The Federal Reserve is quietly pumping big money into the banking system by way of the market for repurchase agreements (the repo market). In September, this sector—which connects institutions with cash to institutions in need of quick cash (short term loans)—went suddenly dry, and interest rates on short term debts spiked from around 2 percent to 10 percent. To normalize interest rates, the Fed began pumping cash into market by purchasing stagnant paper (treasury bills and other securities). Since then, a staggering $300 billion (the feds pumped another $70 billion into the repo markets this month), has been spent to keep the repo market going.
Jerome Powell, the Board of Governors of the Federal Reserve System, claimed that this massive operation was not quantitative easing (QE)—the $4 trillion Fed program that re-inflated the insolvent stock market after the crash of 2008—because the government is now only purchasing short term debts. QE was about long term debts. But this distinction is meaningless for one simple reason: the repo operation is, like QE, expanding the Fed's balance sheet. Meaning, the cost of saving this financial market is, once again, being transferred to the public.
Ivan Martchev, an investment strategist, put it this way in Market Watch:
The operation — let’s call it QE4 — is supposed to carry through the second quarter of 2020, as per the Fed’s own statements. We don’t know when in the second quarter such QE maneuvers might end, but whether it’s April or June, we may see a record-high Fed balance sheet during that quarter.
The lowest reported point of the Fed’s balance sheet since the balance sheet normalization started [under Obama] was $3,759,946 billion ($3.76 trillion rounded) on Aug. 28, 2018. The latest reported level is $4,047,882. That’s close to $300 billion in QE added in only 2½ months since the disruptions in overnight interest rate markets started in September. If the Federal Reserve carries the $60 billion monthly rate until the second quarter, that would mean that it would have surpassed the all-time high of $4.5 trillion in its balance sheet holdings (set in February 2015) sometime during June 2020
But why was there turbulence in the repo market in the first place? Why this spectacular credit crunch? According to conventional economic measuring instruments, the GDP is still growing. The unemployment rate is reaching lows that have not been seen in many decades. And the stock market is breaking records. Where did the cash or buyers go to all of a sudden? Jerome Powell has offered nothing in the way of an explanation. Some do not want an explanation—they just want more government cheese. Lots of mainstream economists and columnists have, predictably, blamed capital requirements imposed on banks after the crash of 2008. They claim banks have the cash but they can't use it because regulators want them to have a stash in case of an emergency. Others say it was the taxes that corporations had to pay. It sucked all of the money out of the market.
That is where things stand, USA. You had a massive economic crash in 2008. Millions lost homes and jobs. The feds spent $29 trillion to bail out the global financial sector (read this PDF from Bard's Levy Economics Institute), and all you can get from economists and columnists in mainstream business papers is more blather about how the government is the problem. There is, as you can see, no shame in the game.
But the answer can be found in Hyman Minsky's hypothesis for financial instability (PDF). Markets do not naturally seek a state of stability (or an equilibrium point of sellers and buyers). Indeed, stability itself leads, according to Minsky, to greater instability. When things are volatile, speculators (not to be confused with investors—or entrepreneurs) take fewer risks. When things appear to be stable, then caution is thrown to the hurricane. There is no mystery in the repo crisis if you are familiar with Minsky's writings.
But guess what? The government has changed the rules for food stamps in such way that it can deprive a large section of the poor of basic assistance and save tax payers a grand total of $5.5 billion over five years. I have no words that can adequately express the scale of this kind of obscenity: $300 billion given to banks; $5.5 billion taken from the neediest members of our society.