U.S. Debt Crisis Comes into View as Fed’s Balance Sheet Explodes Past $7 Trillion

Numerous aspects of what the Fed is doing are likely illegal under its statutory legislation known as the Federal Reserve Act.

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

On May 29, 2019, the Federal Reserve’s balance sheet stood at $3.9 trillion. As of this past Wednesday, May 27, 2020, the Fed’s balance sheet had skyrocketed to $7.145 trillion, an increase of 83 percent in one year’s time.

But the explosion in the Fed’s balance sheet cannot be attributed solely to the economic downturn caused by the COVID-19 pandemic. The math and the timeline simply do not support that argument. According to the timeline at the World Health Organization, on December 31, 2019, China first reported a cluster of cases of pneumonia which were identified in early January to be the coronavirus now known as COVID-19. These were the first known cases anywhere in the world.

But on December 31, 2019, the Federal Reserve was already deep into a debt crisis in the United States. We know that from the minutes of the Federal Reserve’s Open Market Committee. The Fed minutes for the meetings on December 10-11, 2019 state that the Fed’s emergency repo loans (that it had started making on September 17, 2019 for the first time since the financial crisis of 2008) had  “totaled roughly $215 billion per day” as of the date of that meeting.

Using the Fed’s own Excel spread sheet data for its emergency repo loans, Wall Street On Parade reported on January 27 that the Fed had made $6.6 trillion cumulatively in emergency revolving repo loans to Wall Street since September 17. The first death in the U.S. from COVID-19 did not come until February 28 and was reported by CNN one day later.

Repo loans (repurchase agreements) are typically routine overnight loans between banks, mutual funds and other financial institutions. The institution borrowing the money provides high quality bonds (typically Treasury securities) as collateral and signs an agreement to buy back the securities at a specified price. The difference in the price is effectively the interest charged on the loan.

The Fed started out on September 17 offering overnight loans of $75 billion daily. Three days later, on September 20, it added 14-day term loans. On October 23 the Fed announced that its daily repo loans would be increased from $75 billion to $120 billion while its term loans would continue. On December 12, the Fed announced that it would supplement its repo loans by adding a 32-day loan of $50 billion to its ongoing, twice per week term loans of 14-days and it would increase its overnight loans from $120 billion to $150 billion on December 31, 2019 and January 2, 2020. The Fed said it would also add an extra $75 billion overnight loan, thus bringing an extra $185 billion of liquidity over the turn of the year on top of its ongoing repo loans.

The Fed has subsequently added an alphabet soup listing of Wall Street bailout programs, many of which have been resurrected from the days of the 2008 crisis.

Today, the Fed’s balance sheet shows that its repo loan program is still ongoing with a $181 billion balance outstanding. Emergency lending from the Fed’s Discount Window stands at $18 billion. Emergency loans to the trading houses on Wall Street under its Primary Dealer Credit Facility (PDCF) stand at $6 billion. Buying up undesirable debt from money markets under the Money Market Mutual Fund Liquidity Facility (MMMFLF) shows a balance of $33 billion. Scooping up unwanted commercial paper under the Fed’s Commercial Paper Funding Facility (CPFF) stands at $12.79 billion. Making outright purchases of investment grade and junk-rated corporate bonds under its Corporate Credit Facilities (which is targeted to expand to $750 billion by September 30) was just launched three weeks ago and currently stands at $34.85 billion.

All of the above programs, which provide assistance to the Wall Street banks and their trading units, total $267.64 billion currently outstanding. But the assistance is far greater than that. The repo loans are currently being made at an interest rate of 0.10 percent – a tiny fraction of what Wall Street’s trading houses would pay for these loans in the open market. If the trading houses simply loaned that money out as margin loans to hedge funds and day traders, they could make astronomical profits. The Fed is making its Discount Window loans and Primary Dealer Credit Facility loans at 0.25 percent – again, a preposterously low rate with no relationship to where these trading firms could borrow in the open market.

Think of it in these terms: imagine if every American who is paying interest of 9 percent or higher on their credit cards to these same Wall Street banks (e.g. Chase, Citibank, Bank of America, etc.) were offered money from the Fed to pay off these credit cards at an interest rate of 0.10 or 0.25 percent. Americans could get their financial houses in order rather easily. But no such deal is being offered to struggling Americans – 40 million of whom are now unemployed

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One thought on “U.S. Debt Crisis Comes into View as Fed’s Balance Sheet Explodes Past $7 Trillion

  1. Been say’n since the GENESIS of the GreatER Depression, 2007-08, that the PRIVATELY-held [NOT]Federal[NO]Reserve WILL “QE to infinity” and those D[e]C[eit] Turd-Pond sludgers “juz get’n started”. Jim Morrison was purported to have once declared, “I don’t know what’s gonna happen, but I wanna have my kicks before the whole [schiff]house goes up in flames”. Well, this “FORD5GS” – Fly-Over Rural “Deplorable”, GROUNDed/GROUPed/GUNned/GARDENed/GOD[ly] and . . . SIMPLIFIED – drafted ‘Nam ’69 VFW hoping to get his “final kick” “remotely viewing” said before the Lord calls me Home. “JC always before me”. NO FEAR/HATE. Lock and load. Hoo-rah.

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