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(Shhh! Don’t Tell Wall Street that the Fed is Tightening.) Repo Loans Hit Zero; Fed Balance Sheet Shrinks by $248 Billion in a Month

Courtesy of Pam Martens

Federal Reserve Building, Washington, D.C. with Dead BullBeginning on September 17 of last year, months before the first COVID-19 case had been discovered anywhere in the world, the Federal Reserve – for the first time since the financial crisis of 2008 – jumped into the repo loan market, where financial firms borrow from each other overnight, and began making tens of billions of dollars in loans a week to the trading houses of Wall Street. The Fed calls these 24 trading houses its “primary dealers.”

For the vast majority of the Fed’s 107-year existence, it was limited to making loans to only commercial banks, which would assist the general U.S. economy by passing on those loans to businesses and consumers. Since the financial crisis of 2008, the Fed has become a money spigot to the Wall Street casino, based solely on its own interpretation of what it’s allowed to do.

The Fed’s emergency action on September 17 resulted from the fact that repo loans on that date had bizarrely spiked from 2 percent to 10 percent, strongly suggesting that one or more trading houses were in trouble and other financial firms were backing away from giving them loans.

The Fed releases weekly data each Thursday at 4:30 p.m. on its balance sheet holdings. It’s known as its H.4.1 report and shows balance sheet levels for Wednesday of that week. Yesterday, the Fed’s H.4.1 bizarrely showed a balance of zero for repo loans outstanding on Wednesday, July 9. To give you an idea of just how bizarre that zero figure is, here’s a rundown of how the Fed’s weekly repo loans grew from their inception on September 17.

In a one-month period, from September 18 to October 16 – the Wednesday level of repo loans grew from $75 billion to $197.7 billion outstanding. The Wednesday balance of outstanding repo loans hovered in the $200 billion range weekly through March 11 of this year. Then they skyrocketed.

From March 11 to March 18, the Fed’s repo loans increased from $242 billion to $442 billion outstanding. What could possibly explain such a massive surge in the demand for money from the Fed by the trading houses on Wall Street in one week’s time? There was a massive selloff in stocks triggered by spreading fears of the COVID-19 pandemic. The share prices of the biggest banks on Wall Street tanked, raising more alarm bells.

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