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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)

Ellen Brown for TruthDig.Org 9 Mar 2020:

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.

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Coronavirus Patient Zero in Italy Reportedly a Pakistani Immigrant

GatewayPundit, 7 Mar 2020:

According to recent reports from Italy the coronavirus patient zero in the Pavia area is a Pakistani immigrant who refused to self-isolate after testing positive for the virus.

The EU Times reported that the Pakistani man continued to cook and deliver Chinese food and infected an entire region of Italy.

Mainstream Italian news outlets, such as Il Giornale and ADNKronos are reporting the news.

According to Il Giornale the police intervened following an anonymous tip.

Paul Joseph Watson at Summit News reported:

The man believed to be coronavirus patient zero in Italy is a Pakistani migrant refused to self-isolate after testing positive for the virus and continued to deliver food.

Health authorities asked the man to quarantine himself at his home in the Pavia area for two weeks, but he ignored the request and continued to work at a Chinese restaurant.

He then compounded the risk of spreading the virus by making home deliveries of Chinese food.

Authorities were alerted to the situation and the military intervened to return the man to his home.

“The Carabinieri have been busy reconstructing all the movements of the young man, in order to identify as many people as possible with whom he came into contact. In the meantime, the military has closed the Chinese restaurant,” reports Free West Media.

The migrant now faces up to 3 months in jail for failing to self-isolate under article 650 of the Italian penal code.

Italy has recorded a total of more than 3,000 cases of coronavirus and 148 people have died. The country was the primary source of the virus spreading to numerous other European countries.

By MARK DUELL FOR DAILY MAILONLINE, 6 March 2020:

Britain is now facing a ‘recession’ as first coronavirus death on UK soil sends markets in panic with FTSE 100 opening 1.85% down at 6,581 - wiping off gains made during the week

London FTSE100 index major companies loses 124 points, 1.85% to 6,581

Frankfurt DAX30 sheds 1.8% to 11,735, Paris CAC40 drops 1.8% to 5,264

Milan’s major stock index FTSE-Mib also goes down 3.1% to 20,890 points

Hong Kong & Shanghai stocks also tanked overnight amid economic fears.

European stock markets including the FTSE 100 sank further this morning as traders feared that the coronavirus crisis could plunge Britain into recession.

London‘s benchmark index of major companies lost 124 points or 1.85 per cent to 6,581 today after Britain recorded its first death from the infection.

It also comes as a top investment bank warned coronavirus could push the UK to the brink of recession in the coming months.

In eurozone, Frankfurt DAX30 shed 1.8% to 11,735 points and ParisCAC 40 dropped 1.8% to 5,264, compared with yesterday’s closing levels.
       
TODAY: London’s FTSE 100 of major companies lost 124 points or 1.85 per cent to 6,581 today
       
THIS WEEK: The FTSE fell this morning, wiping out the gains it had seen so far this week
       
PAST FORTNIGHT: The FTSE has plunged since the virus sparked a worldwide rout last week

Meanwhile Milan’s major stock index the FTSE-Mib went down 3.1 per cent to 20,890 points as Italy continues to face the biggest outbreak in Europe so far.

In Asia, Hong Kong and Shanghai stocks also tanked as the coronavirus crisis overshadows government and central bank moves to limit economic impact.

Global markets hit by another wave of panic selling as fears…

for the FTSE 100 erased the index’s gains from earlier this week, with export-heavy companies now having lost more than £175million in value since the epidemic sparked a worldwide rout last week.

Cruise operator Carnival dropped 4.2 per cent to its lowest level since 2012, a day after its Grand Princess ocean liner was barred from returning to its home port of San Francisco on virus fears.

Britain said an older person with underlying health problems had succumbed to the flu-like virus yesterday, while the number of infections jumped to 115.

In company news, drug maker AstraZeneca fell 1 per cent after it said its treatment for a form of bladder cancer failed to meet the main goal of improving overall survival in patients in a late-stage study.

Top investment bank Goldman Sachs analysts has warned coronavirus could push the UK to the brink of recession in the coming months.

They say the outbreak will cause a ‘substantial’ near-term hit to economic growth, decimating the tourism industry and slashing leisure spending as Britons stay indoors.

It will cause a headache for new Chancellor Rishi Sunak, who is due to present his first Budget next week.

But analyst Sven Jari Stehn said: ‘The Budget may now focus on measures to safeguard public health than a broad-based expansion of spending.’

Goldman Sachs expects the economy to be flat in the first three months of 2020 and to contract by 0.2 per cent between April and June.