Federal Reserve Panic Grows, Several Come Out for - 0.5% Rate Cut This Week
July 22, 2019 (EIRNS)—Several Federal Reserve governors or regional presidents, and one nominee, have called for the Federal Open Market Committee (FOMC) to cut the Fed discount rate by half a percent or even more this week, as fear is growing that the global economic slowdown will trigger a trans-Atlantic bank collapse. Minneapolis bank president Neel Kashkari, St. Louis president James Bullard, and New York president John Williams have all proposed a half-point cut; Trump’s Board of Governors nominee, Judy Shelton, has called for that cut or more. The standard explanation—the stock markets demand it—is trivial; the problem is the threat of megabank failures, perhaps already begun with Deutsche Bank, when the leveraged loan and junk bond markets are triggered by waves of defaults.
The Bank of England has joined the Bank for International Settlements (BIS) in acknowledging that the corporate debt bubble is threatening the major banks.
“The Bank of England’s recently published Financial Stability Report,” reports Forbes July 22, “shows that banks, especially American ones, are the largest owners of leveraged loans and collateralized loan obligations (CLOs). Banks own a little over 55% of the $3.2 trillion global leveraged loan and CLO market. Banks own leveraged loans in three ways: they hold some on their balance sheets, they have them in the pipeline to sell to a special purpose vehicle which will then sell the leveraged loans in a CLO, and by holding CLOs.”
Moreover, and worse, the Bank of England report charts the fact that the megabanks are the largest holders of CLOs based on leveraged loans—the financial media and others, including numerous Republican Congressmen, have been insisting that these “safe derivatives” were all assets of funds and shadow banks only.
On June 30, the so-called “central bank of central banks,” the Bank for International Settlements, based in Basel, Switzerland, warned of a bank crash from corporate overindebtedness in the advanced economies, in its Annual Economic Report. The Guardian’s headline on the report, “Corporate Debt Could Be the Next Sub-Prime Crisis, Warns Banking Body,” was typical.