The Fed Appears to Be Losing Control of Interbank Lending, As in September 2019

The current phase of the comatose state of the global financial system started in September 2019, when the repurchase (repo) market froze, forcing the Federal Reserve to intervene and replace interbank lending by providing hundreds of billions of overnight liquidity to the system itself. But rather than improving, things only worsened, and the Fed now seems to be losing control again.

Indicating the urgency of coping with the problem, a new Standing Repo Facility has been created by the Federal Reserve with an authorization of $500 billion, subject to unlimited increase by Fed Chairman Jerome Powell. The new facility was announced on July 28 and began operating on July 29. It will make repo loans not only to primary dealer banks, but to hedge funds, private equity funds, money-market mutual funds…. And, there is a second Standing Repo Facility as well, for “foreign and international monetary institutions.”

The situation has clearly become much more unstable and contagious according to Pam and Russ Martens (wallstreetonparade. com). The Federal Reserve has injected $4.5 trillion in reserves into the big banks just since the restart of QE in October 2019. At the same time, they are crammed with trillions in new deposits and they have withdrawn loan and lease credit, net, from the economy, while doubling their speculative securities assets.

Equally ominous: The Fed embarks on these new facilities to pump in liquidity, after about six weeks of reverse repo operations (in which the Fed makes overnight loans of Treasuries in exchange for cash loans from banks; i.e., it soaks up liquidity from the banking system), which have run as high as $1 trillion/ day! This indicates it is dealing with, or perhaps lurching around in, real volatility stemming from the very masses of deposits and stock-price gains it has caused to appear.

Worst of all, in the view of the Martenses, is that the Fed announced the Standing Repo Facility on the afternoon of July 28, when it had been called for that morning by the G30 Working Group on Financial Markets, headed by the consummate bad actor in a financial crash, Tim Geithner. As head of the New York Federal Reserve, Geithner “sluiced out $29 trillion to bail out the Wall Street banks” in 2008, as the Martenses wrote.