this rewarding of risk-taking until the Central Banks and governments stop bailing out the too-connected-to-fail. The Central Banks must put in penalties or only partially reduce downside losses of the riskier behaviors so that the market can more reasonable assess risk. Overleveraging due to being too-connected-to-fail must be de-incentivized or the appeal of such behavior will continue (at the general public's expense).
    • DS
      David S.
      14 December 2020 @ 21:24
      Well said. DLS
    • JE
      Johannes E.
      15 December 2020 @ 16:24
      Between politics and political economy, it's not in their self-interest to do so. Which is why I suspect the private sector and autonomous individuals working off-grid will eventually force their hand to start acting more honestly. That, or they'll see ever-increasing momentum towards a self-regulated, voluntary and honest Galt's Gulch of capital movement off-system. They can then plunder only themselves for their bailouts. We all know what's going on with a currency / banking system off-ramp gaining momentum. It's only a matter of time before accountability gets them into "check". Then ball is in the PTB's court.
  • JE
    Johannes E.
    15 December 2020 @ 16:15
    FWIW, this makes a ton of sense providing context of what's going on when things bottle up, how negative interest rates can be tolerable, and is very valuable for laymen to understand we're not living in your grandfather's basic fractional reserve system = $ trillions in "money printing" = hyperinflation environment anymore. Neat to hear what might lie in the future re custody and settlement, but even with that, as a standalone, this is very hard to contextualize unless you already have experience with the broader mosaic. Per some comments, I look at this not as tradeable information, but rather as context for better comprehension of reading the matrix and what the future may hold. Great interview! Thanks Cait and Dr. Singh!
  • RM
    Russell M.
    15 December 2020 @ 15:52
    Very, very interesting! Central banks want to control all the money. A nice impetus to avoid control with Bitcoin.
  • DN
    D N.
    15 December 2020 @ 14:41
    This is why I signed up for real vision. Excellent excellent segment. This is true discussion and analysis of banking. Collateral sources & uses + wholesale markets needs more attention on this platform. Please get those responsible for financial resource management at G-SIBs to do follow up interviews on how it all comes together.
  • DL
    D L.
    15 December 2020 @ 14:11
    Amazing discussion about things I want to understand more of, regrettably I think Caitlin forgot to slowdown and synthesize the information from Mr Singh (she did in the very beginning). Would love to see a recap video re-explaining these things, clarifying diff terms etc
  • DO
    DIOGO O.
    15 December 2020 @ 11:05
    I missed the use of graphs in the interview... such a complex discussion deserves more graphs to explain it better... Maybe Dr. Singh could come back and make a ''expert view''??
  • BD
    Bryan D.
    15 December 2020 @ 06:48
    As someone who has been in money markets for 15 years this was very good. Also Caitlin is a very good interviewer in this space so hopefully they use her more.
    • DO
      DIOGO O.
      15 December 2020 @ 11:04
      She is awesome...way better than the ''freaked'' Hugh Hendry... LOL
  • BD
    Ben D.
    15 December 2020 @ 07:08
    This is the first time in the last several months of watching real vision at 2x speed that I had to watch at 1x speed to properly follow along. That's not to say that I dont understand what's going on and why central bank bank government bond purchases are deflationary not inflationary. The pacing of the interview is good along with the explanations along the way. Thanks to Jeff snyder who's a regular contributor on this platform I already had a simple understanding of this incredibly complex topic. In the future if it is allowed I would definitely like to see Brent Johnson or Jeff have a discussion with Caitlin or Dr Singh. In the future if someone more knowledgeable than me could articulate how Richard Koo (from balance sheet recession and previous guest) and central bank buying most of the high quality collateral would impact the future. I was REALLY surprised that Dr Singh had at least a decent understanding of how stable coins worked or even that he knows that DeFi exists. I know this may be difficult for both but if Dr Singh or Caitlin could come back on real vision some time in the future as both we're really great. Always thrilled when there much to be learned from these conversations and that Real vision makes them happen.
  • DS
    David S.
    14 December 2020 @ 21:36
    An additional avenue of investigation is to arrest or to pay someone who knows the plumbing from the inside to explain the real world. The scam will already be played out if we try to uncover it from the outside. The social safety net for banks and shadow banks is way to expensive for broke tax payers. In addition it drives responsible financial institutions out of the market. DLS
    • DS
      David S.
      15 December 2020 @ 04:49
      Clarification. Someone inside the shadow banking system who knows what they are doing under cover. DLS
  • MD
    Michael D.
    14 December 2020 @ 08:41
    This one was a bit over my head. My first thought is that I would love to have Steve Van Metre break this interview down in a future segment, so that it is a bit more understandable. My second thought is that I would love to have Jeff Snider interview Dr. Manmohan in a future segment.
    • MD
      Michael D.
      14 December 2020 @ 08:43
      Also, Caitlin's explanation for why Treasuries are a more desirable than cash in the repo market was a lightbulb moment for me
    • AS
      Amit S.
      15 December 2020 @ 01:27
      You've echoed my thoughts..SOS to Steve
    • JA
      John A.
      15 December 2020 @ 04:07
      Watch this, a lot of what Dr. Singh was talking about was covered in an easier to understand level. I'm still trying to unpack this interview because it seems like Dr. Singh was brain dumping a lot of information in a disorderly and excited manner =). https://youtu.be/fRyG1WUZDVc
  • DP
    Duane P.
    15 December 2020 @ 03:01
    This was extremely good but like others have said, this was a bit over my head with lots of jargon and acronyms. I also feel like this discussion didn't see the forest for the trees a bit too. This was good information but it's not clear to me what the full implications are of this. What is the implication for the value of treasuries and the yield curve long term. Value of the dollar? How will this affect inflation? How will bank profits, both regional and mega-banks, we affected. How can we use this information to avoid the Japanification of Europe and the US? How will countries' economy be affected by those who stick with the status quo system? Some further interviews with these topics and/or guests would be great. I think both Jeff Snider and Raoul would be great interviewers with Manmohan.
  • NL
    Nikola L.
    15 December 2020 @ 02:38
    Thank you both. I will be playing this one few times.
  • CT
    Charles T.
    15 December 2020 @ 01:22
    Great discussion! Interviews like these provide the educational content that will separate Real Vision from everyone else. The interview left me with a couple of questions. 1. How large is the shadow banking system? 2. Does anyone know the relative size of leverage in between quarterly or yearly reporting? 3. What impact does delayed settlement have on liquidity? Also, imo, rehypothecation of digital assets will only add a band-aide of additional capital to the currently over leveraged system. The current banking system is trying to pull crypto networks into the existing framework. For owners this is the quickest way to monetizing these ideas / investments but I don't know if it is the best path forward. Is is possible for RV to produce a 5-7 page paper based on this discussion that includes data on policy changes from the GFC effected liquidity, the repo markets, and how crypto could disrupt things?
  • mc
    michael c.
    14 December 2020 @ 23:40
    Certain key points are similar to the same ones that were made when Steve V. Metre interviewed with Jeff Snider on 10/6.
    • DS
      David S.
      15 December 2020 @ 00:04
      Love Mr Snider, but this was done on a different level. DLS
  • bb
    bernard b.
    14 December 2020 @ 22:48
    Wow! My head exploded over the last Caitlin interview and the complexities of custody.... Re-hypothecation - sounds like a magic spell. Financial wizardry indeed. Every day I learn more and know less and less.
  • WS
    Warren S.
    14 December 2020 @ 18:26
    I think it would be useful for many of us if RV would kindly provide a dumbed down version of this interview.
    • FA
      Fabrizio A.
      14 December 2020 @ 21:59
      I agree. Maybe Steven Van Metre could do an episode to break it down.
  • ly
    lena y.
    14 December 2020 @ 20:53
    It would be nice if Caitlin Long comes back and discusses how digitalization can unwind the plumbing of the monetary system! This is super interesting!
  • CD
    Chris D.
    14 December 2020 @ 19:59
    Fabulous to have Caitlin Long doing interviews!
  • TP
    Timothy P.
    14 December 2020 @ 18:06
    Nice fragile leveraged opaque banking system you have there. It would be a shame if something came along that was transparent, put the power of transacting in people's hands, and generally didn't engage in the garbage behavior of your legacy system. Crypto is going to eat these bankers' lunch. It has in some ways already.
  • MJ
    Marc J.
    14 December 2020 @ 15:18
    Brilliant.
  • RM
    Richard M.
    14 December 2020 @ 15:07
    Wow!!! Really, really deep, but also really, really interesting (I think Jeff Snider might even learn something by listening to this!). Thank you Caitlin and Dr. Singh for this fascinating discussion.
  • ML
    Max L.
    14 December 2020 @ 12:19
    Really informative, thanks guys