The Fed Fueled Today’s Liquidity Crisis with One Key Moral Hazard Action

The central bank not only allowed five big banks to constitute the core of the U.S. financial system, it allowed them to amass huge multi-trillion dollar risks that threaten the entire system.

By Pam Martens and Russ Martens of Wall Street on Parade.

The Federal Reserve Bank of New York (New York Fed) made the astonishing announcement last Thursday that it will be pumping a cumulative $2.93 trillion into Wall Street trading houses (primary dealers) between December 16 and January 14. That’s on top of the $360 billion of liquidity it is pumping into the markets by buying back $60 billion a month in Treasury bills from its primary dealers.

The Fed’s excuse for opening its self-created money spigots to the tune of trillions of dollars to Wall Street’s trading houses – a replay of what it did secretly during the financial crisis of 2007 to 2010 – is that this is simply a technical fix for allowing bank reserves at the Fed to shrink too far. But that is merely a symptom – not the actual disease afflicting the U.S. financial system.

The facts on the ground strongly support the argument that the Fed itself created this mess by rubber-stamping bank mergers that allowed five banks (out of 5,000 in existence in the U.S.) to now constitute the core of the U.S. financial system.

In a 2015 report, researchers at the federal Office of Financial Research found that the health of the entire U.S. financial system rested on the financial health of just five mega banks: Citigroup, JPMorgan, Morgan Stanley, Bank of America and Goldman Sachs. Each one of those banks, with the exception of Bank of America, is “supervised” by the New York Fed. Bank of America is supervised by the Federal Reserve Bank of Richmond. (See These Are the Banks that Own the New York Fed and Its Money Button.)

According to the Office of the Comptroller of the Currency (OCC), the bank holding companies of those same five mega banks, as of March 31, 2019, were sitting on obscene levels of derivative risk: in notional (face amount) of derivatives, JPMorgan Chase held $58.7 trillion; Citigroup had $51.5 trillion; Goldman Sachs Group reported $50.8 trillion; Bank of America held $37.9 trillion while Morgan Stanley sat on $35 trillion. At the time, these five banks represented 86 percent of all derivatives held by the more than 5,000 Federally-insured banks and savings associations in the U.S. Derivatives played a key role in the financial collapse of 2008 and yet neither the Fed nor Congress have reined in the risks

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One thought on “The Fed Fueled Today’s Liquidity Crisis with One Key Moral Hazard Action

  1. Must say,it’s worth clicking no the link to the video at the bottom of Martens testimony to Congress.Absolutely damning indictment of the US political class that they allowed the repeal of Glass Steagall.


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