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The Fed Doesn’t Know What Is Happening; in 2007, LaRouche Did

Sept. 21, 2019 (EIRNS)—The phase of general warnings from the likes of former Federal Reserve chairman Janet Yellen—that aggressive bank speculation in the immense corporate debt bubble “could lead to waves of defaults in the next crisis” along about 2021-22—is over. The Federal Reserve is suddenly pulled into a “repo-calypse” and forced toward renewed “quantitative easing” (QE) within two months. The financial crisis has now begun, in 2019, in the U.S. and European and some major developing sector economies. Worsening the crisis is the fact, as St. Louis Fed President James Bullard noted Sept. 20, that “U.S. manufacturing already appears in recession”—much more obviously true across European nations.

The time for action on Glass-Steagall bank separation and related steps is now very short. The period is similar to that inaugurated by Lyndon LaRouche’s July 25, 2007 webcast warning of imminent global financial crisis, immediately followed up by his Aug. 22, 2007 emergency proposal for the Homeowners and Bank Protection Act against the oncoming crash (Glass-Steagall bank reorganization plus a national foreclosure moratorium).

The Fed took another step in its rapid, forced march back to QE on Friday, Sept. 20, showing it knows the liquidity crunch in the Wall Street banking system is continuing, but still appears not to know why. The New York Federal Reserve Bank announced that it will conduct $75 billion “repo” operations again every business day for the next three weeks—24-48 hour lending to banks against Treasuries, Fannie/Freddie securities and MBS (mortgage-backed securities) guaranteed by Fannie and Freddie—and in addition, will start extending these loans to two weeks. It said: The Open Market Trading Desk

“will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each [first on Tuesday Sept. 24].... The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019.”

The Wall Street banks led by JPMorgan Chase now confidently expect full QE (purchase by the Fed of the same securities) to be underway again by November.

This, while it may briefly tamp down the spiking of overnight lending interest rates, will not stop the gradual widening of the financial emergency, because the Fed does now know why or where the holes in the “everything bubble” have opened up. New York Fed President John Williams, in a Sept. 20 interview with the Financial Times, said he was sure the big banks have plenty of liquidity to fill the increased demand for overnight loans, and doesn’t understand why they are suddenly not able or willing to, forcing the Fed to do it.

The big banks, meanwhile, in the hyper-speculative regime of ZIRP and NIRP (zero interest-rate policy and negative interest-rate policy), are failing to perform even their most basic financial functions: corporate bond market liquidity and purchase of government securities. In Europe, they refuse European Central Bank term loans even with negative yield, not believing they can make money re-lending such funds compared to junk and speculative operations in the everything bubble. In the United States, they have been lying low in Treasury auctions to force the yield on those Treasuries at least slightly above the overnight rate; then they may buy. They put their big clients into bond indices, swaps and other derivatives rather than into bonds or bond funds; and they take the same positions themselves.

Wall Street sees a crisis hitting the everything bubble, and does not have the liquid reserves to deal with it. For this, it blames the Fed, for having reduced its asset book (and thereby, the banks’ excess reserves) by more than $1 trillion over the past 18 months. But these reserves are still $3.3 trillion, including some European megabanks serviced by the Fed. Why is that not enough? What threatening crisis or combination of crises is bigger than that?

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