Courtesy of Pam Martens
COVID-19 Status in California as of December 29, 2020 (Source: State of California)
By Pam Martens and Russ Martens
The question of just how much fiscal stimulus and COVID-19 relief payments are needed right now in order to prevent the U.S. economy from going off a cliff requires a recognition of what we do not know about the actual fragility of the U.S. economy over the next 12 months and the current fragility of the financial system of the United States.
We start from the factual premise that the current financial crisis did not originate as a result of the pandemic. The plumbing of the financial system broke on September 17, 2019, months before the first COVID-19 case was discovered anywhere in the world. We know this because this is the date that the Federal Reserve announced it would begin acting as lender of last resort to the repo loan market on Wall Street. (Repos are a form of borrowing where banks, brokerage firms, hedge funds and mutual funds engage in short term loans, typically overnight, which are collateralized with safe securities such as Treasury notes.)
The demand for short-term repo borrowing dramatically outpaced amounts offered for loans on September 17. This drove the overnight repo loan rate to an unprecedented high of 10 percent rather than the typical range of 2 to 2.25 percent, which was where the Fed was targeting the Fed Funds rate at that time. The Fed was forced to race to the rescue, injecting $53 billion into the repo market via the New York Fed on that date and promising to make another $75 billion available the next morning.
The repo loans from the Fed continued in massive amounts through the fall. By January 6 we were reporting, using the Fed’s own data, that the “Federal Reserve Admits It Pumped More than $6 Trillion to Wall Street in Recent Six Week Period.” The CDC reports that it “received notification of the first case of laboratory-confirmed COVID-19 in the United States on January 22, 2020.”
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