Something is Seriously Wrong with the Financial System

Over the last week, we’ve outlined how the Fed has introduced NUCLEAR levels of money printing.

This is coming in the form of QE 4, a program through which the Fed will print $60 billion per month in new money and use it to buy Treasury debt from the large banks.

But the Fed is simultaneously running two other operations, called repos, through which it is providing $75 billion in liquidity in overnight operations… as well as $35 billion twice a week via a different repo program.

Regarding those last two items, repo programs are actually complicated things that require a great deal of knowledge concerning banking regulations. So for simplicity’s sake, you need to know the following:

  1. Banks are required to maintain certain levels of liquidity (meaning liquid, cash-like assets they can easily sell).
  2. Those banks that do not have the required levels of liquidity can “park” some of their less liquid assets with the Fed overnight in exchange for cash, thereby increasingly their liquidity.

When the Fed first launched its overnight repo program in September, it claimed that this was just a temporary program to help the banks maintain liquidity at a time when quarter-end taxes were coming due (taxes are paid in cash, which reduces liquidity temporarily).

However, it is now clear that this was a lie. The Fed has extended its overnight repo program through NOVEMBER. The Fed has also launched a second repo program through which it will provide $35 billion in additional funding twice a week to banks for longer periods of time (meaning the banks don’t need to return it the next day).

This, in of itself, is bizarre. If everything is fine in the banking system, why does the Fed need to continuously provide upwards of $100 billion in liquidity every single month? If this issue was indeed simply a temporary item related to corporate taxes, why is the Fed continuing these operations for months after tax season ends?

And then there’s the issue of QE 4.

Banks are Desperate for Liquidity, But Why?

As I mentioned before, the Fed is printing $60 billion in new money and using it to buy bonds from the large banks.

However, the banks are indicating they need MORE than just $60 billion per month. During the first few days in which the Fed printed new money and offered to buy debt, the banks were offering many multiples of what the Fed was buying.

Let me give you an example.

Last week the Fed printed $7.5 billion in money that it intended to use to buy debt from the large banks.

The large banks offered the Fed $36 billion in debt.

Put another way, for every $1 the Fed offered to buy, banks offered $4.80 in debt for sale.

This tells us the banks are DESPERATE for cash/liquidity. It’s the equivalent of the banks screaming, “Here buy my debt please, I need some cash!”

Between this and the repo programs I mentioned earlier, we are getting numerous signs that something major is happening in the banking system. Banks are truly desperate for cash to the point that even $130-200 billion in liquidity per month isn’t adequate.

This is a major warning. We had similar warnings before the 2008 crisis. The only difference between now and then was that at that time we’d already had major signals that the housing bubble had burst and that the economy was rolling over.

This time around the debt markets are acting as though things are just fine and the economy is growing, albeit at a slower pace.

Which begs the question… what exactly is going on that the banks are in such a panic?

I’ve got my suspicions. I’ll tell you about them tomorrow.

Best Regards,

Graham Summers
Editor, Money & Crisis

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Graham Summers

Editor Graham Summers has spent the last 15 years building a reputation as one of the most sought after and highly respected investment strategists on the planet. His work has been read and quoted by former Presidential advisors, award-winning institutional analysts, U.S. Senators, and more. He’s one of the few analysts on the planet to...

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