In view of these developments, the three-month recession of the first quarter 2020 - the shortest recession ever - takes on a new coloration. It appears to be the continuation of the "repo" [1] market crash of September 2019, and explains the volumes of repurchases by the Federal Reserve since then. The quality of the names of the banking institutions, as well as the volumes they borrowed, is symptomatic of a major financial crisis. From September to December 2019, they collectively borrowed $22,644 billion [2]. In the first quarter of 2020, they borrowed $28,063 billion. Adding the two together, the total comes to $50,707 billion - over three times the amount the Federal Reserve lent to the same banking institutions during the 2008 Subprime crisis, according to the General Accounting Office [3] (graph 8 shows the names of largest borrowers from September 2019 till March 2020).
To further illustrate the unusual character of the Federal Reserve's decisions, graph 9 displays its overnight repurchases since January 2008. At the highest level during the period under consideration, they were nearly ten times greater than they were during the Subprime crisis. The financial crisis of the first quarter of 2020 is no accidental occurrence caused by an overseas virus, but a major choc due to over-extended financial institutions. The Federal Reserve knew it, and so did the administration.
Graph 7
Graph 8
Graph 9
The Federal Reserve was created in 1913 to avoid a repeat of the financial crisis of 1907. Its role is to define the monetary policy, regulate the banking sector, and prevent bank runs. It's in the name of that last function that the Federal Reserve provided liquidity from September 2019 till March 2020. Banks may run out of liquidity for two reasons: either because of a banking panic or because they are bankrupt. Of course, the Federal Reserve is supposed to provide liquidity only in the first instance, not in the second. One could reasonably argue that on September 17, 2019, there has been a banking panic. However, if that situation reproduces itself over seven months, as it did from September 2019 till March 2020, one can no longer argue that this is the case. Financial institutions were not faced with a banking panic; they were essentially bankrupt.
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