‘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
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.
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.
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.
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.
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.
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.”
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.
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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