Debt, bubble policy, and the role of the repo market in the Federal Reserve’s management of capitalism in crisis

Abstract

In the last decade, repurchase-agreements (repos) between banks and financial institutions have grown significantly as banks systemically low on cash see repos as the cheapest, safest, and quickest way to get the funding they need for running regular services. However, hikes in interest rates by the Federal Reserve since March 2022 have increased the cost of interbank borrowing. This causes stress on many banks, and ultimately, brings into question the financial system’s long-term reliance on repos and other obscure short-term funding methods. Awareness of the Fed’s repo market policy, and their monetary policy in general, ought to matter to political economists and workers alike because it reveals precisely how the economy is controlled by a few levers inside the marriage between state and finance capital. Consequently, in this article I outline the repo market and its significance to the Fed’s management of economic crises. This requires a relative understanding of their general monetary policy, which in itself requires significant material economic contextualizing. It is this context that ultimately matters most, and which will therefore be the focal point of discussion. Only after such contextualization does the discussion end with a word on the rise of repos, the risks of increased reliance on it, and possible future directions from the perspective of both capital and labor.