By Pam Martens and Russ Martens: April 6, 2020 ~
On Thursday, March 26, in the midst of a growing panic on Wall Street over a lack of liquidity for toxic debt, the Federal Reserve Chairman Jerome Powell did something unprecedented. He appeared live on the Today show. His interviewer, Savannah Guthrie, opened the interview by noting that one writer had said that the Fed can simply conjure money out of thin air. (It can.) Guthrie asked Powell if there was any limit to the amount of money the Fed was willing to put into the economy to keep it afloat. Her question should have been: is there any limit to the amount of money the Fed will conjure out of thin air to keep Wall Street afloat?
Powell said this:
“In certain circumstances like the present, we do have the ability to essentially use our emergency lending authorities and the only limit on that will be how much backstop we get from the Treasury Department. We’re required to get full security for our loans so that we don’t lose money. So the Treasury puts up money as we estimate what the losses might be…Effectively $1 of loss absorption of backstop from Treasury is enough to support $10 of loans.”
Powell was forced to do damage control on Thursday because White House Economic Advisor Larry Kudlow had let the cat out of the bag at a press briefing the Tuesday evening prior that Main Street would be getting less than $2 trillion from the stimulus bill while the Fed would be getting $4 trillion as a result of its ability to leverage its share of the stimulus money, making this actually a $6 trillion stimulus bill. When the final stimulus bill was signed, the Fed got $454 billion of taxpayer money to cover its losses, which it can thus leverage up to $4.54 trillion to buy up the toxic debt that is exploding all over Wall Street.
Speaking to viewers of the Today show, Powell made it sound like the U.S. Treasury putting up taxpayer money at the Fed to absorb losses on Wall Street’s bad bets is the most normal thing in the world and a long-established practice. We’ve been studying the history of the Fed for the past 30 years and we can assure you that this is a brand new, tricked-up rescue plan by the Fed.
During the 2007-2010 financial crisis, which included the implosion of century-old firms on Wall Street in 2008, the Fed, secretly and on its own with no involvement of the U.S. Treasury or Congress, made $29 trillion in loans to Wall Street trading houses, global banks, hedge funds and foreign central banks. The Fed drew such a dark curtain around its operations that Senator Bernie Sanders had to attach an amendment to the Dodd-Frank financial reform legislation of 2010 so that Congress and the American people could finally find out how much the Fed had loaned and to whom it went by ordering a Government Accountability Office audit of the Fed’s “emergency” loans. That audit, which covered only some of the programs, reported $16.1 trillion in cumulative loans made by the Fed. When the Levy Economics Institute included the Fed programs that had been left out of the GAO audit, the tally came to $29 trillion in cumulative loans.
If there had been any such requirement that taxpayers had to put up $1 for each $10 loaned by the Fed at that time, taxpayers would have had to pony up $2.9 trillion. That certainly did not happen.
The fact that it did not happen the last time around suggests that the Fed knows for certain that there are going to be big losses this time around. The $454 billion of taxpayer money is likely just a down payment. The next stimulus bill will likely throw even more taxpayer money at the Fed to absorb Wall Street’s losses.
It’s absolutely brilliant – in an evil genius sort of way.
To make sure that there are all kinds of legal roadblocks to prevent the public from ever finding out just how much the Fed spends to bail out Wall Street and where the money went, the $454 billion, or at least a good chunk of it, will go into Special Purpose Vehicles (SPVs) structured as private corporations which are not subject to sunshine laws. (SPVs are the same accounting trick that Enron used to hide its failing finances before it blew up.) The Fed’s SPVs will then hire Wall Street firms to manage the funds and add another layer of opacity by making them sign a confidentiality agreement that survives the termination of the contract. The Wall Street money manager, BlackRock, has already been hired and signed such a contract.
To underscore that secrecy on the part of the Fed is once again a priority, Section 4009 of the final stimulus bill actually suspends the Freedom of Information Act for the Fed and allows it to conduct its meetings in secret until the President says the coronavirus national emergency is over.
And the official narrative is going to be that everything was just fine on Wall Street and in the economy until the coronavirus hit. At the Tuesday, March 24 press briefing, Kudlow also said that “We started the year very strong and then we got hit by the coronavirus.” But that’s simply not true. As we reported yesterday:
“According to the New England Journal of Medicine, the first confirmed case of coronavirus was reported in the United States on January 20, 2020. But according to the Fed’s own minutes, between September 17, 2019 and December 10-11, 2019, the date of its December federal open market committee meeting, the Fed had been pumping ‘roughly $215 billion per day’ in emergency loans to Wall Street’s trading houses or more than $6.23 trillion in cumulative loans – before there was any coronavirus crisis in the United States.”
On November 29 of last year, the Washington Post quoted two experts on the state of toxic debt on Wall Street. Emre Tiftik, a debt specialist at the Institute of International Finance, said this: “We are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion.” Krista Schwartz, a finance professor at the University of Pennsylvania’s Wharton School said this: “It’s going to make everything happen faster, larger, worse. The recession would just be that much deeper.”
The article noted that corporate debt had reached a record $10 trillion or an unprecedented 47 percent of the overall economy. Even worse, the corporate borrowing binge had not gone to boost innovation or the productive capacity of the corporations but had been used instead to “repurchase their own shares, pay higher dividends to investors and fund acquisitions.” Quoting S&P, the article noted that “more than $3 trillion over the past five years” had been spent by the corporations to buy back their own stock.
Those stock buybacks artificially inflated profits at these firms and resulted in huge compensation for “performance” for the corporate CEOs, including those at the biggest banks on Wall Street. Now the day of reckoning is here and the evil genius plan is to throw a few crumbs at desperate people on Main Street while forcing the taxpayer to absorb the astronomical losses of another decade of hubris by the Fed and Wall Street.
