The repo — short for “repurchase” — market exists to ensure there’s enough liquidity in the system so that investors who have their cash tied up elsewhere can still quickly and cheaply borrow what they need to execute trades. In the repo market, an investment bank that needs a quick, temporary jolt of cash can borrow it by doing two things. First, it can put up safe collateral, such as treasury bills. Second, it can promise to repurchase those bills back at a slightly higher price very soon — as soon as the next day. The difference between the two prices is the repo rate (1.8 percent as of this writing).
What happened in September was that lenders in the repo market were themselves short of cash, and thus the daily repo rate more than doubled. Starting the next day, the Federal Reserve injected (through loans) tens of billions into the system and things appear to have settled down (repo market volumes are typically north of a trillion dollars per day). The disruption, in other words, was a temporary problem of clogged pipes, not a long-term, structural deficiency.
There are progressives who bridle at any sort of bank bailout, but I’m not one of them. Frozen, or even lastingly clogged, credit flows are the stuff of recessions, and it’s not the bankers who get hurt in downturns.
But this incident still gave me pause. I marveled at the speed with which the Fed has thus far injected over $200 billion — close to 1 percent of GDP — of bank reserves, enough to quickly get the repo rate back down to where officials wanted it. It’s good that the Fed can rescue credit markets serving high finance. But where’s the urgency for Congress and state legislatures to help people stuck in failing labor markets?
Consider, for example, persistent place-based disparities. So far this year, the national unemployment rate has stayed well below 4 percent. But in Detroit, the 2019 jobless rate has been more than twice that, at about 9 percent. Relative to the nation, job growth has been slowing sharply in the Detroit area for a year now (i.e., before the strike against GM) and was last seen clocking in at around zero. Recent research by Andre Perry of the Brookings Institution points out that in 20 majority-black cities with more than 65,000 residents, the average black unemployment rate is 12 percent.
These facts underscore the point that even with national unemployment at a 50-year low, there are people and places that have been left behind. Though the research refers to a few years ago, the Economic Innovation Group found that 50 million Americans lived in “distressed communities,” characterized by high poverty rates and low educational attainment, with over 40 percent of working-age adults non-employed. Of particular concern, the gap between prosperous and distressed areas has grown in recent years, driven by a diverging trends in job growth and business start-ups.
Economists used to eschew place-based policies, blithely advising people in distressed places to move to prosperous ones. Thankfully, in recent years, such facile thinking is disappearing — in part because people are increasingly staying put — and ideas to help struggling communities are percolating. Economist Tim Bartik suggests ways to help revitalize manufacturing communities, including helping small manufacturers connect to broader supply chains and training local workforces; David Neumark proposes that the federal government subsidizes jobs in struggling places; Larry Summers has ideas for targeted infrastructure investment and taxing location-incentive subsidies by affluent cities, to “give more disadvantaged communities a fairer chance to compete” for new businesses.
Such ideas aren’t free, but neither are the Fed’s loans to the banks that lend in repo markets. In both cases, however, because interest rates are low, whether we’re unclogging credit flows or helping people and places get back on their feet, both investments are worth their costs.
Of course, part of the difference is that the repo market went haywire all the sudden, while problems in the places described above are more like a slow burn. But that’s no reason to only help the banks. In fact, the major distinguishing factor here is that the Fed operates politically independently (despite Trump’s efforts to compromise this critical attribute), while policies like those noted above must be enacted by national or state legislatures.
Some balance would be useful: I like credit flows as much as the next guy, but let’s see the same urgency for the living standards of large swaths of people who’ve been left behind for too long.