Sunday, March 19, 2023

‘Not QE’ as Fed Trapped Between a ‘Rock and a Hard Place’ (Connecting the Dots: FDIC, Federal Reserve, St. Louis Federal Reserve, Department of the Treasury & Soros Funding, All Networking)

‘Not QE’ as Fed Trapped Between a ‘Rock and a Hard Place’ (Connecting the Dots: FDIC, Federal Reserve, St. Louis Federal Reserve, Department of the Treasury & Soros Funding, All Networking)

BUSINESS COLUMNISTS

The Epoch Times

By Lance Roberts

March 18, 2023Updated: March 18, 2023

The Marriner S. Eccles Federal Reserve Board building in Washington on March 16, 2022. (Saul Loeb/AFP via Getty Images)

https://www.theepochtimes.com/not-qe-as-fed-trapped-between-a-rock-and-a-hard-place_5132744.html

Commentary

“QE” or Quantitative Easing has been the bull’s siren song for the last decade, but will “Not QE” be the same?

Last week, amid a rash of bank insolvencies, government agencies took action to stem a potential banking crisis. The Federal Deposit Insurance Corporation (FDIC), the Treasury, and the Fed issued a Bank Term Lending Program with a $25 billion loan backstop to protect uninsured depositors from the Silicon Valley Bank failure. An orchestrated $30 billion uninsured deposit by 11 major banks into First Republic Bank followed. Those deposits would not occur without Federal Reserve and Treasury assurances.

The details of the Bank Term Funding Program were described in the Federal Reserve press release.

“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

“With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.”

Banks quickly tapped the program, as shown by a $152 billion surge in borrowings from the Federal Reserve. It is the most significant borrowing in one week since the depths of the Financial Crisis.

Refinitiv Chart: RealInvestmentAdvice.com (Courtesy of St. Louis Federal Reserve)

The importance of this program is that it will inject up to $2 Trillion into the financial system, Bloomberg reported.

“‘The usage of the Fed’s Bank Term Funding Program is likely to be big,’ strategists led by Nikolaos Panigirtzoglou in London wrote in a client note Wednesday. While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest, they said.”

As Bloomberg notes, major banks like JP Morgan likely will not tap the Feds lending program due to the stigma often attached to such usage. Moreover, there are roughly $3 Trillion in reserves in the U.S. banking system, of which the top five major banks hold a significant portion. However, as I noted last week in “Bank Runs:”

The Fed caused this problem by aggressively hiking rates which dropped collateral values. Such has left some banks which didn’t hedge their loan/bond portfolios with insufficient collateral to cover the deposits during a ‘bank run.’

As shown, the rapid increase in rates by the Fed drained bank reserves.

Refinitiv Chart: RealInvestmentAdvice.com (Courtesy of St. Louis Federal Reserve)

The demand by banks for liquidity has now put the Federal Reserve between a rock and a hard place. While the Fed remains adamant in its inflation fight, the BTFP may be the next QE program disguised as Not QE.

Investor Conditioning

Classical conditioning (also known as Pavlovian or respondent conditioning) refers to a learning procedure in which a potent stimulus (e.g., food) becomes paired with a previously neutral stimulus (e.g., a bell). Pavlov discovered that when he introduced the neutral stimulus, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not yet present. This learning process resulted from the psychological “pairing” of the stimuli.

Such conditioning has happened to investors over the last decade.

In 2010, then Fed Chairman Ben Bernanke introduced the “neutral stimulus” to the financial markets by adding a “third mandate” to the Fed’s responsibilities—the creation of the “wealth effect.”

“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose, and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion,” Ben Bernanke said in a Washington Post Op-Ed in November 2010.

Importantly, for conditioning to work, when the “neutral stimulus” is introduced, it must be followed by the “potent stimulus” for the “pairing” to complete. For investors, as the Fed introduced each round of “Quantitative Easing,” that is, the “neutral stimulus,” the stock market rose, that is, the “potent stimulus.”

As shown, asset prices rose as the Fed expanded its balance sheet.

Refinitiv Chart: RealInvestmentAdvice.com (St. Louis Federal Reserve)

While many suggest that the Fed’s QE programs have no impact on the financial market, the near 87 percent correlation between balance sheet changes and the market would imply otherwise.

Refinitiv Chart: RealInvestmentAdvice.com (Courtesy of St. Louis Federal Reserve)

This is why investors cling to each Fed meeting in anticipation of the “ringing of the bell.”

In Pavlovian terms, the “pairing is complete.”

BTFP Is Not QE

While the BTFP facility is technically Not QE, it does reverse the Fed’s efforts to reduce financial liquidity. The chart below shows that the Fed’s balance sheet has surged since last week, reversing more than six months of previous tightening.

Refinitiv Chart: RealInvestmentAdvice.com (Courtesy of St. Louis Federal Reserve)

This reversal of liquidity is not surprising given the recent rout in the banking sector. J.P. Morgan noted on Friday that U.S. banks lost nearly $550 billion in deposits last week. Panicked investors were transferring funds to major banks from regional banks, which put further stress on already discounted collateral due to the Fed’s rate-hiking campaign.

“The big picture from the H.4.1 release is that the U.S. banking system induced the Fed to expand its balance sheet and inject $440 billion of reserves in just one week. That large liquidity injection reverses a third of the previous $1.3 trillion of reserve tightening since the end of 2021. Given such a backdrop of elevated banking system liquidity or reserve needs, this naturally raises the question of whether the Fed can continue QT [Quantitative Tightening], similar to 2018/2019.”

As we have repeatedly discussed, it was only a matter of time before the Fed “broke something.”

“The economy and the markets (due to the current momentum) can  DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy.”

Refinitiv Chart: RealInvestmentAdvice.com (Courtesy of St. Louis Federal Reserve)

History is clear about the outcome of rate hiking campaigns.

The question is whether the Fed’s Not QE can fix the problem.

The Fed Created This

As noted in this past weekend’s newsletter, the Fed must choose between fighting “inflation” or again bailing out the financial system in the name of “financial stability.”

Of course, this entire situation is entirely due to the Federal Reserve.

In October 2020, I wrote an article arguing that Neel Kashkari was wrong and the Fed was indeed creating a “moral hazard” by injecting massive stimulus into the economy following the pandemic. The Oxford Languages definition of moral hazard is: “The lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.”

Unsurprisingly, zero interest rates, $5 trillion in fiscal policy to households, and $120 billion in monthly QE removed all “risk” from owning risk assets. The spike in inflation and speculative risk-taking was the result.

The “lack of incentive to guard against risk” becomes problematic when monetary, fiscal, and zero-interest-rate policies are reversed.

Yes, this is all the Fed’s doing.

However, since the turn of the century, the Fed has been able to repeatedly support financial markets by dropping interest rates and providing monetary accommodation. This was because inflation remained at low levels as deflationary pressures presided.

Refinitiv Chart: RealInvestmentAdvice.com (St. Louis Federal Reserve)

With inflation running at the highest levels since the 80s, the Fed risks creating another inflationary and interest rate spike if they focus on financial stability. However, if they focus on inflation and continue hiking rates, the risk of a further crack in financial stability increases.

I don’t know which path the Fed will choose, but the markets have little upside. The moral hazard the Fed created in the first place has now come home to roost.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Connecting the Dots:

Timothy D. Adams was an undersecretary for the U.S. Department of the Treasury and is a director at the Atlantic Council of the United States (think tank).

Open Society Foundations was a funder for the Atlantic Council of the United States (think tank).         

George Soros is the founder & chairman for the Open Society Foundations.

Herbert M. Allison Jr. was a director at the Atlantic Council of the United States (think tank), the assistant Treasury secretary for the Barack Obama administration and an advisory committee member for the Federal Reserve Bank of New York.

Timothy F. Geithner was the president for the Federal Reserve Bank of New York, the treasury secretary for the Barack Obama administration and an overseer at the International Rescue Committee

Foundation to Promote Open Society was a funder for the International Rescue Committee.

George Soros was the chairman for the Foundation to Promote Open Society.

John C. Whitehead is an overseer at the International Rescue Committee and was the chairman for the Federal Reserve Bank of New York.

Indra K. Nooyi is an overseer at the International Rescue Committee and was a director at the Federal Reserve Bank of New York.

W. Michael Blumenthal is an overseer at the International Rescue Committee and was a trustee emeritus at Princeton University.

Albert Einstein was the founder of the International Rescue Committee and a professor at Princeton University.

Paul R. Krugman is an economist at Princeton University and was a consultant for the Federal Reserve Bank of New York.

Kathryn A. Hall is a trustee at Princeton University and an Economic Advisory Council member for the Federal Reserve Bank of San Francisco.

John F. McDonnell is a benefactor for Princeton University and was the chairman for the Federal Reserve Bank of St. Louis.

Alan S. Blinder is a professor at Princeton University, a friend of Ben S. Bernanke and was the vice chairman for the Federal Reserve Board.

Donald L. Kohn was the vice chairman for the Federal Reserve Board, a member of the Federal Open Market Committee and is a senior fellow at the Brookings Institution (think tank).

Foundation to Promote Open Society was a funder for the Brookings Institution (think tank) and the International Rescue Committee.

George Soros was the chairman for the Foundation to Promote Open Society.

Maurice R. Greenberg is an overseer at the International Rescue Committee, the chairman for the Federal Reserve Bank of New York and a benefactor for the Harlem Children's Zone.

Michael R. Bloomberg was a benefactor for the Harlem Children's Zone and is the founder of Bloomberg LP.

Bloomberg Politics is a division of Bloomberg LP.

George Soros was a benefactor for the Harlem Children's Zone and the chairman for the Foundation to Promote Open Society.

Foundation to Promote Open Society was a funder for the Harlem Children's Zone.

Richard S. Fuld Jr. was a benefactor for the Harlem Children's Zone, a director at the Federal Reserve Bank of New York and a director at the Robin Hood Foundation.

Foundation to Promote Open Society was a funder for the Robin Hood Foundation.

George Soros was the chairman for the Foundation to Promote Open Society.

Jeffrey R. Immelt is a director at the Robin Hood Foundation and was a director at the Federal Reserve Bank of New York.

Stephen Friedman was the chairman for the Federal Reserve Bank of New York and is a trustee at the Aspen Institute (think tank).

Foundation to Promote Open Society was a funder for the Aspen Institute (think tank).

George Soros was the chairman for the Foundation to Promote Open Society.

Paul A. Volcker was a lifetime trustee at the Aspen Institute (think tank), the chairman for the Federal Reserve System and the president for the Federal Reserve Bank of New York.

Richard A. Debs was the COO for the Federal Reserve Bank of New York and a trustee at the Carnegie Endowment for International Peace (think tank).

Open Society Foundations was a funder for the Carnegie Endowment for International Peace (think tank).

George Soros is the founder & chairman for the Open Society Foundations and was the chairman for the Foundation to Promote Open Society.

Foundation to Promote Open Society was a funder for the Carnegie Endowment for International Peace (think tank) and the Brookings Institution (think tank).

John C. Whitehead is an honorary trustee at the Brookings Institution (think tank) and was the chairman for the Federal Reserve Bank of New York.

Glenn H. Hutchins is a trustee at the Brookings Institution (think tank) and a director at the Federal Reserve Bank of New York.

Donald L. Kohn is a senior fellow at the Brookings Institution (think tank), was the vice chairman for the Federal Reserve Board and a member of the Federal Open Market Committee.

Alice M. Rivlin is a senior fellow at the Brookings Institution (think tank) and was the vice chair for the Federal Reserve Board.

Ben S. Bernanke was chairman for the Federal Reserve Board, is a friend of Alan S. Blinder, a professor at Princeton University and the and a distinguished fellow at the Brookings Institution (think tank).

John F. McDonnell is a benefactor for Princeton University and was the chairman for the Federal Reserve Bank of St. Louis.

Richard C. Blum is an honorary trustee at the Brookings Institution (think tank) married to Senator Dianne Feinstein and an Economic Advisory Council member for the Federal Reserve Bank of San Francisco.

Louis W. Cabot is an honorary trustee at the Brookings Institution (think tank) and was a director at the Federal Reserve Bank of Boston.

Susan M. Collins is a nonresident senior fellow at the Brookings Institution (think tank), and a director, Detroit branch for the Federal Reserve Bank of Chicago.

Foundation to Promote Open Society was a funder for the Brookings Institution (think tank) and the Committee for Economic Development.

George Soros was the chairman for the Foundation to Promote Open Society.

Lee C. Bollinger is a trustee at the Committee for Economic Development and was the chairman for the Federal Reserve Bank of New York.

William J. McDonough is a trustee at the Committee for Economic Development and was the president & CEO for the Federal Reserve Bank of New York.

Peter G. Peterson is a trustee at the Committee for Economic Development and was the chairman for the Federal Reserve Bank of New York.

John E. Sexton is a trustee at the Committee for Economic Development, was the chairman for the Federal Reserve Bank of New York, and the chair Council of Chairs for the Federal Reserve System.

Roger W. Ferguson Jr. is a co-chairman for the Committee for Economic Development and was the vice chairman for the Federal Reserve Board.

Barbara B. Grogan is a trustee at the Committee for Economic Development and was the chair - Denver branch for the Federal Reserve Bank of Kansas City.
James E. Rohr
 is a trustee at the Committee for Economic Development, a member of the Federal Advisory Council to the Federal Reserve Board and was a director – Cleveland for the Federal Reserve Bank of Cleveland.

Lee C. Bollinger is a trustee at the Committee for Economic Development and was the chairman for the Federal Reserve Bank of New York.

William J. McDonough is a trustee at the Committee for Economic Development and was the president & CEO for the Federal Reserve Bank of New York.

Peter G. Peterson is a trustee at the Committee for Economic Development and was the chairman for the Federal Reserve Bank of New York.

John E. Sexton is a trustee at the Committee for Economic Development, was the chairman for the Federal Reserve Bank of New York and the chair Council of Chairs for the Federal Reserve System.

Roger W. Ferguson Jr. is a co-chairman for the Committee for Economic Development and was the vice chairman for the Federal Reserve Board.

Jeffrey A. Joerres is a trustee at the Committee for Economic Development and a director at the Federal Reserve Bank of Chicago.

Foundation to Promote Open Society was a funder for the Committee for Economic Development and the Roosevelt Institute.

George Soros was the chairman for the Foundation to Promote Open Society and is Jonathan Soros’s father.

Jonathan Soros is George Soros’s son and a senior fellow at the Roosevelt Institute.

Cantwell F. Muckenfuss III is a director at the Roosevelt Institute and was a counsel to the chairman for the Federal Deposit Insurance Corporation (FDIC).

Paul S. Sarbanes is a governor at the Roosevelt Institute and was Martin J. Gruenberg’s senior counsel.

Martin J. Gruenberg’s senior counsel was Paul S. Sarbanes and is the chairman for the Federal Deposit Insurance Corporation (FDIC).

Resources: Past Research

Rep. Ken Buck on D.C.’s Swamp: Politicians Are ‘Bought with Taxpayer Dollars’ (Researchers Note: Follow the Money!) (Past Research on the U.S. Department of the Treasury)

SATURDAY, APRIL 15, 2017

https://thesteadydrip.blogspot.com/2017/04/rep-ken-buck-on-dcs-swamp-politicians.html

100 Years of Government Theft (Past Research on the Federal Reserve)

MONDAY, DECEMBER 23, 2013

https://thesteadydrip.blogspot.com/2013/12/100-years-of-government-theft.html

Smaller Bites – Bank of America Corp. (Bailout Company) (Connecting the Dots: Bank of America Corp. (Bailout Company), The Federal Deposit Insurance Corporation (FDIC) & The Soros Funded Think Tanks, All Networking) (Past Research on the Federal Deposit Insurance Corporation (FDIC))

FRIDAY, NOVEMBER 11, 2022

https://thesteadydrip.blogspot.com/2022/11/smaller-bites-bank-of-america-corp.html

'Ballad for Trayvon Martin' Debuts at Princeton (Past Research on Princeton University)

SATURDAY, DECEMBER 7, 2013

https://thesteadydrip.blogspot.com/2013/12/ballad-for-trayvon-martin-debuts-at.html

Paul Krugman insists 'we won't be' in a recession after admitting he was wrong to dismiss inflation concerns (Connecting the Dots: Paul Krugman, Princeton, The Federal Reserve, Soros & his son, Soros Funded Think Tanks, National Bureau of Economic Research, Mikhail Gorbachev, the Communist Party of the Soviet Union & an Orchestrated Crisis) (Past Research on the Federal Reserve Bank of St. Louis)

THURSDAY, JULY 28, 2022

https://thesteadydrip.blogspot.com/2022/07/paul-krugman-insists-we-wont-be-in.html

Game Change: The Massive Conflict of Interest In Bloomberg Politics’ Attack On ‘Duck Dynasty’ (Past Research on Michael R. Bloomberg)

TUESDAY, MAY 5, 2015

https://thesteadydrip.blogspot.com/2015/05/game-change-massive-conflict-of.html

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