Author Topic: End of the Federal Resrve?  (Read 62 times)

Crunch

  • Members
    • View Profile
End of the Federal Resrve?
« on: March 28, 2020, 07:56:50 AM »
Quote
CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer. PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer. TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities. SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market. MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.

Sounds like the fine print may have been overlooked. Of course, there’s real fear that the bad orange man will abuse this:

Quote
In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election. Why stop there? Should Trump win re-election, he could try to use these SPVs to get those 10,000 Dow Jones points he feels the Fed has denied everyone.

Imagine that, Trump with total control of the financial markets and nothing to slow him down much less stop him. What could possibly go wrong?

Fenring

  • Members
    • View Profile
Re: End of the Federal Resrve?
« Reply #1 on: March 28, 2020, 12:58:36 PM »
Although this is interesting news, I don't see how it's worse than in 2008 when the Fed unilaterally conducted an international bailout for trillions of many private banks without any government authorization and with no transparency. It was only discovered after a partial audit got shoved down their throats. So it's pretty clear already that the system such as it is has problems for which there is no oversight and certainly no accountability.