www.levernews.com/…
Over the last 7 months, the Federal Reserve Bank has quietly transferred more than $420 billion (a record amount from the program) to Wall Street through its New York branch. By way of comparison, that lump sum is almost equal to the pot of money that Congress passed to bail out the banks during the 2008 financial crisis under the Troubled Asset Relief Program.
These infusions, called repurchase agreements, are a form of short-term lending in which the Federal Reserve trades cash in exchange for assets, usually Treasury bills and mortgage-backed securities, as collateral from the banks.
But according to critics, the money has instead frequently ended up in the hands of hedge funds and other financial firms, which often use it to make risky bets on various securities and derivatives that can be more profitable than ordinary loans.
This infusion of cash into the banking system could be a signal that the banking sector has run out of cash and is unable to manage their day to day cash flows, meaning they can’t pay their bills, cover withdrawals and make loans.
But the circumstances driving those transactions — and whether they signify broader financial turmoil — remain unknown.
It’s unclear, for example, which banks received the funds, since that information is kept secret to help protect the institutions’ reputations.
“Without more information, it’s impossible to say whether this is a good big deal or a bad big deal [that] regulators are getting banks to use liquidity facilities or… if the financial system is under stress,” said Todd Phillips, a former senior attorney at the Financial Deposit Insurance Corporation, a federal agency that oversees the banking sector.
When banks are short of cash, they usually tap private repo markets, but interest rates for repurchase agreements have risen and the repo markets have recently slumped so, the New York Fed has stepped in, encouraging banks to use its own in-house repurchase agreement provider. One way the Fed has been encouraging banks to come to them for their repurchase agreements is by removing the $500 billion cap it had in place since June, 2021.
Historically, banks have been reluctant to use the Federal Reserve for short-term lending unless they’re desperate, because it can send a signal to the market that the institution is short on cash.
Over the past year, the Federal Reserve has tried to break that stigma by urging banks to utilize the system. Federal Reserve economists believe the policy acts as a relief valve to keep interest rates within their target margins.
According to DCReport, the massive infusion of cash could be driven by rising commodity prices and the banking sector’s decisions to short precious metals. If this is correct, or if there are other bets the banking sector that are going badly, bailing out the banks may set up what economists call a moral hazard, i.e., rewarding bad behavior and getting more bad behavior.
The last time we saw big cash shortfalls on Wall Street we saw the collapse of the economy in 2008. By some measures the Great Recession was more damaging and more enduring in the harm it caused than the Great Depression that began in 1929.
DCReports
