Fed’s Pre-Crash Actions of 2007 Continue To Repeat in 2019
Oct. 10, 2019 (EIRNS)—However hard President Donald Trump may be working to create “trade talk optimism” for the stock market, the financial crisis facing the world sticks out, in the fact that the U.S. Federal Reserve is compelled to keep pumping emergency cash into the banking system to cover leaks in the “everything bubble” of unpayable debt. The situation continues to be one that has not been seen since the spring and summer of 2007, and to echo it strongly.
This morning the Fed made overnight and two-week “repo” loans to banks totalling nearly $90 billion. Two days ago Fed Chair Jerome Powell announced more quantitative easing “soon”—while insisting it was “not QE,” as in “this time it’s not a duck.” While some of the repo loans are repaid by the banks, the measure of the crisis the Fed faces is how much it has had to enlarge its balance sheet since Sept. 17, both by reinvestment of interest on government securities and the mortgage-backed securities it holds, and by emergency net repo lending—both representing rapid injection of liquidity into the banking system. As calculated by the “Wall Street on Parade” website, that was $176 billion in the two weeks to Sept. 30. And in the past two days, Oct. 9-10, the Fed has made “repo” loans of $118 billion more.
During spring 2007, all that was apparent to most people was that home foreclosure rates had increased around the U.S., some mortgage lending companies had imploded, and home prices had stopped rising. But the Federal Reserve began making just such liquidity loans to banks, while then-Chair Ben Bernanke pronounced that problems were “contained” in the subprime mortgage sector. When Bear Stearns had to shut down two large hedge funds that June, the Fed’s liquidity lending increased. Aided by these injections, the prices of toxic mortgage-backed securities debt held up and even rose further, as ironically dramatized in the film “The Big Short.” Vast bank and insurer liabilities in the then-$700 trillion derivatives markets were concealed; though not from Lyndon LaRouche, who announced the death of the financial system in 2007 and put out legislation that August to save homes and commercial banks from the coming crash.
When Bear Stearns itself failed in March 2008, the Fed made a very large long-term “repo” loan of $30 billion to JPMorgan Chase to take over Bear Stearns’ assets. This showed how thin was the Fed’s line between making emergency “repo” loans and buying securities at face value from banks. In the same way now, what has effectively become a “standing overnight and term repo facility” at the Fed, is now going over into QE4.
With an industrial recession worsening the corporate debt center of the “everything bubble,” we know what is coming unless Wall Street banks are broken up by Glass-Steagall legislation.