The Federal Reserve Has Become the World’s Largest ‘Bad Bank’
April 2, 2020 (EIRNS)—The U.S. Federal Reserve, based on previous and ongoing activity, is now the world’s largest bad bank. A bad bank is created when a failing bank is split into two: a “good” bank, into which the viable assets are placed, and a “bad” bank into which all the toxic assets are placed. The Fed functions like, and has the same damaged creditworthiness as, Lehman Brothers or Deutsche Bank.
The Fed’s total asset holdings have just reached $5.3 trillion. The Fed never held more than $1 trillion in assets until 2008: On Sept. 3, 2008, it held $925 billion in assets, but after the 2008 crisis hit, by Nov. 26, its held assets of $2.1 trillion. Through quantitative easing, the Fed’s asset holdings rose to $4.2 trillion in early 2014. On March 11, 2020, the Fed held $4.3 trillion in assets, and by March 26, they were $5.3 trillion. In 15 days, their assets increased by 25%.
And yet, the Fed’s assets are increasingly worthless. The vulnerability of the Fed is demonstrated in the housing market.
First, home purchase applications are cratering in hotspots. In New York, according to the Mortgage Bankers Association, home purchase applications fell by 17.2% for the week ending March 20 compared with the previous week, and then by an additional 18.1% for the week ending March 27, representing approximately a two-week fall of 35%. In California, home purchase applications fell by approximately 39% over the same two weeks. These represent two of the largest home markets in the world.
There are two reasons why this is happening. Families’ real living standards have been falling for a while. Further, two days ago, the St. Louis Federal Reserve Bank projected that unemployment would reach 32%. That means one or two wage-earners in the household may likely lose their job. The $1,200 payment per person as part of the $2.2 trillion stimulus act would pay for maybe one month’s mortgage or rent. Would you buy a home? The second reason for this process, is you can’t home shop when you are under stay-at-home orders.
The whole idea there will be a “bounce back of the housing market,” is false. Moreover, the sharp drop in home-purchase applications may blow out the entire mortgage bubble.
Failures in the mortgage market are already occurring. The April 1 Asia Times reported that the Fed had tapered its purchase of risky mortgage-backed securities (MBS). But, “Forced sales of MBS by leveraged funds alarmed the Fed, which said [March 31] that it would buy at least $700 billion in government and mortgage bonds, and may have bought double that amount before the end of the week.”
Four mortgage investment firms have defaulted and shut their doors during the past week: MFA Financial, Invesco Mortgage Capital, AG Mortgage Investment Trust, and TPG RE Finance Trust, as EIR reported on March 31.
The Fed has bought MBS, and will be instructed to buy more. The Fed will buy other asset-backed securities, based on credit cards, leases, student loans, you name it. The Fed was given power last week, which it seized upon, to create and operate a host of special purpose vehicles which are lending to or purchasing failing financial instruments. The more the Fed buys of garbage instruments, the more its balance sheet loses value. The more assets the Fed buys, the less the assets are worth. In the coming weeks in this self-feeding cycle, the Federal Reserve will increase its asset holdings from $5.3 trillion to $7 or $20 trillion, proliferating its holding of worthless toxic assets, that certifies its bankruptcy.
Contrary to having a “strong” central bank to steer the crisis, the City of London and Wall Street banks have created a bankrupt entity.