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The Fed’s Baffling Response to the Coronavirus Explained
Man wearing mask in front of New York Stock Exchange buildingA man taking precautions amid the coronavirus outbreak walks past the New York Stock Exchange. (Mark Lennihan / AP)
When the World Health Organization announced on Feb. 24 that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points, or 10%. In an attempt to contain the damage, the Federal Reserve on March 3 slashed the fed funds rate from 1.5% to 1.0%, in its first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.
Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half-point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving U.S. companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning that their suppliers get their supplies there; and 938 of the Fortune 1,000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of U.S. pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt.
So what was the Fed’s reasoning for lowering the fed funds rate? According to some financial analysts, the fire it was trying to put out was actually in the repo market, where the Fed has lost control despite its emergency measures of the last six months. Repo market transactions come to $1 trillion to $2.2 trillion per day and keep our modern-day financial system afloat. But to follow the developments there, we first need a recap of the repo action since 2008.
Repos and the Fed
Before the 2008 banking crisis, banks in need of liquidity borrowed excess reserves from each other in the fed funds market. But after 2008, banks were reluctant to lend in that unsecured market, because they did not trust their counterparts to have the money to pay up. Banks desperate for funds could borrow at the Fed’s discount window, but it carried a stigma. It signaled that the bank must be in distress, since other banks were not willing to lend to it at a reasonable rate. So banks turned instead to the private repo market, which is anonymous and is secured with collateral (Treasuries and other acceptable securities). Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks.
The risky element of these apparently secure trades is that the collateral itself may not be reliable, because it may be subject to more than one claim. For example, it may have been acquired in a swap with another party for securitized auto loans or other shaky assets — a swap that will have to be reversed at maturity. As I explained in an earlier article, the private repo market has been invaded by hedge funds, which are highly leveraged and risky; so risk-averse money market funds and other institutional lenders have been withdrawing from that market. When the normally low repo interest rate shot up to 10% in September, the Fed felt compelled to step in. The action it took was to restart its former practice of injecting money short-term through its own repo agreements with its primary dealers, which then lent to banks and other players. On March 3, however, even that central bank facility was oversubscribed, with far more demand for loans than the subscription limit.
The Fed’s emergency rate cut was in response to that crisis. Lowering the fed funds rate by half a percentage point was supposed to relieve the pressure on the central bank’s repo facility by encouraging banks to lend to each other. But the rate cut had virtually no effect, and the central bank’s repo facility continued to be oversubscribed the next day and the following. As observed by Zero Hedge:
This continuing liquidity crunch is bizarre, as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE [quantitative easing].
The Collateral Problem
Ellen Brown is an attorney, chairman of the Public Banking Institute; author of thirteen books including “Web of Debt”, “The Public Bank Solution” and her latest, “Banking on the People: Democratizing Money in the Digital Age.”
As financial analyst George Gammon explains, however, the crunch in the private repo market is not actually due to a shortage of liquidity. Banks still have $1.5 trillion in excess reserves in their accounts with the Fed, stockpiled after multiple rounds of quantitative easing. The problem is in the collateral, which lenders no longer trust. Lowering the fed funds rate did not relieve the pressure on the Fed’s repo facility for obvious reasons: Banks that are not willing to take the risk of lending to each other unsecured at 1.5% in the fed funds market are going to be even less willing to lend at 1%. They can earn that much just by leaving their excess reserves at the safe, secure Fed, drawing on the Interest on Excess Reserves it has been doling out ever since the 2008 crisis.
But surely the Fed knew that. So why lower the fed funds rate? Perhaps because it had to do something to maintain the façade of being in control, and lowering the interest rate was the most acceptable tool it had. The alternative would be another round of quantitative easing, but the Fed has so far denied entertaining that controversial alternative. Those protests aside, QE is probably next after the Fed’s orthodox tools fail, as the Zero Hedge author notes.
The central bank has become the only game in town, and its hammer keeps missing the nail. A recession caused by a massive disruption in supply chains cannot be fixed through central-bank monetary easing alone. Monetary policy is a tool designed to deal with demand — the amount of money competing for goods and services, driving prices up. To fix a supply-side problem, monetary policy needs to be combined with fiscal policy, which means Congress and the Fed need to work together. There are successful contemporary models for this, and the best are in China and Japan.
The Chinese Stock Market Has Held Its Ground
While U.S. markets were crashing, the Chinese stock market actually went up by 10% in February. How could that be? China is the country hardest hit by the disruptive COVID-19 virus, yet investors are evidently confident that it will prevail against the virus and market threats.
KASTANIES, Greece (AP) — Greek authorities fired tear gas and stun grenades Wednesday morning to repulse a push by migrants to cross its land border from Turkey, as pressure continued along its frontier after Turkey said its own border with Europe was open to whoever wanted to cross.
Meanwhile, the Czech Republic, Hungary, Poland and Slovakia pledged to help Greece to deal with pressure along its border.
Speaking after meeting his counterparts from the other three countries, Czech Prime Minister Andrej Babis said the situation was serious and the EU must protect its borders.
“We’re ready to help,” Babis said.
Polish Prime Minister Mateusz Morawiecki said his country was ready to deploy guards at the Greek-Turkish border, while his Slovak counterpart Peter Pellegrini said the growing number of migrants “poses a security threat not just for Greece.”
Hungarian Prime Minister Viktor Orban said that there are some 130,000 migrants on the move that the EU has to stop on its borders, and that “Hungary will take an active role in doing so.”
The four countries have been known for their tough stance against migrants and rejected an EU plan to redistribute refugees in member states.
Meanwhile, European Council head Charles Michel was meeting with Erdogan in Ankara Wednesday, while EU Vice President Josep Borrell and Commissioner for Crisis Management Janez Lenarcic were holding talks with Turkish Vice President Fuat Oktay.
Speaking to reporters after a meeting with Erdogan, Borell said that the EU delegation asked Turkey “not to encourage the further movement of refugees and migrants toward the EU borders.”
“We had the opportunity to express our understanding of the difficult situation Turkey is currently facing but also stressed that the current developments at the European borders is not leading to any solution,” he said.
Borell also told reporters that Turkish officials’ response was that Turkey was not encouraging people to move but that “they cannot prevent people from doing so.”
Greek authorities said there were about 15,000 people along the Greek-Turkish land border on Wednesday. They said that between Saturday morning and Wednesday morning, they had blocked 27,832 attempts to cross the border, and had arrested a total of 220 people who managed to cross.
Ankara has come under harsh criticism from some European countries.
“The people are being used by President Erdogan as a political football, as weapons and as instruments of pressure on the European Union,” Austrian Chancellor Sebastian Kurz said Tuesday.
Fraser reported from Ankara, Turkey. Elena Becatoros in Athens and Karel Janicek in Prague contributed to this report.
On behalf of the Polish authorities, the Interior Affairs Minister Mariusz Kamiński has declared readiness to send 100 border guard soldiers and 100 police officers to support Greece in dealing with the migration crisis that has recently emerged at the country’s frontier with Turkey.
On Wednesday, EU member states’ interior affairs ministers met in Brussels at an extraordinary assembly in the wake of thousands of migrants and refugees from the Middle East gathering at the gate to Europe.
“We hope that the situation will settle down, but we have to take into account all the scenarios, which is why we are able to lend the Greeks a hand very quickly,” Minister Kamiński said.
The Commander of the Polish Border Guard, in consultation with the Minister of the Interior has already forwarded information on this matter to the European Border and Coast Guard Agency (Frontex). Greek authorities had previously requested the institution launch a rapid intervention as regards the migrants issue. Such interventions are intended to provide immediate assistance to an EU country whose border is under extreme pressure due to a large number of developing countries’ nationals attempting to enter its territory illegally.
As it stands, Frontex does not have its own regular corps, hence it must be based on border guards from EU states. After agreeing on a rapid intervention operational plan with Greece, Frontex will ask other EU and Schengen-associated countries to provide border guards and other personnel from the rapid response reserves immediately.
Mr Kamiński stated that Poland’s participation in any plan to relocate refugees would be out of the question if such a proposal were put forward.
“Refugee relocation is not an option, I stressed it clearly. What matters first and foremost is the real protection of the Greek-Turkish border, which we treat as the external EU border. On that matter, Poland presents concrete, real proposals that can mitigate the situation on the EU border,” the minister said.
On Wednesday morning, Greek services reported that from Saturday to Wednesday, they had stopped nearly 28,000 people attempting to cross the border illegally from Turkey and arrested 220 who had succeeded.
Erdogan to Greece: “Don’t be stupid. The migrants don’t want to stay in your country. Just let them through to other countries in Europe.”
Erdogan: “Greece, these people won’t remain in your country. They will pass through and go to another country in Europe. Why do you feel disturbed? We told you! We said that if it goes on like this, we’ll open the gates, but you didn’t believe us. Oh, Greece, now I’m calling on you to open your gates. Get out from under this burden! Let them go to other countries of Europe. There is no other way. The burden must be shared and we are looking for partners.”
Turkish regime leader Recep Tayyip Erdogan said on Monday that his government had no intention of stopping the relentless westward flow of migrants toward continental Europe, warning that “millions” would soon be headed toward the EU.
“Since we have opened the borders, the number of refugees heading toward Europe has reached hundreds of thousands. This number will soon be in the millions,” Erdogan said today in Ankara during a televised speech, Greek daily newspaper Kathimerini reports.
“After we opened the doors, there were multiple calls saying ‘close the doors.”
“I told them ‘it’s done. It’s finished. The doors are now open. Now, you will have to take your share of the burden’,” he said.
Late Sunday night, Turkish interior minister Süleyman Soylu said that 100,577 migrants had left Turkey through Erdine, at the border with Greece.
Despite the regime leader and his interior minister’s claims that hundreds of thousands of migrants are already amassed at the Greek border, figures from the International Organization for Migration suggest that these figures are vastly inflated.
According to the IOM, more than 13,000 migrants have now arrived at the Turkish-Greek border.
Earlier today, Voice of Europe reported that the Greek government has announced that it is preparing itself for 150,000 migrant invaders to try and reach its various islands in the Eastern Aegean Sea. Over 1000 migrants have already slipped by Greece’s coastguard and have managed to land on Greek islands in the Eastern Aegean.
Arthur Lyons
@ALyonsvi
Individual citizens are going to have to stand up and fight against this invasion. twitter.com/AlexLeroy90/status
Alex
@AlexLeroy90
Des grecs empêchent l’invasion des migrants islamistes envoyés par Erdogan Dégagez ! Nous sommes chrétiens ici !
video
Clashes escalate between Greek army and migrants on Turkish border
Over the weekend, Greece’s Deputy Defense Minister Alkiviadis Stefanis announced over that the migrants who’ve gathered at Greece’s border – most of whom are fighting-age men – made around 9,600 unsuccessful attempts to breach the border illegally.
The migrant invaders set fires and attacked Greek security forces, shouting things like: “The dogs can’t see us anymore. Burn them. Allahu Akbar.”
Imam of Peace
@Imamofpeace
“The dogs can’t see us anymore. Burn them. Allahu Akbar”
Turkey: Migrants cut through barbed wire at Greek border
“It will be difficult to stop the massive flow of people who have set out on their journey. That is why we can expect an increase in pressure in the coming days — even in the event that Turkish authorities act to prevent people from crossing the border,” an internal Frontex report said.
Ellen Brown is an attorney, chairman of the Public Banking Institute; author of thirteen books including “Web of Debt”, “The Public Bank Solution” and her latest, “Banking on the People: Democratizing Money in the Digital Age.”
Turkish president Erdogan has previously