Repo Loan Crises Track Financial Crashes
Aug. 16, 2021 (EIRNS)—What happens if the global COVID pandemic, generating its highest caseload of suffering in its two years’ duration, is punctuated by the event of a major financial crash? The Green New Deal will then encounter much more fierce resistance from the citizenries of nations; but will the political leaderships then rush, one fatal last time, to save Wall Street and the City of London, or will they be compelled to save humanity?
EIR’s continued warnings that the mid-September 2019 “repo crisis” set off a countdown to a crash, were duplicated by the economists Pam and Russ Martens in their “Wall Street on Parade” column of Aug. 12. Using almost four decades of data on the Fed’s provision of liquidity to financial firms published in the just-released Annual Report for 2020, they show that there have been three episodes of sudden, massive rises in so-called repurchase-agreement or “repo” lending by the Fed to the banks. The first episode occurred in 1998—a 365% spike in daily repo loans demanded by the banks and provided by the Fed—and peaked just two months before the global stock and bond market crashes of 1998 began. The second episode began in late 2007; liquidity “loans and other credit extensions” listed in the Annual Report spiked by 24 times in the next 12 months, from $72 billion to $1.6 trillion, ending in the global financial crash of September 2008.
And the third such episode began with the “repo crisis” which suddenly forced the Fed into action in September 2019, and has shown a second wave this summer. This liquidity lending torrent has surged again in mid-2021 despite unlimited quantitative easing of $120 billion/month for the past 18 months. In 2009 the beginning of QE replaced the liquidity lending after the 2008 crash, ending “repo” operations for 10 years. But this time QE has been immediately followed by another, even larger spike of liquidity loans this summer and the formation of a Standing Repo Facility to provide them.
Now there are indications the Federal Reserve may try to announce in September the start of “tapering” of quantitative easing securities purchases—which have been supporting Wall Street’s markets—with “repo” and other liquidity operations at a very high level. The Aug. 18 release of minutes from the FOMC’s July 27-28 meeting are expected to reveal discussions of a tapering announcement in September.