The Fed panicked today. It doesn’t know what to do because, as Jeff Snider pointed out, it has no clue what the disease is.
NO! It’s not the coronavirus, as the Fed claims, and litterally everyone believes. So the Fed’s prescription can’t work.
The Fed announced today that it would attempt to stuff $1.5 trillion in short term loans into Primary Dealer trading accounts over the next 3 weeks. OK, but will there be any takers?”
Those loans aren’t signature loans. They’re not payday loans. This is not “No Money Down, Good Credit, Bad Credit, We Finance Everybody” stuff. Repo loans require collateral.
And that brings us to why the problem is the Fed itself. It has cornered the market in T-bills, and now it says it will take an even broader range of collateral off the market.
There’s already not enough collateral available to back the repo that’s out there. The Fed has cornered the market in good collateral, and anybody else holding it sure isn’t going to let go of it in this envirnoment.
The problem isn’t too little credit. It’s too much. Leveraged traders are liquidating stocks because they have to get rid of the credit that had financed it. They want to and have to reduce the leverage that they had used in various other forms of mindless speculation and financial engineering.
That financial engineering was driven by the Fed’s ever increasing support of moral hazard.
When those trades stopped working, it was game over. The Fed can’t fix that. So now it all must be unwound, and the Fed can’t stop it by making even more credit available and taking even more collateral off the market and locking it up.
Had the price and availability of credit been rational all along, we wouldn’t be in this mess. The system would not be massively overburdened with debt and leveraged to the hilt.
The coronavirus would come and go with hardly an economic blip. There would be health effects. There would be economic effects. But the system would have easily weathered it, and the markets could have looked beyond the valley, as they always had in the past.
Now, the system is too fragile. Overburdened with and ossified by too much credit and too much leverage, it no longer has the capacity to do that. Now the stock market crash has wiped out ALL of the remaining collateral, and now the Fed will tie up even more.
So instead of an economic blip, we’re seeing a financial crash that could end up in a depression.
The Fed has prescribed the wrong medicine because it has misdiagnosed the disease. The Fed itself caused the disease. It spent 11 years building a house of credit cards. That house is now collapsing under the weight of too much credit in too many hands.
We can thank the Fed’s 11 years of ultra easy credit, free money, unlimited money printing, and massive asset inflation, while mass raping hard working savers. Sadly it benefitted only the bankers and speculators, while it penalized old fashioned hard work and thrift.
The chickens of that evil policy of constantly growing moral hazard, of robbing the poor to pay the rich, have come home to roost. The piper has demanded payment.
Below is the Fed’s statement today, with the most important policy announcement first.
Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
NY Fed
Here’s the entire statement:
The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released a new monthly schedule of Treasury securities operations and has updated the current monthly schedule of repurchase agreement (repo) operations. Pursuant to instruction from the Chair in consultation with the FOMC, adjustments have been made to these schedules to address temporary disruptions in Treasury financing markets. The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities. Term repo operations in large size have been added to enhance functioning of secured U.S. dollar funding markets.
- As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The distribution of purchases across sectors will be the same distribution as the Desk uses to reinvest principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in Treasury securities. The first such purchases will begin tomorrow, March 13, 2020.
- Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak. Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.
Detailed information on the schedule of Treasury purchases is provided on the Treasury Securities Operational Details page. Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.
https://www.newyorkfed.org/markets/opolicy/operating_policy_200312a
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