Duh!

There’s a lot of unpacking to do when scrutinizing Michael S. Derby’s Sept. 5 Reuter’s piece titled “Rising demand for Fed bank lending program not a sign of stress.” Isn’t the necessity of doing what the Fed does best, creating another program inherently an indicator that there is stress? Otherwise, there would be no program. Duh!

And this program is like no other. It is ground-breaking. Why? Because collateral provided for the loans bears no interest rate risk. You see, the collateral is posted at “face” value versus “mark” value. What Derby writes is the understatement of the year (year coincides with the term of the loan), “Market conditions may also explain why some banks have found some room to tap the BTFP even as overall conditions in their industry have returned to normal. That’s because they can get a favorable treatment for bonds that have lost value due to the surge in yields seen over recent weeks.” (My italics) Favorable? You have a portfolio of Treasurys or other bonds that have lost value due to interest rate risk. Suddenly and without any skill required they return to par when posted in the program. Presto! A $70 dollar Treasury is now worth $100.

If there is no stress, then why is Barclay’s Joseph Abate quoted as saying the following, ““Most of the borrowing was done by the troubled banks at the beginning.” Does he know something, we don’t know? Then he says this “isn’t an indication of trouble.” Of course, it isn’t because the Fed has once again come to the rescue. Duh!

And what would a bailout be without people taking advantage of it? Derby writes, “…while the ongoing demand for the Fed's Bank Term Funding Program may result from some overhang from the initial troubles back in March, the growth in its loan output this summer more likely arises from opportunistic money management strategies some banks may be employing.” (My italics)

This bailout thus far has reached $108 billion. A large number but only a fraction of a 2019 bailout recounted by Christopher Leonard in his book, “The Lords of Easy Money: How the Federal Reserve Broke the American Economy.” According to Leonard, a $400 billion injection by the Fed was “unprecedented.” He goes on, “…it benefited a small group of hedge funds that had essentially hijacked the repo market and used it as a vehicle to make risky bets.”

When is this all going to end? When are we as a country going to say, “Enough!”? It is dizzying to even think about all the programs and machinations instigated by the Fed. And who benefits? Not you and me.

To learn about how all this started and basic delivery systems in place to propagate it, read my book, “Repo Madness: A Simpleton’s Guide to the Street’s Wicked Ways.”

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