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OpEdNews Op Eds    H1'ed 3/10/20

The Fed's Baffling Response to the Coronavirus Explained

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When the World Health Organization announced on Feb. 24 that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points, or 10%. In an attempt to contain the damage, the Federal Reserve on March 3 slashed the fed funds rate from 1.5% to 1.0%, in its first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half-point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving U.S. companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning that their suppliers get their supplies there; and 938 of the Fortune 1,000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of U.S. pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt.

So what was the Fed's reasoning for lowering the fed funds rate? According to some financial analysts, the fire it was trying to put out was actually in the repo market, where the Fed has lost control despite its emergency measures of the last six months. Repo market transactions come to $1 trillion to $2.2 trillion per day and keep our modern-day financial system afloat. But to follow the developments there, we first need a recap of the repo action since 2008.

Repos and the Fed

Before the 2008 banking crisis, banks in need of liquidity borrowed excess reserves from each other in the fed funds market. But after 2008, banks were reluctant to lend in that unsecured market, because they did not trust their counterparts to have the money to pay up. Banks desperate for funds could borrow at the Fed's discount window, but it carried a stigma. It signaled that the bank must be in distress, since other banks were not willing to lend to it at a reasonable rate. So banks turned instead to the private repo market, which is anonymous and is secured with collateral (Treasuries and other acceptable securities). Repo trades, although technically "sales and repurchases" of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks.

The risky element of these apparently secure trades is that the collateral itself may not be reliable, because it may be subject to more than one claim. For example, it may have been acquired in a swap with another party for securitized auto loans -- or other shaky assets -- a swap that will have to be reversed at maturity. As I explained in an earlier article, the private repo market has been invaded by hedge funds, which are highly leveraged and risky; so risk-averse money market funds and other institutional lenders have been withdrawing from that market. When the normally low repo interest rate shot up to 10% in September, the Fed therefore felt compelled to step in. The action it took was to restart its former practice of injecting money short-term through its own repo agreements with its primary dealers, which then lent to banks and other players. On March 3, however, even that central bank facility was oversubscribed, with far more demand for loans than the subscription limit.

The Fed's emergency rate cut was in response to that crisis. Lowering the fed funds rate by half a percentage point was supposed to relieve the pressure on the central bank's repo facility by encouraging banks to lend to each other. But the rate cut had virtually no effect, and the central bank's repo facility continued to be oversubscribed the next day and the following. As observed by Zero Hedge:

"This continuing liquidity crunch is bizarre, as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE [quantitative easing]."

The Collateral Problem

As financial analyst George Gammon explains, however, the crunch in the private repo market is not actually due to a shortage of liquidity. Banks still have $1.5 trillion in excess reserves in their accounts with the Fed, stockpiled after multiple rounds of quantitative easing. The problem is in the collateral, which lenders no longer trust. Lowering the fed funds rate did not relieve the pressure on the Fed's repo facility for obvious reasons: Banks that are not willing to take the risk of lending to each other unsecured at 1.5% in the fed funds market are going to be even less willing to lend at 1%. They can earn that much just by leaving their excess reserves at the safe, secure Fed, drawing on the Interest on Excess Reserves it has been doling out ever since the 2008 crisis.

But surely the Fed knew that. So why lower the fed funds rate? Perhaps because it had to do something to maintain the fa├žade of being in control, and lowering the interest rate was the most acceptable tool it had. The alternative would be another round of quantitative easing, but the Fed has so far denied entertaining that controversial alternative. Those protests aside, QE is probably next after the Fed's orthodox tools fail, as the Zero Hedge author notes.

The central bank has become the only game in town, and its hammer keeps missing the nail. A recession caused by a massive disruption in supply chains cannot be fixed through central-bank monetary easing alone. Monetary policy is a tool designed to deal with demand the amount of money competing for goods and services, driving prices up. To fix a supply-side problem, monetary policy needs to be combined with fiscal policy, which means Congress and the Fed need to work together. There are successful contemporary models for this, and the best are in China and Japan.

The Chinese Stock Market Has Held Its Ground

While U.S. markets were crashing, the Chinese stock market actually went up by 10% in February. How could that be? China is the country hardest hit by the disruptive COVID-19 virus, yet investors are evidently confident that it will prevail against the virus and market threats.

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

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8 people are discussing this page, with 12 comments

shad williams

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It is interesting that those criminal elites can't use their fiat currency as quickly as they would like and are therefore accumulating useless paper. Collateral indeed. What do the people do if the gold is missing? Do we have an audit of how much gold the people own? And of course when it is time to pay, the elites will try to hold on to their real property purchased with two cent dollars.

Submitted on Wednesday, Mar 11, 2020 at 3:41:22 PM

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Paul from Potomac

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The Fed cannot control the USG, any branch. The scientists know what to do, and the government never will.

#1) Dump the advice of the AMA and its lackeys. Doctors have no clue how to cure anything. Use Traditional Chinese Medicine (TCM) to use tried and true cures that DO NO HARM. You will note that China's cure rate and death rate are infinitely superior to all other nations.

#2) Form an alliance of all nations to effect a cure immediately using TCM.

#3) Confiscate the property, all but about $10 million, of all super wealthy people and corporations all over the planet. No exceptions.

#4) Deploy soldiers to end the rape of our planet by corporate entities.

#5) Remove politicians from their positions and replace them with smart people who understand science, technology, engineering, and mathematics.

THEN WE MIGHT JUST SURVIVE.

Submitted on Wednesday, Mar 11, 2020 at 4:39:06 PM

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shad williams

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Very good points. I do write like a jerk sometimes and I am differently as vicious and authoritarian as the system I would like to destroy. My solutions are not constructon but d str ct on. Someone else can build a better world .

Submitted on Thursday, Mar 12, 2020 at 6:19:30 AM

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Private Citizen

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Washington's Governor will allow DONALD J. TRUMP to host rallies, as long as the building occupancy is limited to DONALD J. TRUMP and 249 others.

click here

Submitted on Wednesday, Mar 11, 2020 at 8:22:54 PM

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Derryl Hermanutz

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Great analysis! The financial "markets" are a gigantic heavily rigged Ponzi scheme that would have collapsed in 2008 if it hadn't been bailed out and continuously propped up ever since. But the "banksters" need to maintain the illusion that they are free market businesses entitled to their "trading" profits - even if those profits are only made possible by ongoing central bank support and ongoing government forbearance that withholds imposing "free market" solvency accounting standards on the banks' balance sheets.

A "real" audit would find that most of the banks' assets are merely collateral reported at inflated prices, or uncollectable loan account payments; while their liabilities are fully payable: which means the banks are technically bankrupt.

One of these years people will realize that money is just numbers in accounts (bank deposits) and numbers printed on slips of paperlike material (banknotes); that commercial banks create the spendable money supply in the form of spendable "balances" that are created by typing numbers in the Credits column of borrowers' bank deposit accounts; that central banks create the base money supply by typing numbers in the Credits column of commercial banks' reserve accounts; and that if commercial banks can create money out of nothing and lend it into existence at interest, then governments can create their own money and spend it into circulation as debt-free, interest-free, government-issued "helicopter money".

Submitted on Wednesday, Mar 11, 2020 at 10:19:46 PM

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Ellen Brown

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Thanks Darryl, totally agree!

Submitted on Thursday, Mar 12, 2020 at 2:35:01 PM

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TruthWillPrevail2020

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The fiat financial system has been held together by smoke an mirrors for a long time now. The old system allowed the banksters to skim the wealth of the world and make us their debt slaves. Trump and the patriots are getting ready to reset the entire system to a gold/metal-backed crypto currency system. The 1913 Federal Reserve Act was illegal anyway. Soon to be cancelled. It needs to be done, and Trump has the balls to do it. I think I hear a Jubilee playing in the background. And I say, Amen to that!

Submitted on Thursday, Mar 12, 2020 at 1:48:43 PM

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shad williams

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Reply to TruthWillPrevail2020:   New Content

Wow. Sorry I missed that.

Submitted on Thursday, Mar 12, 2020 at 8:33:48 PM

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john taylor

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Never gonna happen. The Donald Trump's fake wealth is in FED reserve notes, dudes not biting the hand that feeds his crazy,diluted ass. He's the POTUS because the Financial powers that be want him there & he works for them. The dream ended when they murdered JFK.

Submitted on Thursday, Mar 12, 2020 at 8:34:16 PM

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TruthWillPrevail2020

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Wrong. The Deep State controlled presstitute media constantly attacks Trump (and conditions the masses) because he is not one of them. He is their enemy. It should be obvious for any with eyes to see. And with the military on Trump's side, finally ready to fulfill their oath to defend against all enemies both foreign and domestic, they are going to take down the cabal and restore the republic. Too bad so many are too blind to see it happening right in front of them.

Submitted on Thursday, Mar 12, 2020 at 9:24:35 PM

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Lance Ciepiela

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This COVID-19 is perhaps the greatest challenge that the Fed has faced in modern times. No matter how low interest rates are pushed and no matter how much helicopter money the Fed drops from the sky it isn't going to cause fearful Americans to go shopping, take trips, or start businesses. And nothing that the Fed can do will be able to mitigate the severe disruptions to global supply chains that we are currently witnessing. #PrivateHands.

Submitted on Thursday, Mar 12, 2020 at 4:33:04 PM

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shad williams

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Reply to Lance Ciepiela:   New Content

In that case, give the Fed to me. I can think of a thousand decent ways to combat not only the Coronavirus but some of the "we lie, we cheat, we steal" viruses. We also murder is of course understood...so they gotta go right? How long we gonna allow a bunch of psychopaths to run around the planet, threatening, blowing up sh*t and killing people? Maybe I can bad mouth them to death...

Submitted on Thursday, Mar 12, 2020 at 8:47:42 PM

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