The Federal Reserve Tries To ‘Fix’ What It’s Destroying

March 13, 2023, 2022 (EIRNS)—The Ghost of Financial Collapse Past has knocked again. The sin of Wall Street and the City of London after the 2008 crash—refusing LaRouche’s Glass-Steagall and New Bretton Woods, insisting on floating exchange rates, subsidizing through the central banks all forms of financial speculation—has come back to haunt them again as it did in September 2019, and will again soon. Three U.S.-based banks “worth” $400 billion in assets have failed in four days; another, First Republic Bank in California, is teetering; and again Credit Suisse is making the Tower of Pisa look perpendicular by comparison. Trans-Atlantic interbank lending is again “under stress” on Monday according to a worried wire from Reuters, and credit default swaps on banks’ bonds are getting more expensive.

While the U.S. Treasury and the Federal Deposit Insurance Corp. took one action on the afternoon of Sunday, March 12 which is plainly against U.S. law (see separate report), the Federal Reserve took another which attempts, yet again, to fix with money-printing liquidity, what the Fed destroys with its interest rate policies.

That was, to quote the Fed’s Sunday evening announcement “a 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.” Of note, “These assets will be valued at par,” not at their reduced market value in an environment of sharply increased interest rates. “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.”

This fund for liquidity loans will have “up to $25 billion from the Exchange Stabilization Fund [from the Treasury] as a backstop for the BTFP.”

U.S. banks are estimated to have taken a $700-$800 billion hit to their capital in “unrealized losses” from rapid rate hikes by the Fed; Silicon Valley Bank had about $16 billion of those losses when it failed, because it tried to sell some of the Treasury and other securities involved, and the losses were “realized.” The $25 billion “backstop” from the Treasury is laughable.

Such Federal Reserve liquidity loans, when the Fed did the same thing in September-October 2019, escalated from a few billion in loans overnight, to more than $100 billion each night, loaned to banks for up to 90 days. The illiquid financial institutions taking the loans were not disclosed by the Fed then, but the banks knew who they were, and still would not lend to them. The same will happen with banks that go to the Fed window for “BTFP” liquidity loans, signaling that they need to sell off devalued assets.

The Wall Street Journal’s March 12 editorial, signed by the Editorial Board, commented: “This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.”

And from China’s Gloal Times: “ ‘SVB’s bankruptcy shows that the U.S.’ monetary policy is a total failure. The U.S. Fed’s faster-than-expected tightening created turmoil in the global financial system and eventually harmed its own banking system,’ Li Yong, deputy chairman of the Expert Committee of the China Association of International Trade, told the Global Times on Sunday.”