What is the Overnight Reverse Repo Facility?

'Reverse repos are deposits private banks make at the Fed.'

'Deposits--like putting money in a bank?'

'Yes.'

'You're shitting me. All this time I've been breaking my brain to understand this and reverse repos are just deposits?'

'Pretty much.'

'What makes it reverse?'

'It's reverse because everything is always viewed from the Fed's perspective. The banks who make these deposits at the Fed have normal repos with the Fed.'

'Do I get repo when I put my money in the bank?'

'No, that's just a deposit.'

'But I thought you said reverse repos were deposits. I mean, I'm giving the bank cash and they're giving me a balance on their books and some interest. What's the difference?'

'The difference is that the Fed is giving the bank a bond as collateral. Only a moron would give the someone a bunch of money without any collateral.'

'I don't get any collateral from my bank...'

'...'

'But why does the Fed give their depositors collateral?'

'Because a reverse repo is a loan.'

'I thought you said it was a deposit.'

'Same thing.'

'So the Fed is taking out a bunch of loans every night? What do they do with the money?'

'Nothing. They just sit on it.'

'You're telling me that they were just sitting on hundred of billions of dollars every night. No big deal?'

'Yup.'

'Wow, well that sucks. Money is weird.'

'Government money is.'

'Can I ask you another question?'

'Sure.'

'What the hell does nighttime have to do with it?'

'Banks don't know how many deposits they will get on any given day. Maybe you won the lottery and you show up five minutes before closing to drop off your winnings. What do you think they do?'

'Isn't that what they have safes for? To keep money in?'

'Oh your poor wife.'

'What's the point of all the security guards and steel bars and thick walls? I've seen movies: there's always some kind of steel space hatch and you have to tunnel through ten-foot thick concrete to get in.'

'Use your imagination. Pretend your the bank where the lottery commission has accounts. Just before closing you get a call that the lotto winnings need to be paid out. What if you don't have the money?'

'Banks don't have the money?'

'Honey, banks never have the money.'

'What happens?'

'Well, it sounds like the lotto commission's bank needs loan and it just so happens that your bank has a surplus of cash...'

'You're joking!'

'No. Banks loan each other money at the end of the day. And they loan it to the Fed. One of the ways the Fed fucks with the system is by deciding what interest rate to offer when banks loan them money. You ever hear people talking about the Fed raising interest rates?'

'That's the interest rate?'

'One of them. See, if your bank loans money to the lotto commission's bank, maybe it doesn't pay it back on time or at all. That's risky. When they loan their money to the Fed it's risk-free--at least there's no worries that the Fed won't be able to print some more dollars for them. So private banks have to offer something better than whatever rate the Fed offers, other wise they won't be able to get any loans.'

'I still don't understand why the Fed wants money.'