Federal Reserve Hikes Daily Cash Injections into Banks

Oct. 24, 2019 (EIRNS)—The Federal Reserve’s emergency liquidity injections into the banking system spiked upward again on Oct. 24. This showed why the Fed had announced on yesterday afternoon that it was raising its overnight “repo” loan limit from $75 billion/day to $120 billion/day, and its two-week “repo” limit from $35 billion to $45 billion per auction. What actually happened Oct. 24, Thursday morning, was that the overnight cash injections hit a new high of $89.1 billion, while demand for the $45 billion in two-week loans went way over the new limit, to $62 billion.

So, $134 billion emergency liquidity injections to the banks in one day, by far the highest yet in the crisis since Sept. 17, and another $17 billion gone begging. The Fed may soon have to increase its just-started $60 billion/month “say it ain’t QE” program of buying securities from the banks.

Since Sept. 17, the Fed keeps accelerating the liquidity bailout, and keeps falling behind the problem. It is not just chasing ambulances; it’s chasing hearses, as the number of debt-zombie companies piles up and produces zombie hedge funds, and likely by now zombie investment firms. Out of the corner of its eye, it has to be watching S&P’s published warning Oct. 24 of an emerging crisis in the banking system of India, and the financial and social chaos caused by austerity and disinvestment policies in South American and Southwest Asian countries.

These injections are looking more and more limitless. So where are the “limits on Federal Reserve lending” that the Bank of England’s former governor Mervyn King was complaining about—and said would have to be scrapped in closed-door meetings with Congress, lest we come to “financial Armageddon”?

King at the IMF (its Per Jacobsson Lecture, named for an early-years-BIS fascist with a democratic face) said the usual: “The world economy is stuck in a low-growth trap”; “We have too much borrowing, and too little spending”; “We have entered the great stagnation”; etc., the phrases that are supposed to make you think of “Green New Deal” infrastructure spending. He had sarcastic advice for the new European Central Bank president and outgoing IMF Managing Director Christine Lagarde: “Stay in Washington.” Europe’s economic picture is disastrous.

But for the Fed, King listed two problems: In the 2007-08 financial blowout the Fed wasn’t able to bail out the likes of Countrywide Mortgage, or Lehman Brothers investment bank whose collateral was no good. And second, under Dodd-Frank (he didn’t actually name the legislation), the Fed cannot print money without “providing liquidity to the financial system [as a whole], and not to aid a failing financial company”.

So King said, in a word: There has got to be a Fed-run insurance program right away (not deposit insurance—bank-insurance and shadow-bank insurance) where every financial company puts up collateral and pays a premium, and the Fed can bail out any financial company at any time. A kind of “term repo lending taken to infinity.”

The implication: Forget bail-ins, we’ll need Wall Street bank bailouts, and soon.

The productive-investment alternative to bailing out speculation would not be mentioned in a Per Jacobsson Lecture: Restore the Glass-Steagall Act.