Strange events are unfolding, y’all. Over the past two months – since just September – the New York Federal Reserve has loaned $3 trillion dollars to banks in the ‘repo’ market. And nobody’s talking about it! Well, nobody that most Americans hear from.
Banks in this country must hold certain amounts of money in reserve, i.e., meet legal reserve requirements. If they can’t meet those requirements, they go into the ‘repo market’ and borrow enough overnight (really for a mere 6 hours) to stay legal. The rate at which banks borrow from one another hovers around 1.5%.
This lending rate (the Fed Funds Rate) is very, very important. It’s the interest rate biiiiggg banks charge one another. All other lending in the whole country trickles down from them, so this rate basically controls all loan rates throughout the US. As a matter of fact, when the Fed raises or lowers interest rates, it targets the Fed Funds Rate. In an economy fueled by debt, this is a key linchpin.
So…when the Fed Funds Rate went from 1.5% to 10% overnight, back in September, you can imagine there was some handwringing in high places. A move like this not only portends big, big problems, it also means the Fed has lost control. And control is key to this whole limping, scraping, corrupt, decaying blight we still refer to as an economy.
Why, afterall, would the Fed Funds Rate jump so much, so fast?
Well because nobody thinks they’ll get paid back, of course. Overnight, inexplicably, these monstrous banks suddenly decided they didn’t want to loan to other banks anymore. But why? These are the largest, most well-managed, governmentally-secured, too-big-to-fail institutions in the greatest country that’s every existed, world without end, amen. Why would they suddenly not want to loan to one another for a mere six hours? What do they know about each other that we don’t?
The answer, unfortunately, is still blowing in the wind.
In the meantime the New York Federal Reserve is filling the gap. Setting the rate at 1.75%, it has loaned $3 Trillion dollars into the repo market to make banks whole while we sleep.
I don’t know about y’all but quotes about things done in the dark being brought into the light begin popping into my head right about now. This isn’t a small problem. This isn’t a problem on the scale of that half-rusted work truck racing down the highway past you with one back wheel wobbling like crazy. This is a whole pile of rusted out trucks on fire, in the middle of the interstate, just ahead of you, surrounded by masked hordes firing AK-47s into the air.
Nothing like this has taken place in this country since January 1980, just before Volcker took office and pushed interest rates to the sky.
But don’t worry. The recession’s over. We’re good.