The US Federal Reserve has increased its balance sheet by about $300 billion in the last week during the banking crisis. The US Federal Reserve had been quantitative tightening from $9 trillion to $8.3 trillion, but has added $300 billion to its balance sheet.
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Astonishing, all this blame being thrown around and no one even thinks to look at the Trump-era bank deregulation.
$300B doesn’t necessarily mean $300B dumped into the economy.
Some of it should be recouped from the banks once assets are unwound, or the banks are sold off. And in theory all the other banks will have to pay more for FDIC insurance.
Those long term bonds that got the banks in trouble are mostly still worth their face value IF held to maturity (minus inflation of course, but plus the interest paid). It’s only if they are cashed out now that they lose big. Maybe the Fed has the luxury to hold them, where the banks did not, because the banks needed to be able to pay depositors immediately.
The Fed need only adopt a ‘quantitative easing plan’ for repatriation of those bonds, when banks holding them suddenly need to prematurely sell them for bank-reserves liquidity challenges or crises. By comparison to the whole federal deficit balance sheet, its really a drop in the bucket.
It DOES lend credence to the Fed being reticent to do so, on the theory that such unplanned QE exigencies then lead banks to imprudently invest in these bond instruments in times of high inflation, to get both the financial stability that bonds (normally) afford, yet without attendant upside (failure) risk.
Still … as sovereign instruments of highest stability, the Fed really has a responsibility to perform such QE ‘micro event funding’ on an as-needed basis.
Had The Fed done so, there would’ve been no SVB or Signature bank collapses. Which in my mind would have been preferable. I guess. Maybe.
The Fed’s bank stress tests didn’t examine the impact of a long term interest rate rise. To not consider this in an environment where the Fed is raising the interest rate reeks of incompetence.
Or maybe a backdoor bank bailout was part of the plan.
Probably the back-door gambit.
The whole thing stinks, to be sure. Stinks ‘cuz it didn’t need to go down as it did (or so I argue).
HOWEVER, I was on a long, long drive this morning, and got to thinking … even The Fed doesn’t want to repatriate the long bonds which have zilch-for-coupon interest rates at the full face value. By their own rules, they cannot just chop ’em up in a shredding machine, print new money, and whistle Dixie to the world-of-securities investors who depend on them NOT doing that very thing. No. The could repurchase the paper on an as-needed basis to bail the banks and credit unions that parked a perhaps-imprudent amount of cash in them (without backstops), but in the end, they too are committed to re-sell them at each Tuesday Auction to the market. And accept whatever The Market wishes to buy them at.
And that’s the rub. The Fed doesn’t want to turn around and take a 20% or greater ‘cold shower’ on the repatriated long bonds. Well … it can, of course, but then The Deficit then grows by the bath amount, in turn. Which requires printing more bonds. Which drives UP interest, as The Market gets a sour feeling regarding the prudential value of US Treasury paper. And bids low, driving up effective interest. Which downwind makes for even more banks put in the clinch. Vicious Cycle, 101.
So, I don’t know. I’m still feeling that repatriation to solve a banking crisis is the right approach, but it needs to be ‘sold to the market’ on special terms. They (The Fed) just has to sit on the paper until the era of crises is nigh, then go about the business of slipping the stacks of old bonds into the auction … down the road. Perhaps even, at the end of the bonds’ terms. In which case, it all ‘goes away’, with the great heaving stacks of new money minted for the very purpose.
Y’know?
The Fed has several advantages that banks do not, specifically the ability to avoid audits, avoid insolvency, and time. The Fed could keep these bonds until interest rates go back down and then reissue them.
You have to wonder what else the smart guys missed.
I’m far less worried about the national debt than others here.
First, we had increased the debt since the 2008-09 crisis-2022 mostly through QE by almost 80%: https://www.self.inc/info/us-debt-over-time/. This is actually FAR less than the debt increased during the Civil War: “The most expensive decade in American history was the 1860s, where national debt increased 3,726% from $64.8 million to $2.48 billion.” (link above). WWII saw the debt go over 100% of GDP too, and it went down afterwards.
The debt wasn’t a problem, nor was inflation until the Covid supply shortages, exacerbated by the sanctions on Russia due to the war and additional sanctions on China. It’s not due to wage increases, only significant in 2022-23 and less than the CPI anyway.
Inflation is not a monetary phenomena, despite Milton Friedman’s warning; it’s due to supply shortages (demand is more-or-less constant, and up).
So, $300 Billion of pretend money just got dumped into our economy. Don’t be surprised if next months CPI reverses course and starts rising.
Every bank is in trouble. $300 Billion saved only three of them. Upcoming defaults are auto loans, student loans, credit cards, and mortgages. Hyper inflation is a defacto default on US Treasury bonds. Banks hold these worthless IOU’s.
Don’t forget the commercial real estate mortgages that are percolating
Goodbye QT1. Hello QE9. This is a rock and a hard place of the feds own making. It just stinks we have to live with the consequences of their monetary stupidity.
Inflation is always and everywhere a monetary phenomenon. So, expect more inflation as a result.
Everybody with any sense knew what was coming when Biden announced that “Milton Friedman isn’t running the show anymore.”
It was like a hospital administrator announcing that “Joseph Lister isn’t running the show anymore.”; An open announcement that Biden was going to run the government into the ground.
Even economists who don’t LIKE Friedman’s economics wouldn’t have said that.
What do you expect when he tried appointing a born and trained Soviet-era Marxist as comptroller?
But Good ol Janet Y said everything was Great!!!
I mean, that’s all that matters.
That and how well defended we are now that Corporal Emma has two moms