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This Chart Shows How the Fed Has Spooked the Commercial Paper Market

Courtesy of Pam Martens

Data Source: St. Louis Fed

Data Source: St. Louis Fed

By Pam Martens and Russ Martens

Yesterday the Federal Reserve released the minutes of its Federal Open Market Committee meeting of October 29-30. The minutes show that the FOMC members were fingering their worry beads over plans for their longer-term handling of the hundreds of billions of dollars weekly that the New York Fed is pumping into the overnight and term repo markets. The worries center on whether the Fed is creating moral hazard and/or that the banks will “take on an undesirably high amount of liquidity risk.”

We have news for the Fed: both of those horses have left the barn. The Fed enshrined moral hazard and liquidity risk among Wall Street banks when it funneled $29 trillion to the miscreant banks from 2007 to 2010 while intentionally hiding its footprints from the public until it lost its court battle and had to disclose the data.

According to the Bank of England’s Financial Stability Report that was released in July, the leveraged loan market is now $3.2 trillion. U.S. mega banks and other global banks hold 38 percent of those high-risk loans or $1.21 trillion. The report also points out that “In the U.S., gross corporate debt as a share of GDP is now above pre-crisis levels.”

The Fed’s FOMC minutes also revealed that it is worried about “the likelihood that participation in the Federal Reserve’s repo operations could become stigmatized….” Well, obviously, if you can’t get one of your peer banks to give you a collateralized overnight loan and have to turn to the Fed, you’ve got a stigma problem.


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