Something happened on the 31st of October that should have made headlines, but didn’t. The US Federal Reserve injected US$72 billion into the US banking system over two days—US$50 billion on Friday, then another US$22 billion on Monday. It was the largest liquidity operation since the dot-com crash over twenty years ago.
The financial press buried it under jargon about “month-end pressures.” Central bankers offered reassurances. Everyone moved on.
But when banks need emergency funding on this scale, two days running, something more than routine is happening.
First, let me explain repos without the jargon. “Repo” is short for repurchase agreement. It’s an overnight loan in which a bank provides high-quality bonds as collateral and receives cash in return. The next day, they reverse the trade—return the cash, get their bonds back. Banks do this constantly to manage their daily cash needs.
Normally, banks with spare cash lend to banks that need it through the repo market. Interest rates stay within the Fed’s target range, everyone’s happy, the system hums along.
But on that Friday, short-term lending rates spiked above the Fed’s target range—a sign that banks were scrambling for cash and willing to pay premium rates to get it. When market rates blow out like this, it means normal funding channels aren’t working properly.
So the Federal Reserve stepped in through its Standing Repo Facility, accepting Treasury bonds and mortgage-backed securities as collateral and providing cash at a fixed rate. This facility was created precisely for moments like this—when the market’s plumbing gets clogged.
The question isn’t whether the facility worked. It did. The question is: why did banks need to use it at record levels for two days in a row?
For years after 2008 and again during COVID, the Fed printed money by the truckload, buying government bonds and flooding banks with cash. Interest rates dropped to nothing. Everyone got used to easy money.
Then inflation showed up. The Fed had to reverse course, selling bonds back and sucking cash out. Meanwhile, the US government keeps running massive deficits, issuing more bonds to soak up whatever cash remains.
Both the Fed and Treasury are pulling money from the same pot. Banks still need reserves to function, but there’s less to go around. Result? Periodic cash shortages, especially at month-end when banks square their books.
The Fed recently announced it would stop this “quantitative tightening.” Some say that it came too late. Similar funding pressures are showing up in UK markets—overnight lending rates there have also spiked to multi-year highs. When problems appear across both the US and UK markets simultaneously, you’re not looking at isolated glitches. You’re looking at a global dollar shortage affecting international banks.
Nobody knows. That’s what makes it concerning.
There are differences. Banks today are pledging high-quality bonds as collateral rather than hiding toxic mortgages. Post-2008 regulations force US banks—and banks globally, including ours—to hold more capital and maintain bigger cash reserves as liquidity buffers against shocks.
But the system is still built on massive leverage and interconnected balance sheets. Commercial property markets in the US are under serious stress, with offices sitting empty and property values falling. American regional banks are losing deposits. And banks worldwide that need to borrow US dollars to fund their operations—including our Australian-owned banks—are finding it harder and more expensive to do so.
The lesson from 2008? Crises don’t announce themselves. They start with small technical problems experts dismiss as temporary. Then everything breaks at once.
Our four big banks are Australian-owned subsidiaries plugged into global wholesale funding markets. We’re not insulated by distance—we’re connected by debt.
In 2008, our government had to introduce emergency guarantees—both for retail deposits and wholesale funding—to keep confidence in the banking system. We got through it without any bank failures, but it showed how vulnerable we are to global funding shocks. Another credit crunch puts us straight back in that position.
The US dollar is the world’s reserve currency. When American banks can’t fund themselves smoothly, it puts pressure on every institution with dollar debts. Credit markets are global. Stress in London or New York means tighter lending conditions here within days.
Why are governments running massive deficits while central banks try to drain money from the system? These policies pull in opposite directions.
Fiscal expansion pushes interest rates up. Monetary tightening does the same thing. Combining them creates even more upward pressure on rates, which eventually breaks something. Right now, that “something” appears to be short-term funding markets for banks.
Either governments need to stop spending money they don’t have, or central banks need to stop pretending they can keep withdrawing liquidity. You can’t have it both ways without periodic crises when the contradictions become too large to ignore.
Politicians don’t want to hear this because cutting spending loses votes. Central bankers don’t want to hear it because their credibility depends on controlling inflation. So everyone keeps pushing forward, hoping the music doesn’t stop.
But on the 31st of October, the music stopped. The Fed stepped in and got it playing again. What happens next time when they can’t?
When central banks make unprecedented interventions and the financial press treats it as routine, something is wrong. When experts offer reassurances identical to what they said before the last crisis, scepticism is warranted.
I’m not suggesting you pull your money out. But understand the global financial system remains fragile. The structural problems that caused 2008 haven’t been solved—they’ve been papered over with regulations and emergency facilities that may or may not work when tested.
For New Zealand, this means questioning whether our banks really are as stable as we’re told. The Reserve Bank just released stress test results saying our five largest banks can withstand severe scenarios, including geopolitical shocks and cyber attacks. That’s reassuring. But those same kinds of tests didn’t predict 2008 either.
And it means recognising that when the world’s most powerful central bank needs to inject US$72 billion in emergency cash over two days, dismissing that as routine is foolish.
The canary in the coal mine is singing. Whether we’re heading for disaster or just temporary turbulence remains to be seen. But pretending we can’t hear the warning would be a mistake we might not get to make twice.
Steve Baron is a New Zealand-based political commentator and author. He holds a BA with a double major in Economics and Political Science from the University of Waikato and an Honours Degree in Political Science from Victoria University of Wellington. A former businessman in the advertising industry, he founded the political lobby group Better Democracy NZ. https://stevebaron.co.nz