The Fed Is Going All-In To Keep The System From Collapsing

Gresham’s Law in action: The diminishing availability of physical gold from the market (per several different accounts in London) corresponds to the proliferation of fiat currency printing and paper gold derivatives.

Since September the Fed has increased the size of its balance sheet by $414 billion or 11% in less than four months. It’s the fastest rate at which the Fed has printed money in its history.  The Fed insists that this “repo” program is not the reinstatement of “Quantitative Easing.”  In one sense the Fed is correct. This money printing program is a direct bailout of the big banks. And now the Fed is proposing to start bailing out hedge funds:

Federal Reserve officials are considering lending cash directly to hedge funds through clearinghouses to ease stress in the repo market. But that could be a tough sell for policy makers  (WSJ).

Yes, liquidity in the inte-rbank overnight collateralized lending system dried up in September.  But it’s not because of a shortage of cash to lend. The reason is two-fold.  First, banks needed cash/Tier 1 collateral to shore up their own reserves. Why?  Because bank assets – especially subprime loans – are starting to melt-down – i.e.  rising delinquencies and defaults. This is provable just by looking at the footnotes in quarterly bank 10-Q’s.  Second,  hedge fund assets – primarily the bottom half of CLO’s, credit default swaps, leveraged loans – are melting down.

The banks know this because these are the same deteriorating assets held by banks. In order to induce overnight repo lending, it would require a repo rate many multiples of the artificially low repo rate in order to reflect the risk of holding compromised collateral  overnight. This is why the repo rate spiked up briefly to 10% in September. That rate reflected the overnight interest rate desperate borrowers were willing to pay for an overnight collateralized loan.  Banks pulled away from lending in the repo market because they no longer trusted the collateral – even on an overnight basis. This is why the Fed was “forced” to start printing $10’s of billions and make it available to the repo market.

The Fed created the problem in the first place by holding interest rates artificially low and leaving several trillion of its first series of QE operations in the banking system. This in turn fostered  a catastrophic level of morally hazardous investing by banks and hedge funds. Now the Fed will try to monetize this – it has already hinted that the “repo” bailout will be extended now to April.  Absence this Fed intervention, 2008 x 10 will ensue – which will happen eventually anyway.

Ultimately, it will be a tragedy if the Fed bails out the the banks and the hedge funds – especially the hedge funds. Who benefits from this?  Bank and hedge fund operators should be penalized for making reckless investment decisions – not bailed out by  what will end up to be taxpayer money.  We already saw in 2008 that banks take the bailout funds and continued to pay themselves huge bonuses despite making lending decisions for which they should be penalized.

And a bailout of the hedge funds would reward hedge fund managers for investments that would never have been made had the Fed let a free market determine the true cost of making those investments.

I said back in 2003 that the Fed would print money and monetize debt until the elitists had swept every last crumb of middle class wealth off the table and into their own pockets before letting the system collapse. The bank bailout in 2008 and now the bank/hedge fund bailout is an example of this wealth transfer process.  The only question that remains in my mind is whether or not the current bailout operation will be the last “sweep.”

5 thoughts on “The Fed Is Going All-In To Keep The System From Collapsing

  1. As I remarked in a comment on a previous article, the amount needed to cooper up the financial system this time will be staggering. The price of a security is set on the margin, and everyone owning it thinks that’s what it’s worth – at least until the selling starts – then look out below.

    So we’re probably talking many trillions. Max Keiser thinks the Fed can print $$25 to $30 trillion, without batting an eye, and with impunity. I don’t. It will be the end of the dollar.

  2. I can see Trump being elected ‘King’ of the MAGA tribe by a small community of Mad Max dwellers in New York. Residing in a burnt out Trump Tower bartering car tyres for fish from the Hudson. This melt down will be more than epic.

  3. The Middle class will one day pay for stupid mistakes they made specially in USA.
    Interesting article about gold coins sales , it’s simply unbelievable because gold will go higher 100%. Link -https://www.gold-eagle.com/article/gold-eagle-coin-sales-record-low-investors-sleeping

  4. 1-17-20 3:30 pm C.S.T. It has now been 70 straight sessions and
    the Spoos has not had a 1% correction. Welcome to Zimbabwe,
    where you soon will need a dump truck full of worthless paper
    in order to pay for a loaf of bread. Thanks a lot Powell and all
    former Fed heads. America is over.

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