The Fed’s lost control of its ability to fix interest rates.
We know that because it’s had to resort to doing huge amounts of repos with banks lately, something it hasn’t done in a decade, to control the fed funds rate which is spiking above targets set by the Fed.
But it’s worse than that.
The Fed’s lost the confidence of markets, lost its ability to control the economy, and lost our future.
The Federal Reserve System’s a shell game, they’re con artists, and the game they’re playing is crooked.
Someone needs to blow the whistle on the Fed.
At great risk to myself, because the Fed is a protected institution, I will be that someone.
The Fed Formed a Faustian Bargain of Critical Importance for Your Future
The Fed was created by a handful of the biggest bankers operating in America, who in 1913 forced the Federal Reserve Act that legitimized it as our central bank through an inept and complicit Congress.
In return for the bankers’ creation taking over America’s money supply, literally, and being able to print as much of its money as it wants, to generate profits for its bank constituents who charge interest on the money they lend out and to flood them with cash when they blow themselves up from their greed, the government got a buyer of last, and lately first resort, to buy the debt that it issues in order to spend on what politicians expect will win them votes.
A Faustian bargain, for sure.
About those fed funds and surging repos.
The last time the Fed used repos and reverse-repos on a gigantic scale was back in the late 1970s and early 1980s.
Back then the economy, battling an accelerating wage-price spiral that fostered inflation and stagnated economic growth, spawning the moniker “stagflation,” was driven over a cliff by the amount of money in the economy and the accelerating “velocity” of money, the rate at which consumers and businesses in an economy collectively spend which increases as inflation increases.
To rein in inflation, the Fed, under the last honest Fed Chairman, Paul Volcker, changed its interest rate targeting mandate to a money supply mandate and wrung inflation out of the economy by having the Fed’s open market operations trading desk conduct massive amounts of reverse-repos.
Unlike repos, which the Fed uses to inject money into banks and the economy, reverse-repos take money out of banks by forcing them to buy, for cash, Treasuries that the Fed sells them.
Shrinking America’s money supply and causing interest rates to soar killed demand across the economy and plunged it into a full-on recession.
As painful as it was, it worked. The new approach to monetary policy killed inflation, quickly and seemingly forever.
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Fast Forward to 2006 and Beyond
With the economy humming along nicely in 2006 and bankers feeling their oats, they maneuvered Congress into amending the Federal Reserve Act to allow the Fed to pay interest on the reserves and excess reserves banks have on deposit in Federal Reserve regional banks.
Under the Financial Securities Regulatory Relief Act of 2006, because bankers argued that not getting paid interest on idle reserves parked with the Fed was an effective tax on them, starting on October 1, 2011, the Fed was “authorized” to pay interest on billions of dollars of bank reserves.
Then the financial crisis hit.
America’s biggest banks and investment banks, staggering towards insolvency, which they all technically reached as a result of over-leveraging themselves in an epic orgy of money-grubbing mortgage mania, needed bailing out and more.
One of the packages of aid thrown to the banks was the emergency Economic Stabilization Act of 2008. That legislation moved forward the starting date which the Fed could pay interest on bank reserves and excess reserves from October 1, 2011, to October 1, 2008.
Banks, who conduct the vast majority or repos, lending money to each other overnight in the $1 trillion dollar plus daily fed funds market, had stopped lending to each other in 2008 because they knew their counterparts were insolvent and if any of them went down none of them would get their money or collateral back.
That’s when the fed funds market essentially shut down.
But that didn’t matter to banks because they weren’t lending to each other and weren’t making loans.
Besides, they were given all the money they needed by the Fed and through other liquidity lifelines set up by the Treasury, thanks to Congress, to pretend they weren’t insolvent.
As they recovered, and since there was no need to borrow because they weren’t lending, banks parked not only the required reserves they had to maintain but all their excess reserves at the Fed.
To collect risk-free interest, of course.
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In 2007 banks required reserves parked at the Fed averaged $43 billion. Excess reserves parked at the Fed averaged $1.9 billion.
By 2012 required reserves parked at the Fed averaged $100 billion, due to higher reserve requirements since 2008, and excess reserves parked at the Fed averaged $1.5 trillion.
In March 2013 excess reserves at the Fed were $1.76 trillion. By October 2013 they were $2.3 trillion. At their high point in 2014 they exceeded $2.6 trillion. They remain around $1.5 trillion today.
The interest the Fed pays on reserves, required and excess reserves, went from 0.25% in 2008 to a high of 2.40% in early 2019. The current interest paid on excess reserves (IOER) is 1.80%.
Since 2009 the Fed’s paid banks over $550 billion in interest.
No wonder they’re so profitable.
When commenting on interest paid in 2018 St. Louis Fed president James B. Bullard said, “paying them something of the order of $50 billion [is] more than the entire profits of the largest banks.”
The racket is that the Fed gets the money it pays banks in interest from the interest it gets on the $4.2 trillion in U.S. Treasuries and mortgage-backed securities it bought with money it “prints” for free.
That’s what I call a racket.
Okay, so now you know all that.
What you don’t know is how the Fed’s new monetary game backfired on them, why they’re having to resort to doing repos again to flood cash-strapped banks with money, and what it all means for the economy and your financial future.
I’ll tell you on Friday.