I was sitting at my desk in August 2007 reading financial headlines that sounded surreal. I was running a new start-up bank here in Georgia. The Fed was pumping hundreds of billions of dollars into the market in a desperate bid to stabilize them by flushing them full of liquidity – the beginning of a decade-long period of “Quantitative Easing”. The Fed had to do something to keep financial institutions and financial markets from collapsing. I heard that overnight LIBOR rates were not quoted one Friday afternoon. European banks were concerned that if they loaned their excess cash to other banks on Friday, they might not get it back on Monday if the other banks failed. The European Central Bank began pumping hundreds of billions of dollars and Euros into the market. We stood on the cliff-edge of global financial collapse.
In 2007 I had to make sense of what was happening. Why were financial markets spiraling out of control? What did this mean for our little bank? We made loans in our community, mostly to builders. How would these macro events affect us and our borrowers? What did we need to do to prepare for what lay ahead? In fact, the question was what could we do? The answer, it turned out, was nothing. Greenspan had built a monster and no one could control it.
Today, September 18, 2019, I sit at my desk reading the same headlines. Here’s a sample:
The Fed just pumped $128 billion into markets to pull down interest rates
– Business Insider 9/18/19
For a second day, the New York Fed spent billions to calm the financial market
– CNN.com 9/18/19
FED pledges to continue pumping billions into US economy
– BBC.com 9/18/19
Today’s 2019 Fed Monster is of different composition than the Fed Monster birthed in 2007 but no less predictable. How can we say this? Because we blogged about it in 2016: Blog Post October 5, 2016 World Debt Exceeds $152 trillion - Does it even matter to you? and Blog Post October 20, 2016: Here Be Dragons! In hindsight, the 2007 Fed Monster was hiding in plain sight, just as this one has been.
In retrospect, total the Fed pumped $3.5 trillion dollars into financial markets to stabilize them from 2008 to 2015 and despite its best efforts to pare back its balance sheet, it has largely been unsuccessful in its efforts to slime down. And now, in the latest episode of The Fed to the Rescue, market participants know the Fed and ECB will rescue them every time they get into trouble. The decade since the Great Recession has shown that regulators are utterly incapable of de-levering and de-risking financial markets because they themselves are the worst offenders – enormous bloated balance sheets loaded with illiquid assets, drawing money from the treasury at will, disconnected from the restraints that every business on the planet must operate within.
Time will tell if this is going to be another huge “correction.” With age comes wisdom or at least the ability to spot trends. From my chair, the headlines read the same.
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