Americans hated it when the Federal Reserve handed trillions of dollars to crooked Wall Street banks following the 2008 Financial Crisis. Politicians were confronted about the merits of central banking and bailouts. For the first time in history, college students were chanting “End the Fed” at campaign rallies as Ron Paul took the central bank to task during his presidential campaigns. Now all has gone quiet. What happened?
Virtually everyone in America vehemently opposed the central bank handing piles of cash to the same bankers whose greed and fraud had caused the Financial Crisis. Little has changed, but the public’s revulsion taught the central bankers an important lesson. If they give handouts to greedy and fraudulent bankers, they had better do it in secret.
Avoiding a public outcry is probably why there is scant information about what is actually happening in the repo markets right now. The Fed continues to ramp up its overnight lending operations and has now poured in just short of three-quarters of a trillion dollars in the past month.
The stated reasons for injecting all of this freshly printed cash are dubious at best.
We know private banks suddenly priced the risk of overnight lending to other banks multiples higher. The Fed’s program, which was originally presented as a fix to a very temporary problem, has now been expanded and extended multiple times.
The actual problem has turned out not to be short-lived, and the sums involved in addressing it are staggering.
The Fed just ramped up its commitment to now provide $690 billion in supposedly short-term funding. It will onboard the associated risk at a rate far below what the private market dictates.
One or more banks are seriously short of cash. Their peers won’t, or can’t, extend a short term, fully collateralized loan at less than punitive rates.
That’s why the Fed stepped in with another massive handout. As far as the Fed is concerned, no bankers should pay for whatever sins and mismanagement led them into trouble.
Jerome Powell and other Fed officials aren’t going to admit that, of course. They also don’t want the public to know which firms are getting these backdoor bailouts, or why.
They want Americans not to worry or pay much attention. We’re told repo loans are secured by bulletproof collateral – U.S. Treasuries. They aren’t talking about why this collateral isn’t providing comfort to private-sector lenders who want much higher rates.
The Fed might just get away with it, too. Nobody is chanting “End the Fed” anymore. Candidates aren’t talking about the central bank… with the exception of Donald Trump, who has done an about-face since his election. He now lambasts the Fed for not doing nearly enough.
The wealth transfer from Main Street to Wall Street looks set to continue unchallenged. When the next bubble pops, Americans may again remember why a central bank, which responds to every problem by printing vast sums and handing it to other bankers, is a terrible idea.