By Mike Whitney
February 01, 2020 "Information
Clearing House" -
A
five-alarm fire has broken out in a little known,
but critically important area of the financial
system where high-quality bonds are swapped for
cash. The “repo” market, which is short for
repurchase agreements, is part of the nondeposit,
shadow banking system that remains largely
unregulated despite the fact that it was ground zero
in the 2008 financial crisis.
On September 17, 2019, the
repo market was whipsawed by a sudden spike in
short-term interest rates that rose from the Fed’s
target rate of roughly 2% to an eye-popping 10% in a
matter of hours. The incident, that put traders into
an immediate frenzy, sent the Fed scrambling for the
printing presses where it swiftly rolled-off $75
billion to finance additional short-term loans and
to add liquidity to a market badly in need of cash.
The Fed’s efforts did in fact bring rates back down
to the 2% target-range but at great cost to its
credibility. Despite repeated assurances that the
financial crisis was over, the Fed has resumed
pumping $60 billion per month into a market that is
liquidity-starved and dangerously out-of-whack. In
truth, the only thing preventing another spike in
rates followed by an excruciating debt cascade, is
the Central Bank’s ability to bury the problem under
a mountain of freshly-minted dollar bills. Absent
that, another cataclysmic crash would be
unavoidable. Check out this excerpt from an article
from Wall Street on Parade:
“According to the data
made available on the public website of the New
York Fed, since September 17, 2019 it has
funneled a cumulative total of $6.6 trillion to
some of the 24 trading houses on Wall Street
that are known as its “primary dealers.” The
giant sum has been sluiced to Wall Street in the
form of repurchase agreement (repo) loans
without any details being provided to the
elected representatives in Congress as to which
firms are getting the money or what it’s being
ultimately used for.” (“Fed
repos have plowed $6.6 trillion to Wall Street
in 4 months”, Wall Street on Parade)
The Fed is swapping cash for
collateral of unknown quality. The public doesn’t
know the terms under which these agreements have
been made nor do they know whether the banks are
concealing their own insolvency as they did
following the collapse of Lehman Brothers in
September 2008. What we do know, however, is that
the Fed has provided a “cumulative total of $6.6
trillion” at the discounted rate of 1.55% to the
most distrusted institutions in America without any
congressional oversight, without any independent
review of the process, and without the American
people having the slightest idea of the risks that
are involved in blindly rolling over trillions of
dollars of short-term loans to these thoroughly
corrupt and totally unreformable financial
institutions.
