The US financial system would not have survived the 2007/08 crisis if the FED had not intervened, had expanded its balance sheet to around US $ 4.5 trillion, and had cut the key rate several times.
However, the FED officer was clear that such a monetary policy would permanently destroy the System. This is why they have begun to raise interest rates cautiously in 2015 and to reduce the FED’s balance sheet.
Late, as demonstrated at the end of 2018: the stock market experienced its worst December slump for 70 years and only calmed down after Powell promised a return to looser monetary policy.
The FED chief’s reaction made clear what had happened in the ten years before: the financial industry had become dependent on cheap money and demanded more injections like an addict.
Although the FED publicly denies it, we are currently experiencing such injections in the context of interventions on the US Repo market, to an unusually rapid extent.
What is the Repo market?
The Repo market is part of the US bond market, where U.S. banks and hedge funds, if necessary, supply it with fresh money. Repo stands for Repurchase Operation. Financial institutions that need money for transactions do not simply borrow, but sell overnight securities, in particular US government bonds, in order to buy them back the following day.
The US Repo market is approximately $ 2.2 trillion and has been operating smoothly since the turbulence of the world financial crisis. Those who held US government bonds and needed fresh money, could get it through a temporary sale overnight. Conversely, institutions with sufficient funds were able to collect interest through a temporary purchase of government bonds.
On 16 and 17 September, the Repo market had experienced severe turbulence. In order to prevent negative effects on interbank trading, the FED intervened for the first time since 2008 and provided the System with money. This means that it acted as a buyer itself, thereby lowering the interest temporarily raised as well as the smooth running of the transactions.
What’s behind the problems?
Media, big banks and the FED immediately pointed out that this was a technical, short-term imbalance of supply and demand, caused among other things by a shortage of money on the part of the companies due at the end of the quarter tax prepayment and due to recent large-scale government bond purchases.
This Version of the events has now refuted the further development. In the meantime, the problems have not disappeared, but have been persistent and have led to an ever-increasing amount of money being pumped into the System step by step.
What is the cause and why the measures taken by the FED seem to have had little effect is not yet clear. It is clear, however, that initially there was talk of a three-day intervention by the FED. Shortly thereafter, it was said that by 10 October at least $ 75 billion a day, they would intervene in the Repo market and offer the distressed banks three 14-day Repo operations of at least $ 30 billion each.
From the $ 75 billion, 120 billion and from the $ 30 billion two weekly $ 45 billion injections have now become, in total, breathtaking $ 690 billion per week. In addition, the FED announced on 11 October that it would purchase US government bonds for 60 billion short-term bonds on a monthly basis by June 2020. In the past 14 days she has already bought T-Bills for 30 billion dollars.
There is no holding anymore
No one can tell why the FED is using this instrument right now. It is speculated that their leadership expects problems at some big banks because of the onset of the recession, but also that an disorderly Brexit could cause various banks or hedge funds to difficulties because of the bets placed on them in the derivative sector.
No matter what the reason is, one thing is certain: the newly created money will not flow into the real economy this time, but through large investors into the financial casino and the already threatened bubbles in the markets grow further.
The global financial system has thus entered a new Phase, because this time it is clear that there will be no return. The FED’s decision means that the money locks are open in the long run and the world is facing a Phase of devaluation that no longer has to be stopped.