Submitted by Taps Coogan on the 14th of the November 2019 to The Sounding Line.
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Grant’s Interest Rate Observer founder and editor, Jim Grant, recently spoke with CNBC’s Rick Santelli about the radical transformation in monetary policy that has occurred in the last two months, which very few people seem to fully appreciate. Namely, the Fed has embarked on one of the most aggressive monetary policy re-accommodation regimes in history. Point-in-fact, Mr. Grant notes that the Fed has done upwards of $3 trillion in repos in barely two months. While it is important to note that most repos expire after just one day and must be redone everyday to maintain the same level of liquidity, $3 trillion, nonetheless, represents a historic liquidity injection. As we noted here, the Fed’s balance sheet is growing at the fastest pace since the depths of the Financial Crisis.
Some excerpts from Jim Grant and Rick Santelli:
“As of now, Rick, from the start of the operation in the middle of September to just about yesterday, we have, on a gross basis mind you – just adding up all the dollars spent day-by-day, we have spent upwards of $3 trillion (on repos), which is a lot of money, even when you say it fast.”
“…Is this a defacto nationalization of the repo market that was once the venue of all the different large institutions and primary dealers that seem to have just exited the space?”
“The federal funds market in which banks would transact on the basis of price signals to buy and sell bank reserves… is kind of a ghost town and the Fed Fund rate is for show only. What has superseded it is the repo rate which is the collateralized rate. You charge that for lending against Mr. Mnuchin’s stock of bonds and bills (treasury debt). The repo market is completely dominated by the Federal Reserve. It is the property of the US federal government and we are dealing with administered rates with huge amounts of money, and I think it is worrisome.”
“…This all happened in a very nonchalant way. There didn’t seem to be any protest, any big stories. Granted, even I thought ‘Well, it is just going to provide some liquidity.’ But now it is most likely going to be a permanent operation… I’ve been around a while, like you have. What happened to using the discount window? …It seems as though we’ve moved from lender of last resort, helping banks in the form of our central bank, to the market maker of last resort, the market lender of last resort. They’re the last resort for everything.”
“What we have done is to swap price discovery… for the administration of prices and interest rates, especially of money market interest rates. What Chairman Powell will not say is that in the last three months the Fed’s earning assets, its bonds and bills, have grown at an annualized rate of 23%. Way back in September, before the eruption in the repo market, that was shrinking at a rate of about 9%. So very quietly the Fed has done an about-face and whatever he says with respect to the funds rate, the Fed is very very accomodative and the rate of injection of high powered money is very fast…”
“….We went from open outcry to just crying in open that the markets aren’t going to ever be like they were and market participants in aggregate, and all of their decision making, now boils down to a group of several men.”
I, for one, couldn’t agree more with the points made above. For a decade we have been casting aside foundational elements of our free-market system in order to postpone a slowdown in growth, the likes of which the world has witnessed every five to ten years since the dawn of human civilization. It’s a disgrace.
There is more to the discussion, so enjoy the full video above.
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