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.
Keywords
Introduction
The U.S. Federal Reserve was established in 1913 and has, from the start, served as a central mitigator of capitalist crisis, deeply in favor of capital over labor. Beyond the important critiques levied against reactive bailouts for ‘too big to fail’ banks and stimulus packages that favor corporations over people, attention on the government’s proactive monetary policy ought to matter to political economists and workers alike because it reveals precisely how the economy is consistently subjected to a few technocratic levers inside the marriage between state and finance capital. For instance, over the past decade, an obscure interbank short-term funding method known as overnight repos (short for repurchase agreements) has come to play a disturbingly outsized role in the functioning of the financial credit system, and with it, the economy as a whole. Every day in the repo market, somewhere between $4 and $5 trillion in cash moves between banks and other financial institutions, including the Federal Reserve; prior to 2018, daily volume had never hit $1 trillion (Office of Financial Research 2023). This interbank lending market has become one of the key sources of funding for day-to-day operations and business or consumer lending, as a significant number of banks are structurally illiquid (asset-heavy). However, interest rate hikes from the Federal Reserve since March 2022 have purposely increased the cost of overnight interbank lending, and this in turn purposely increases the cost of all other forms of lending. The increased borrowing costs cause stress on many banks, not to mention working people and households, and brings into question the financial system’s long-term reliance on repos and other short-term funding methods (Sissoko 2019), encapsulating what the critical macrofinance scholar Daniela Gabor (2016: 270) refers to as short-term, fragile finance.
In this article, I hope to explain what the repo market is and why it is so significant to the Fed’s management of long-term, capitalist crisis. To get there, I have to talk about the U.S.’s general monetary policy of the last decade, which itself first requires a good deal of material-economic contextualizing. Marx, modern Marxist political economists, and critical macrofinance scholars are quite useful for this. Put in conjunction with each other, they relate our crisis moment to a situation where profit rates have fallen since the 1950s and never recovered, where the productive or real economy is increasingly reliant if not vastly lagging behind the money capital circuit and broader financial economy, and where the inextricable link between ‘shadow banking’, sovereign bond markets, speculative bubbles, and state crisis management dominates the contemporary Western capitalist regime. Ultimately, this contextualization of repo-based monetary policy with the present disposition of capitalist crisis marks the objective of this paper.
Marxist macrofinancial analysis
In Marxist circles, there has been very little discussion on the repo market and what its role has been in some of the key characteristics of financialized capitalism: regimes of fictitious accumulation, debt-driven growth, and central bank management of cyclical crises. The topics of choice by Marxists in matters of financialized capitalism are undoubtedly essential to grasp, but scholarship could benefit from looking closer at the active relationship between central banks, private lenders, and private borrowers (namely, the dominant commercial banks and other financial institutions such as asset and cash pool managers), particularly surrounding money supply, interest rates, collateral-assets, and overnight lending practices such as repos. Indeed, the repo market is one of the central mediums where this active relationship plays out, and Marxists may find compatibility in how some critical macrofinance scholars speak of contradictions in the financial-economic system that repo markets are at the heart of.
Carolyn Sissoko (2019), for instance, writes about how reliance on repos exposes one of the key contradictions of the neoclassical economic model today, ‘where [financial] markets themselves are a source of liquidity [readily available money; cash flow]’, but where the turn toward repos for quick cash ‘causes real world market liquidity to evaporate’ (Sissoko 2019: 317). Our repo-based financial system reveals the way that ‘governments, not markets’, have become the ‘fundamental source of liquidity’, and moreover, that today more than ever before, ‘the banking system – that is, the banks with the support of the central bank – supports the economy’ (Sissoko 2019: 318).
One of the more promising developments of the past two decades for bringing in a macrofinancial angle to the Marxian critique of political economy has been the rise of studies on ‘fictitious capital’, propagated by thinkers like David Harvey (2006, 2023), Michael Hudson (2014), and Heiko Feldner et al. (2017). This rise has occurred alongside a general increase in readings of Marx’s Capital volumes 2 and 3. Harvey (2006, 2023), for instance, has devoted much of his time to exploring the range of fictitious capital markets that have sprung up over the last few decades. As he (Harvey, 2023) notes You can actually go out now and instead of investing in production, you can start to trade stocks and shares against government debt, against carbon futures, against financial currency futures . . . You can borrow more money to pay the interest on the money you just borrowed. Put differently, money capital can now simply invest in money capital.
Through exploring these new money markets, Harvey (2023) notes a concerning gap between fictitious and real capital in circulation. One can point to the work of sociologist William I. Robinson (2019: 159) to back this up, which finds that the global derivatives market neared $1.2 quadrillion in 2017 compared to gross world product or the total value of goods and services produced worldwide “at some $75 trillion”. Within this context, Harvey (2023) speculates that there [is] likely to be a very serious crash in the financial system, particularly because fictitious capital is actually built now into a global Ponzi scheme. And a Ponzi scheme invariably becomes undone, except in this case [it] is so big that you can’t afford to undo it.
The debt that builds from this scheme is enormous. For instance, total global debt in 2017, public and private, was at $250 trillion (Reese 2022). The scales to which it affects both government and household debt are equally alarming. Total government debt via the global bond market has increased to over $100 trillion, with U.S. accounting for 1/5 of that ($20 trillion); household debt dramatically increased leading up to 2008, has continued increasing since, and is expected to further rise with the new period of high interest rate (Robinson 2019).
The turn toward analyzing the logics of fictitious cap ital has been crucial for the broader shift favoring macro-financial analyses from a Marxist political economic perspective. An emphasis on fictitious capital allows for an emphasis on flows of value outside of commodity production. Crucially, this focus on speculative valorization does not entail a turning away from looking at production or the ‘real economy’. Instead, the emphasis on finance, credit, and interest-bearing capital allows one to recognize a general increase in money capital accumulation at the same time that we notice a general decrease in productive capital accumulation, and it begs the question of why this is the case.
As stated, the promising turn toward macro-financial Marxist analysis has sprung up alongside renewed interest in volumes 2 (1992) and 3 (1991) of Capital. Where Harvey has focused on the latter, the political economist Stavros Tombazos (2019) works to synthesize both. Tombazos notes how Marx pays greater attention here to the circulation of money capital, as part of his attempt to understand a broader matrix of capital circuitry that also includes commodity capital and productive capital. Tombazos connects Marx’s work on capital circuits in volume 2 to his work in volume 3 on the differences and relations between the real economy of production and the financial economy of fictitious capital accumulation, along the lines of how David Harvey (2006, 2023) takes up the volume.
As you might expect, Marxists who follow the labor theory of value view the real economy as the realm where profit is made through the extraction of surplus value (from surplus labor time) in commodity production. More specifically, in Marx’s view, laborers produce commodity capital, which then needs to be realized as money capital (profit). This makes up the industrial capital cycle. Money goes to the laborious production of commodities which leads to more money, Marx’s (1995) classic M-C-M’ formula. But of course, there’s more to M-C-M’ and there’s more than M-C-M’, and this is where Tombazos’ exposition is most illuminating.
Tombazos (2019) explores the way that other formulaic processes are required for capital reproduction within and beyond the M-C-M’ track, such as the expansion of constant capital (Marx’s term for the technological forces of production, the machinery and/or instruments needed for laborers to make commodity-stuff). This is achieved through re-investment of profits toward research-and-development (scientific rationalization). Marx called this process the productive capital circuit. In summary, the three processes of capital most important to Marx were the commodity capital, money capital, and productive capital circuits. This interpretation of Marx can be confirmed by observations he made in Capital, volume 2 (1992: 184): The total circuit presents itself for each functional form of capital as its own specific circuit, and indeed each of these circuits conditions the continuity of the overall process . . . A part of the capital exists as commodity capital that is being transformed into money . . . another part exists as money capital that is being transformed into productive capital; a third part as productive capital being transformed into commodity capital. The constant presence of all three forms is mediated by the circuit of the total capital through precisely these three phases.
Marx goes on to argue that the co-dependency of these capital circuits to one another is so heavy that if one circuit is either trailing or outpacing, then the general capitalist mode of production faces an increased likelihood of crisis, if not already revealing the signs that it is in one. He (Marx, 1992) refers to these crisis moments of capitalism as ‘arrythmias’, as in, the circuits of capital are ‘out of rhythm’ with each other.
After making observations like these about the Marx of Capital volume 2, Tombazos turns to volume 3, which, as we glimpsed with Harvey, has become increasingly known for its exposition of ‘fictitious capital’, articulated in Part 4 of the volume (especially chapters 24–33). Here, Marx (1991: 7) distinguishes between money-dealing capital and real capital. The former he considered ‘fictitious’, representing the ‘superfluous form of the capital relation’, while the latter he designated solely for capital accumulated through waged labor-based commodity production. In chapter 29 of the volume, Marx (1991: 599) further argues that fictitious capital are securities, claims on future value, value that circulates ahead of itself, wherein ‘securities actually represent nothing more than accumulated claims, or legal titles, to future production’. In this sense, if a bank or investor is asked what they are net worth is, they are legally allowed to count as present value their claims on future values from already invested money, whether invested in the form of lending or in the form of buying stocks and other financial assets. The accumulation of future values, especially in the form of bonds, is good enough in many cases to qualify financial institutions or capitalists for even more credit/loan capital to be thrown into circulation.
Marx (1991: 641) goes on to argue in chapter 33 that a certain portion of capital is ‘always merely fictitious, i.e. a title to value, just like value tokens’. In this sense, there is always a gap – however large or worrisome – between money capital connected to commodity-productive activity and money capital connected almost strictly to inter-financial capital lending schemes based on speculated future values (Soon, below, I will work to show how the state has contributed significantly to this gap, out of sheer necessity).
There are a number of reasons why Marx’s work after Capital v. 1 has increased in popularity, but a central one seems to be the material and socio-political conditions of our time that render Marx’s insights so eerily prescient. Today, as one of my reviewers eloquently put it, when we talk about financialization and its effects from the late 20th century to present, we most accurately understand this process when describing it as a leakage of money capital out of the productive circuit and into speculative financial accumulation. In volume 2, Marx (1992: 137) was quite aware of this mode of capital activity, allowing us to see in financialization one of those instances where the capitalist mode of production is ‘seized by fits of giddiness in which it tries to accomplish the money-making without the mediation of the production process’. In volume 3, Marx (1991: 639) further recalls: The amount of profit destined for transformation back into capital will depend on the amount of profit made and hence on the expansion of the reproduction process itself. But if this new accumulation comes up against difficulties of application, against a lack of spheres of investment, i.e. if branches of production are saturated and loan capital is over supplied, this plethora of loanable money capital proves nothing more than the barriers of capitalist production. The resulting credit swindling demonstrates that there is no positive obstacle to the use of this excess capital.
I argue that financial capitalism, in part, amounts to an institutionalized version of this, incentivizing increases in the loan capital supply, and with it, the fictitious/real capital gap. The cheapening of credit through stately regimes of quantitative easing leads to more lending and debt, which leads to more systemic pressure, particularly when it does not get invested back into real production so much as back into the circuits of financial speculation. To contribute to ongoing political economy debates within and beyond Marxist discourses, the remainder of this article – split into the two sections Marxist Crisis Theory and Crisis Management – attempts to better explain the role that money market funding plays in the above-articulated process of fictitious capital accumulation that works at the expense of productive growth and worker-consumer prosperity.
The purpose of such an analysis is not to lambast fictitious accumulation and demand more productive growth, rather, I follow those like Feldner et al. (2017) in arguing that financialization and fictitious capitalization has been a rational systemic intervention – from the standpoint of capitalism as a system fighting for its life. In this view, increased flows toward fictitious capital and away from productive capital should not compel a moral concern or desire for a more productive or industrial capitalism. Instead, it is better to see in these shifts of the composition of social capital a pragmatic response to a productive system dying via its own volition, a shift that started because of the structural issues of the mid-1950s to 1970s which caused the corporate rate of profit to drop dramatically while at the same time dealing with spiraling inflation, a problem that Keynesian demand-side macroeconomics could not handle (Gabor 2016: 973; Kliman 2015: 269–270), and which resulted in a ‘stagflation crisis . . . the double bind of stagnant growth and rising inflation’ (Feldner et al. 2017: 15).
Marxist crisis theory
The slowdown in productive investment in turn led to a slowdown in economic growth. And the growth slowdown – plus artificially stimulative government policies that were pursued in an effort to manage and maybe reverse the profitability, investment, and growth problems – contributed to a long-term buildup of debt, recurrent asset bubbles, and ultimately to the Great Recession and its prolonged aftermath. (Kliman 2015: 252).
In Capital v. 3, Marx (1991: 349–350) argues that falling rates of profit in production encourage greater speculation and riskier investment, and with it, financial crises; he also noted that financial crises are what trigger broader downturns or recessions. The Marxist economist Andrew Kliman (2015: 244) adds that the link between falling profitability and greater speculation is that capitalists do not resign themselves to obtaining the now-reduced average rate of profit (They want to maintain their existing rate of profit, and they may need to maintain it in order to be able to repay their debts.)
Under capitalism, development continues to occur because of its promise to generate profits. As this capacity to generate profits slows down or even vanishes, so does the capitalist-led development.
The essential problem of capitalist development, then, is the progressive nature of capital. If this sounds like a re-assertion if not a call for the renewal of Marx’s Law of Law of the Tendential Fall in the Rate of Profit (LTFRP), that’s because it is. As Kliman (2015) and Michael Roberts (2022) have been keen to note, Marx’s crisis theory – which reaches its most systematic form in Capital v. 3 – is insistent that the long-run falling rate of profit is the central contradiction of capitalism, with legal and extralegal interventions almost always geared toward curtailing this existential issue. Henryk Grossman and Richard Kuhn (2013), following Marx, have identified such ‘fixes’ as ‘counter tendencies that slow or temporarily reverse the tendency for the rate of profit to fall’, but that these ‘only operate temporarily and to a limited extent’, pointing out that nearly every time the rate of profit falls and a crisis and recession ensues, a gradual rise in the rate of profit eventually occurs, but, never returns the higher level that it was at prior to the downturn. If we follow this logic through multiple boom-and-bust cycles, the result is a long-term rate of profit that trends downward. In a similar fashion, Roberts (2022) summarizes Marx’s ‘two key points’ on the LTFRP as follows:
There will be a long-term secular decline in the average rate of profit on capital stock as capitalism develops and,
The balance of tendential and counter-tendential factors in the law explains the regular booms and slumps in capitalist production.
Across a range of Marxist economists including Kuhn, Kliman, Roberts, and Vighi, the idea that all that is needed is a rebalancing or equilibration of capital flows has been one of the great ruses of capitalism. Vighi (2023a, 2023b), in particular, suggests that the ever-increasing shift toward debt reliance in the process of capital accumulation should be summed up as the temporary, stalling, necessary nature of the great intervention to fictitiously prop up profit rates and the slow demise of value, a mode of intervention that literally produces a society living on borrowed time. In the words of Feldner et al. (2017: 1), ‘Through debt we have been living on borrowed time; yet, without the prospect of real growth the issue of debt sustainability only foreshadows a much trickier one, for the covenant of capitalist societies itself is rendered nil and void’.
Despite the goal of trickle-down productive-economic growth through debt creation, cheap borrowing from the financial sector has headed much less toward investment in productive capital than envisioned by the state managers of capital, whose eye on sustaining capitalism as a system is much more rigorous than any individual capitalist making money work for their own interests. Why invest in production when the rate of return isn’t as exciting as elsewhere? A cheaper credit regime supported by the central banks has resulted in a high incentive for a combination of ‘risk-free’ investments in bond markets and risk-heavy speculative investments in the stock and derivatives sectors.
Following the range of political economists cited above, we might say that (1) a slowdown in general economic growth has occurred, because (2) a slowdown in productive growth has occurred, a problem itself born out of (3) a slowdown in production profitability, leading to a greater reliance on (4a) debt creation and debt-driven growth through cheap credit regimes, as well as (4b) speculative asset bubbles making use of said cheap credit. Setting the stage for understanding our crisis moment as the slow demise of value, one can then see in crisis management broadly, and federal funding and repo markets more specifically, a necessary tool for capitalist sustainability. This is in direct opposition to the anarcho-capitalist or libertarian view of monetary policy and central banks as getting in the way of capitalism’s vitality (Aljazeera 2023).
The same can be said about capitalism’s natural tendency toward falling rates of profit. If the natural development of capitalism is falling rates of profit, then the state may attempt to hold this development back for the system’s own safety. A common argument among left academics is to suggest that because neoliberal redistribution policies were enacted, the rate of profit has not fallen during the neoliberal period (Magdoff & Foster 2013; Tombazos 2019). It is argued that the wage share of income decreased, and upper-management and owner share of income increased, thus stabilizing or even increasing the rate of profit. Andrew Kliman (2015) shows how this only gets half the picture right. In his critique of Magdoff and Bellamy Foster’s (2013) conclusions that the profit crisis of the 1970s was resolved via neoliberal redistribution, Kliman shows that while they are right in concluding that the wage share of income dropped, they overestimate the extent due to a reliance on incomplete data. What they see as a 21% drop, Kliman calculates as 9%, using a more complete dataset. Kliman also makes clear that this 9% is not enough to make up for the drop in the profit rate that occurred in the ‘long 70s’ (mid-1950s to early 1980s), a rate which has never recovered. Thus, as he (2015: 249) concludes, ‘neoliberalism was not very successful in restoring profitability’.
To be sure, even if there was not a significant enough wage redistribution to save the profit crisis, it does not follow that labor is in any better position than it was 40 years ago. The opposite is the case, given today’s minimized union density, household debt crisis, and general cost of living crisis. Below are just a few datapoints capturing this social pain:
As of February 2024, inflation is slowing (depending on the measurement), but prices are still significantly up. General consumer prices went up 4.7% in 2021, then 8% in 2022, and another 3.5% in 2023. Here are the metrics on four essential consumer goods, in particular (Rugaber 2023): Groceries are up 25% from pre-pandemic levels. New car prices are up 21% (Official Data Foundation (ODF) 2024b). Home rent prices are up 18% (and still increasing) (ODF 2024c; Yahoo Finance 2023). Home purchase prices are up 18.74% (ODF 2024a).
Beyond inflation, the mainstream press argues that job growth is ‘looking good’. However, it is difficult to tell the quality of these new jobs (full-time or part-time, benefits included, competitive and livable wages, etc.). There is some helpful data, though. For instance, here are some concerning labor trends reported at the end of 2023 (de Visé 2023): The number of Americans working at least two jobs is at its highest rate since before the pandemic; the number of Americans working one full-time job and one part-time job is at an all-time high. Moreover, illegal child labor has nearly quadrupled since 2015; relatedly, state de-regulation (axing of) child labor laws is increasing, arguably in order to allow for more low-wage workers (the minimum wage for children is significantly lower than the adult minimum wage) (Conover 2023). Finally, with regard to labor and income, 62% of Americans are still living paycheck-to-paycheck as of October 2023 (CNBC 2023).
Jobs and income are not the only indicators of working class health, though. We should also look to the ever-expanding debt crisis. As the Federal Reserve Bank of St. Louis (2023a) reports, credit card debt has surpassed $1 trillion for the first time, and the average APR for all credit card accounts is 21.19% (a 43% increase from pre-pandemic levels). In part because of the higher interest rates, the rate of credit card delinquencies (60+ days past due debt) is the highest it is been since 2010 (Federal Reserve Bank of St. Louis 2023b).
There are certainly more socio-economic trends worth discussing, yet the purpose of this article is to consider capitalist crisis not from the standpoint of labor, but rather, from the standpoint of capital. To continue this task, I would like to briefly return to Tombazos’ work, as some of its conclusions are in contradiction with Kliman’s, with potential implications for how to explain our contemporary capitalist crisis’ relationship to both production, speculation, and federal monetary policy.
Synthesizing Tombazos’ incursion
In Global Crisis and the Reproduction of Capital (2019), Tombazos argues that neoliberalization saved the falling rate of profit, even if it accepted a slower growth rate compared to the era of industrialization. He suggests neoliberalism can be best understood as the achievement of financialization, privatization, and especially, increasing the rate of exploitation (through lower wages and higher taxes for the working class, tax cuts for the rich and a gutting of public programs, and an increase in the distribution of profit going to executive wages and shareholder dividends). As noted above, a number of other Marxist economists reject this thesis, arguing that even with all these moves, the aggregate rate of profit still trends downward (there may still be plenty of instances of certain corporations and industries reaching ‘record profits’, while at the same time the total rate of profit for social capital continues to decrease).
The debate on falling rates of profit ultimately depends on how you measure it and what you count as profit (for example, whether you make a distinction between profits and surplus values, between profits and wealth, between financial gains and profits, or between financial profits and non-financial profits), but it is at least generally accepted in Marxist circles, Tombazos and Kliman included, that the neoliberal era itself emerged because of falling rates from the mid-1950s to early ‘80s, and further, that financialization has been one of the key tools for stalling the great arrythmia in capitalism created by the devolution of Fordism and the emergence of the 3rd industrial revolution (electronics and information technologies). In an attempt to reinvigorate the growth rate of capital, financial de-regulation was pursued to allow for greater built up of loan capital and speculative activity. Over time, a disproportional shift in the composition of social capital led to a new kind of crisis, “the crisis of the capitalist reaction and neoliberal response to the crisis of the 1970s” (Tombazos 2019: 84). This disproportional shift is best represented by an increasing gap between money capital growth and constant capital growth (growth of means of production). Too much profit, Tombazos argues, is staying within the money capital circuit, within the financial markets, unwilling to venture out into productive development.
Ultimately, although Tombazos (2019: 84) argues against many Marxists that the aggregate rate of profit is not falling, he still agrees with them that there is a slowdown in productive growth because of a slowdown in production profitability. Furthermore, he still insists that ‘the current crisis is just the most serious episode of the same long-term downward wave that began in the 1970s’. It is worth providing a few datapoints on this long-term downward wave, gleaned from researchers such as Tombazos, Sizzoko, Vighi, and Ted Reese.
The ‘everything bubble’: some datapoints on capitalism’s crisis
According to Tombazos (2019: 65), ‘In 1980, the assets of money capital were roughly equal to world GDP [total money value of commodities], while in 2010 they were four times as high’. This trend of the 1980–2010 period of an increasing gap between money capital and commodity capital is followed by the fact that, ‘Never before in post-war history, perhaps in the whole of peacetime capitalist history, has there been such a long-term and at the same time general stagnation of labour productivity in the developed world as in the period 2008–2018’ (Tombazos 2019: 84). Researching the same year as Tombazos, Sissoko (2019: 330) argues that this long-term ‘savings gut’ – that is, the excess amount of money not in industrial circulation – ‘is best understood as an investment famine’, marked by a relationship between stagnation and the ‘structural illiquidity of the modern market-based financial system’. The structural illiquidity arises out of a financial system that structurally supports the attempts by money capitalists to reroute capital gains away productive investment and toward the purchasing of bonds and other assets that may be collateralized for financial speculation. Importantly, capitalist economies dominated by this manner of speculative finance generate bubbles between financial pricing, expected profits, and the real economy. In agreement with the likes of Harvey and Vighi, Tombazos insists that fictitious capitalization guides this process. As he (Tombazos 2019: 82) notes: Fictitious capital . . . play[s] a decisive role in the growth rate of GDP that preceded the current structural crisis, by suppressing the symptoms of the divergence between the rhythm of valorization of value [production of surplus values] and the ‘sustainable’ rhythm of realization of value [realization of profits]. The ‘bubble’, accelerating the rhythm of realization, was a precondition for the moderate performance of economic activity before the crisis.
Marxists argue that such methods were leaned into in the 1970s and 1980s, and continue to dominate, precisely because of the profitability risk in further developing production. It is a trend, then, that actively undermines productive capital accumulation, while at the same time creating and blowing up bubbles due to hyper-inflated values of financial assets. And yet, without bubbles, the reproduction of capital would struggle to sustain itself at a satisfactory rate. At this conjuncture, the role of monetary policy becomes essential. As Tombazos (2019: 82) argues: [N]eoliberal reproduction of capital survives on ‘technical breathing support’, that is with the support of monetary policies that create new ‘bubbles’. The monetary policy of the central banks (and mainly US fiscal policy) maintains it artificially, but without ensuring satisfactory rates of accumulation of industrial capital or GDP growth and with side effects that may soon take the form of new major crises of finance capital, that is, crises of the financial system and recessions of the ‘real economy’.
To establish how this bears out in the numbers, Ted Reese (2022) sums it up well in recalling the ‘everything bubble’: The third ‘one-in-100-year’ financial bubble in three decades (following the 2000-01 dot com bubble and the 2007-09 housing bubble) engulfing the world economy has been labeled ‘the everything bubble’ since it encompasses every asset (debt) class for the first time, especially short- and now long-term government bonds . . . Official stock market capitalization (the value of publicly-traded stocks) as a percentage of nominal GDP in the US peaked at 199% in November 2021 . . . the previous highs having been 140.5% in March 2000; 101% in November 2007; and 90% in August 1929.
This ‘everything bubble’ has reached such enormous heights that some have grown concerned that Schumpeter’s (1942) ‘creative destruction’ thesis no longer seems encouraging or tenable. With a sense of urgency, Vighi (2017: 23) asks us: Is not the ubiquitous reluctance of policy makers to allow the finance and sovereign debt bubbles to burst, i.e. the destruction of ‘bad assets’ to run its course as a prerequisite for productive investment and renewed growth, a telltale sign for the rampant premonition that the days of ‘creative destructions’ might be numbered and that ‘scorched earth’ could be the more apt metaphor for economic crisis in the twenty-first century?
To summarize, Tombazos, Kliman, Vighi, and Reese all argue, despite their differences, that economic growth today relies on federal monetary policies that encourage bubbles while at the same time establishing themselves as savors amid crises caused by said bubbles – savors on the side of capital, of course. An accumulation of memories of the state bailing out finance capital only further incentivizes the bankers’ speculative activities, with states all but tattooing on their skin that some banks are just ‘too big to fail’ and some debt bubbles too big to let crash. As Rosa Luxemburg (2003: 447) might ask if alive and following the role of central banks today, how does the Federal Reserve ‘provide a solution to the conflict and aggravate it at the same time?’
Crisis management
Bubble policy and The Federal Reserve’s antilabor dual mandate
Before further considering what I call their ‘bubble policy’, it may be useful to outline the Fed’s structure. The Federal Reserve System consists of three ‘key entities’: the Federal Reserve Board of Governors, the Federal Open Market Committee (FOMC), and the regional bank system (Board of Governors of the Federal Reserve System 2022). Rather than having just one central bank, there are 12 regional banks, operating relatively autonomously by selected (not elected) presidents, each focused respectively on their regional macroeconomics and how monetary policy can help it. The Fed refers to this as a ‘decentralized system structure’, but the 12 banks still make up what we understand as the central bank, since they come together to make federal-level decisions like a single central bank may in other nations (Board of Governors of the Federal Reserve System 2022). The Federal Reserve Bank of New York arguably has the most power, as its president has permanent membership on the FOMC, whereas the presidents of the other 11 banks rotate in and out on a 1-year-term basis. The FOMC is the body that comes together to determine whether to increase or lower interest rates or keep them unchanged. As The Board of Governors of the Federal Reserve System (2023) notes, the FOMC is ‘the group responsible for formulating the nation’s monetary policy’. It is referred to as the Open Market committee because when executing their policy, they enter the open market like any private buyer or seller would. Here is where they buy or sell bonds in order to manipulate rates and liquidity levels. Finally, the Board of Governors consists of seven members, each of whom are nominated by the U.S. president and confirmed by the Senate. The seven ‘governors’ each serve 14 year terms and are all members of the FOMC as well. The four remaining FOMC members are made up by the rotating regional bank presidents.
With this Federal Reserve structure in mind, there are a number of factors that have made a speculative, bubble-to-bubble economy possible, but one key factor in making it all work is the FOMC’s control of interest rates and the supply of money in the economy; in a word, their bubble policy. They lower rates in order to give banks and financial institutions access to cheap credit for investing, and they raise rates when they feel like it is time to start cooling the speculative activity so as to not burst the bubble.
For instance, they lowered rates after the 2008 financial crisis in order to incentivize growth. Then, starting in December 2015, they set in motion a gradual phase of increases (draining money from the system), stopping in December 2018. When a brief repo market crisis took place in September 2019, the Fed had to inject money into the financial system to keep it from halted collapse, but this only momentarily helped (Sriya et al. 2020). The same took place in March 2020 because of the COVID emergency, at an even larger scale. Quantitative easing ‘on steroids’, a phrase meant to convey not just the scale but also the speed of these tactics, quickly brought interest rates back to near-zero. The same kind of cheap credit problems popped up (speculation, increased fictitious/real capital gap, excess money supply), so the Fed returned to tightening in March 2022. By June 2023, we reached a point where rates are the highest they have been since just prior to the 2007–08 financial crisis.
Why is the Federal Reserve so intent on interest rates being the central method to manage the financial system? Because their authority and capacity exist solely for controlling the money supply. Manipulation of interest rates is precisely how a central authority can achieve that control in a financial system that is otherwise market based. Yet, the Fed is still locked into a mandate by Congress. Specifically, the Fed has a dual mandate that must legally guide all money supply decisions: sustainable inflation and maximum sustainable employment (Federal Reserve Bank of Chicago 2020). I emphasis sustainable on the latter because of its heavy definitional lifting. The Fed cares more about lowering inflation than maximizing employment, meaning that they will work to lower employment if they rationalize high employment as unsustainable, or, getting in the way of sustainable inflation (which for them is considered 2% annual growth).
This line of reasoning was best exemplified by former U.S. Treasury Secretary Larry Summers (Breaking Points 2023) who, when questioned by John Stewart on the prospects of increased unemployment due to the Fed’s inflation hikes, said, There are certain sicknesses you can have, where there is a drug and it has side effects, and everybody hates the side effects, and no doctor wants their patient to suffer the side effects, but if you don’t address the sickness, you’re going to have a bigger problem down the road.
As the financial economic historian Tim Barker (2021) notes in an excellent interview for Jacobin, economists and politicians like Summers follow a common neoliberal belief that ‘inflation is caused by workers having too much power’. For Barker, ‘There’s a widespread idea from across the mainstream political perspective that workers’ bargaining power becomes a problem at a certain point’. Instead of rejecting this belief, Barker actually insists it is true, but that the mainstream solutions are backwards: Actually, at a certain point, workers’ bargaining power is a problem for the system. And if you’re far enough to the left, your response to that is that the system needs to give way. But if you don’t take that perspective, you say that the workers’ bargaining power needs to give way.
Of course, mainstream economics takes the latter perspective, and so we are left with the Fed abiding by their mandate of maximum sustainable employment, leading to dire consequences for the precariat. If businesses have a harder time accessing loans because of higher interest rates, they’re going to slow down on hiring or even cut back. And even if it is not true that higher interest rates lead to higher unemployment (monthly added jobs have been at a surprisingly good pace since interest rates have gone up, but it is not easy to determine the quality of these jobs), the Fed fully understands that raising rates means making it more expensive for everyone to access loans or credit, whether you are a bank, a business, a wage worker, a retiree, or a student. Seeking to lower inflation through raising interest rates really means seeking to take money out of financial circulation, slow down economic activity, and, make it harder for businesses and individuals to grow via debt.
You may recall the quote from Marx in this article’s first section about an oversupply or excess of ‘loan capital’. The Fed’s quantitative tightening precisely targets this issue of excess. But they cannot do this forever, as solutions to capitalist contradictions come with new contradictions. Raising interest rates further could create a shock in the financial system that not only affects regional and niche banks like that which we saw in March 2023 with Silicon Valley Bank, Signature Bank, and First Republic Bank, but also ‘Big’ commercial players like Bank of America, Citibank, PNC Bank, and TD Bank that have large exposure to unsecured lending and debt-securities (Gilbert 2022). Vighi (2023b) argues that SVB collapsed because it held a high volume of traditionally safe long-term Treasuries (US government bonds) that suddenly lost their value. As interest rates went up, the price of these bonds fell, making the bank’s debt exposure untenable and causing the bank runs.
Yet the reverse move of transitioning to lower interest rates appears to go against the Fed’s purported objective to curb inflation and excess liquidity (cash in circulation). Either way, we’re left with 12 unelected ‘experts’ on the FOMC to decide our fate.
As the Board of Governors of the Federal Reserve System (2022) notes, the open market operations of the FOMC ‘affect the federal funds rate, which in turn influences overall money supply and credit conditions, aggregate demand, and the entire economy’ (my emphasis). What are these open market operations and how do they work? Through these questions, we can finally turn to the rise of treasury bond-based repo markets and their supersized role in the Fed’s fragile handling of the contemporary capitalist crisis. To understand this, though, we have to step out of the sometimes boxed-in Marxist tradition and turn toward the critical macrofinance tradition.
Shadow banking, bonds, repo transactions, and the creation of new money without commodity sale
Less overtly Marxian – though certainly critical – economists, have not quite taken up the fictitious capital and value theory discourse, but they have nonetheless maintained critical focus on finance/money capital, debt-driven growth, and especially, what is increasingly referred to as the shadow banking system (Bryan et al. 2016; Gabor 2016; Gabor & Vestergaard 2016). Marxists would do well to adopt the shadow banking perspective. Putting the two in conversation with each other has the potential to not only build alliances across political economic circles, but also, help us better understand the role of federal monetary policy in what may well be considered the maintenance of a perpetual state of capitalist crisis.
Let us begin with bonds. The government has the power to issue treasury bonds, and today there is an ‘excess demand for these safe assets’, so much so that they have become ‘an exogenous characteristic of the modern economy’ (Sissoko 2019: 319). 1 In doing so, they are essentially artificially creating money to be funneled into the financial system in some way. Once the government mints and issues a bond, it can then be purchased by a primary dealer at a scheduled auction (the 25 or so financial institutions legally allowed to purchase government bonds directly from the government. All other institutions or persons have to buy government bonds through these dealers in what is known as the secondary market). Once a bond is purchased by a financial institution, it functions as a debt-asset. The purchaser now owns government debt. For them, it is an investment. They have just invested money into the government and are on a fixed-rate plan to earn, say, 4% back from the government when the debt ‘matures’ (There are various maturity dates that you can choose for a bond, such as 3 months, 1 year, 3 years, 10 years, 30 years, each typically having a different fixed interest rate). Now, the government itself – through the Federal Reserve – can also purchase its own minted bonds, and does so for very particular purposes, as will be further explored in this section. Indeed, the Federal Reserve is among the top three owners of U.S. government debt, alongside China and Japan (Statista 2023).
When necessary, the government creates credit ‘out of thin air’ to purchase more bonds in order to implement their monetary policy stance. For instance, they may proceed to offer up bonds on the repo market. In this open market, the government, like any other market participant, can sell their bonds to a buyer, who then would sell the bonds back to the government at an already agreed upon up-charge. This up-charge is known as the repo interest rate, and the complete sell-repurchase transaction is known as a repurchase agreement, or, a repo (hence, the repo market; not to be confused with the re-possession market).
What is the function of this market with regard to system management, and with regard to what Vighi (2017: 16) calls the ‘creation of future surplus-value at a historic magnitude that is most unlikely ever to materialize?’. As Daniela Gabor notes, repo markets connect ‘financial stability with liquid government bond markets’, and further, with the government’s ‘capacity as debt issuer’ (Gabor 2016: 967), creating what Gabor calls the repo-sovereign bond market nexus (Gabor 2016: 970). She even goes as far as to suggest that repos are precisely the expression of shadow money (‘shadow money as repurchase agreements, promises to pay backed by tradable collateral. It is the presence of collateral that confers shadow money its distinctiveness’; Gabor and Vestergaard 2016). Gabor situates these practices as tied up with the world of shadow banking, a world that has been constructed through the broad, deregulatory-based financialization and neoliberalization processes of the past 30–40 years. She (Gabor 2016: 970) argues that the market-based shadow banking of American-led global finance ‘organizes credit creation around (collateral) market liquidity’ and thereby demands ‘(some) states to issue debt in order to meet demand for collateral’. Simply put, collateralizing a bond means that an institution or individual who holds bonds can use them as leverage or security to attain new loans or credit. In summary, we may say that shadow banking is the world of interbank lending, where banks secure funds from other banks or non-bank financial institutions, especially money market funds (MMFs).
We see, then, that crucial to the workings of the shadow banking system are collateral assets, for example, the collateralization of bonds into a debt-asset or debt-security. As Robinson (2019: 159) notes, ‘Governments issue bonds to investors in order to close government budget deficits and also to subsidize private accumulation so as to keep the economy going’. Or as The Federal Reserve themselves (2021) note, especially observing the short-term liquidity [cash] transfers achieved through the repo market: The overnight segment of the triparty repurchase agreement (repo) market plays a pivotal role in the normal functioning of the U.S. financial system by acting as an important source of secured short-term funding and supporting the liquidity of key fixed income markets, including U.S. Treasury and agency securities [bonds].
Repo markets, then, are a preferable medium to “connect institutions seeking safety to institutions seeking risk”, at the very least because there is a “promise to pay backed by collateral”; Gabor 2016: 970). While repo market activity experienced an initial rise in popularity in the 1980s and 1990s, with most central banks coalescing around the principle that “financial stability in modern financial systems require global safe assets, issued in liquid government, lubricated by free [unregulated] repo markets” (Gabor 2016: 970), such repo activities have especially picked up since (1) the 2007–08 financial crisis and Great Recession, (2) the money market crunch of September 2019, and (3) the COVID-19 pandemic, albeit in a much more regulated form (a course correction made especially after the risks of deregulated repo markets became clear amid the 2007–08 crisis). 2 They have become a crucial tool for both shadow banking and the execution of federal monetary policy, as repo transactions have an expedited nature unlike other funding markets, both in terms of the speed of transfer and speed of affecting interest rates via changes in money supply.
Interest rate regulation, through manipulation of the federal funds transfer rate, has become the Central Bank’s central tool for responding to, recovering from, and avoiding financial crises. Federal regulators have made an objective to protect banks from collapse by allowing them access to cheap credit via historically low, near-zero interest rates. The lower the interest rates, the greater the capitalist system comes to rely on the public bond market for funding of all sorts of activity. Many banks have come to rely on these ‘low risk assets’ to merely stay afloat (low risk in comparison to private lending, which comes with much higher cost). 3 Unfortunately, in moments that the Feds feel it necessary to raise interest rates in order to fight inflation, such as in 2018–19 and especially 2022–23, the fragility of private banks’ reliance on bonds is revealed. If (1) cheap credit is necessary for both banks and commerce to ‘regularly’ function, and if (2) that credit is consistently pushed into speculative financial markets for banks or investment firms and stock buybacks for corporate enterprises (because investing directly in commodity production is no longer nearly as profitable), then (3) when regulators raise interest rates and thereby make it much more financially difficult for those banks, firms, and enterprises to obtain credit, their whole business model falls under threat. Default becomes a major risk. Businesses have to cut back on commodity production, which trickles down to job loss. 4
All of this may be vital to understand, however, noting the rise in bond activity and its connection to the rise of repo activity and the broader phenomenon of debt-driven growth and crisis management, still does not quite tell us about the repo market.
It is worth providing an example-based definition that does not include the Reserve as a participant for when they need to ‘pump’ money into the financial system. A repo without the Fed would be when a commercial bank such as Bank of America sells some of their government bonds to an investment firm like BlackRock in order to promptly secure cash, with the agreement that the bank will later repurchase those bonds from the firm at a slightly higher price (a 1% repo rate on a $1 billion loan from BlackRock (2023) would mean Bank of America has to pay them back $1.01 billion).
This is a system of cash lending, mediated by the trading of bonds as ‘collateral’ or ‘security’. As stated earlier, the return on investment that lenders receive for this kind of funding is known as the repo interest rate. Mess with the repo rate, as the Federal Reserve likes to, and you are messing with what Financial Times (Tilford et al. 2019) and Bloomberg (Mihm 2019) call the ‘plumbing’ of the economy, and what Wall Street Journal (2019) calls, ‘the grease that keeps the wheels spinning’. If, as already revealed, the Fed admits that repos play a ‘pivotal role in the normal functioning of the U.S. financial system’, it is necessary to ask why the repo has stepped into this role, how it is doing, and more speculatively, how long it can last.
The new role has to do with both certain banks’ systemic needs for short-term cash, the lending banks’ insistence on borrowing banks’ collateralizing their debt, and moreover, the Fed’s unique use of this market to execute their interest rate policy . Regarding the former two reasons, banks increasingly go to the repo market for this short-term interbank lending because, due to current regulations, the repo market offers the best balancing of lender and borrower interests (though Gabor makes clear that this is a lender-centric regime; 2016). It offers the best interest rates for borrowers, close to or near the federal funds rate, and it offers the most secure lending medium for lenders, due to its basis in the sovereign bond market. Many borrowers, large and small, have come to like purchasing bonds over other assets simply because lenders like it; lenders like it because there’s less risk compared to collateral that is not directly backed by the state (Sissoko 2019: 315–316). And the Federal Reserve likes it because they have a little more direct control over the money supply, as repo transactions typically have to go not only through the sovereign bond market but one of the Fed’s authorized clearing houses such as the Bank of New York Mellon (Paddrik et al. 2021).
When the Fed’s FOMC moves to change interest rates in order to adjust money supply, it is usually a little more complicated than just changing a percentage in a computer system. Rather, the Fed likes to manipulate existing rates through what they call ‘open market operations’, which really just means they insert themselves into the ‘free’ market by seeking to purchase or sell bonds like any other participating financial institution. More specifically, they enter the ‘overnight repo’ market when seeking to immediately change interest rates and they focus on long-term bonds when seeking to influence rates more gradually.
Repos have the effect of quickly pumping cash in or out of financial circulation, where supply-demand logics then work to alter the interest rates, likewise in rapid fashion. The Fed purchasing short-term bonds to push money into the economy has the effect of lowering interest rates, whereas selling bonds to take money out of the economy has the effect of raising them.
Under all these conditions and with the interests of the lender, borrower, and Fed in mind, the repo market becomes the institutionally agreed upon site of shadow banking. When problems arise with funding throughout the financial system–a liquidity crisis – the Fed is able to intervene directly by engaging in its own repo transactions, pushing money in or pulling it out of the economy. Indeed, it is increasingly through the repo market that the government ends up borrowing trillions of dollars – not for the sake of funding government expenses, but rather, because the financial market is so demanding of liquidity. As the Federal Reserve Bank of New York (2023) reports, the Fed buys or sells bonds in the overnight repo market in order to ‘temporarily add or drain [cash] reserves available to the banking system and influence day-to-day trading’. This has the effect of either raising or lowering the repo interest rate for all financial institutions buying and selling on the market, making it either more or less expensive for asset-heavy banks to secure cash this way. These banks will still go through with the trading of bonds for cash – they need to in order to function – but it will mean they will have to offset their increased borrowing costs by increasing the borrowing costs for their existing and future customers (businesses and consumers in need of loans). For instance, since March 2022 an increase from 0.5% to 5.25% in overnight lending rates has led home mortgage rates to go up nearly 140% and 100% for 15 and 30 year fixed rate mortgages, respectively (Odion-Esene 2023; as of November 2023). This means that someone who wants to buy a house will have to pay 2× or more per month on their mortgage payments than if they purchased a home prior to March 2022. My personal credit card’s APR has similarly experienced a 100% increase, jumping from 14% to 28%.
Conclusion
The repo market both facilitates the debt crisis and is a response to it. Why? Because the repo market both facilitates and responds to debt markets in general, a market that is so dominant precisely because of the need for debt-driven growth at every level of the economy – financial institutions, corporations, small businesses, and working class households. Investments in productive growth are becoming less and less profitable, generally as well as relative to financial rates of profit and fictitious value accumulation. High stock market valuations, especially relative to actual revenue performance, are a perfect instance of fictitious capital vastly outpacing real capital. What makes the valuation especially fictitious here, sinister even, is that if even just a few major shareholders decide to cash out, the value of that stock (the price per share) drops significantly, wiping out a mass amount of capital in the process. We can refer to this as fictitious because, in a sense, the owners of the stock who suffered the losses amid the price dip did not technically lose any money; they only ever owned a non-money value-asset that represented a money value but which could only ever come to fruition for them if sold. If you sell the value-asset after the stock price has boomed, you will be able to secure that money value, but if you are a big enough owner of that stock relative to the rest of the ownership pool, your selling of the asset will result in a massive loss of fictitious gains for most all other owners of that value-asset, because a sell-off necessarily is accompanied by a devaluation.
Fictitious values, when they are plentiful enough, are good enough to serve as collateral for securing loans. In this case, the stock becomes a collateral-asset (collateral in the sense that so long as you own the stock asset, the lender does not have to worry about trusting you to pay back your loan – they will just take your assets that you collateralized in the case that you cannot pay them back in money form). Elon Musk, for instance, represents an excellent example of this in action. Musk may be the first, second, or third wealthiest person in the world depending on the day, but that wealth is almost entirely made up of fictitious values. Most of his wealth is in the form of Tesla stock, not in his actual bank account. But holding these fictitious values comes with high leveraging power. For instance, he was able purchase Twitter (now, ‘X’) in 2022 only because he collateralized his stock in order to secure a massive loan. If, for any reason, Tesla stock massively depreciates in value, the collateral backing the loan to buy Twitter has just disappeared.
With the rise of fictitious values via inflated stock market valuations, so too is there a rise in stocks as collateral-assets for borrowing money. We may suppose this works fine in plenty of cases, but in an instance of a stock market sell-off or crash, a whole bunch of collateral-assets that are backing loans as guarantees of repayment lose significant value. This frightens lenders, who are worried that borrowers will have to default on their debt, and when this happens, or even the heightened threat of it happens, bank runs may occur wherein people rush to take their money out of the bank because they do not trust their bank anymore to keep their money values secure.
If we turn to the bond market, as I have throughout this essay, we find that much of the same collateralizing happens there, except that the threats are even worse because this is the market that backs the whole Federal Reserve and fed funding system, which itself, as a leading institution of the capitalist state, backs capitalist stability as a whole. We thus find ourselves, from the perspective of critical (as in necessary) analysis, needing to maintain our attention on and properly grasp the problematics of overnight or short-term (credit/debt) funding, bond-securities, repo transactions, and interest rates.
As I’ve tried to show, at the root of our crisis that incapsulates central banks, repos, credit/debt, inflation, and growth is the increasing reliance on fictitious capital as the rate of profit continues to fall in laborious commodity production. The reliance puts exponential pressure on credit and speculation to be the new base for a broad capitalist super-structure, allowing wealth to grow at the financial top without requiring the same for the economy, production, and meaningful jobs. This leads to greater inequality and social-political crisis best represented by the rise in both fascistic and social democratic populisms. The Federal Reserve has been trying to keep Pandora’s Box (the falling rate of profit) closed since its inception, and especially since the major restructuring moments of neoliberalism. But without a socialist mode of production, abolishing the Fed would be a hand-out for libertarian capitalism. Theoretically, a socialized central bank could look like one that simplifies the process of investing in production and development, unburdened by protecting profits and therefore without the need to artificially slow down productivity if it starts heightening the central contradiction of capitalism. Per Marx’s (1973: 625) note in Grundrisse: Capitalism works toward its own dissolution as the form dominating production . . . . Capital itself is the moving contradiction, [in] that it presses to reduce labor time to a minimum, while it posits labor time, on the other side, as sole measure and source of wealth.
If a socialized central bank that tips the scale in favor of labor is a pipedream for the contemporary moment, we could at least fight for a democratized process in the selection of Federal Reserve (FOMC & Board) members. As Tim Barker (2021) insists: Prices and profits have to be an appropriate target for collective intervention, whether that’s through collective bargaining or through government policy . . . Re-politicizing money – or to put it a different way, forcing people to recognize that money has always been politicized – is hugely important for the left . . . We should hope for and build a movement in which we have a mass, collective democratic discourse about monetary policy, instead of leaving it to the so-called experts.
Outside of the politicization of monetary policy and democratizing the Fed, the left needs to at least build up a stronger debt cancelation movement, whether it is medical, housing, or student debt. Wherever there is (predatory) credit and lending, there is also debt. A wiping out of debt would mean a wiping out of excess, fictitious capital. On one hand, this would be enormous for reducing the wealth gap between money capitalists and the working class. On the other hand, it would bring unpredictable consequences to a capitalist economy that, now more than ever, lives via debt-driven accumulation.
