If you haven't heard, the Federal Reserve met on a Sunday and by the dim light of their whale oil lamps seemed to have meted out an unprecedented response to the coronavirus, a health care crisis turned financial panic. It didn't have to be this way, but here we are, again, standing on the precipice of another Global Financial Crisis.
Here's a summary of the Fed's package:
- 100 bip rate cut from 1.00%-1.25% to 0%-0.25% on Fed Funds Rate
- $700 billion in commitments to buying government bonds, i.e. quantitative easing or QE, $500 billion to Treasuries & $200 billion to mortgage-backed securities
- swap lines with all the other IMF central banks except the PBOC, plus the Bank of Canada and the Swiss National Bank
- Reserve Requirement Ratio moving to ZERO starting on March 26
The first three are standard plays for monetary policy of any central bank. Once upon a time, the QE would be shocking. But the US has already gone down this road of massive bond buying. In fact, we had just weaned ourself off our initial foray into QE. The Fed's repo intervention this summer, which understandably went over most people's heads, was just a harbinger of things to come. Yeah, that's right. This QE is in addition to the trillions in repo liquidity promised by the Fed just a few days ago. I can live with all of these actions. Not because they make much sense to me. But rather, that's just what America does - the institutions are coopted by corporations to look out for the stock market and the banks and that's about it. We know this by now.
But what is driving me absolutely crazy right now is dropping the reserve requirement ratio to zero. Seriously, I can't wrap my head around RRR0. Basically, the argument is that banks need to keep some "skin in the game" or otherwise, if they have nothing to lose, they will just lend to strippers and deadbeats to buy McMansions. That's what happened back in the subprime mortgage crisis. At the time, those crap-quality mortgages could count toward a depository institution's required reserves... until they couldn't any more. And then we had the crash.
The concept to understand here is moral hazard. Essentially, we have to let institutions lose at least some of their collateral if they choose to make risky loans that don't pan out. But now, starting on March 26, they won't have to put up any collateral before making YUGE loans. The likelihood that most of those loans won't get paid shoots up dramatically. Most likely, the taxpayer will get left with the bill (as usual).
All that, and we still haven't even seen any monetary policy relief directed at real people, although I get the feeling that RRR0 will be framed as trying to help out the middle class given the title of the Fed's press release, "Federal Reserve Actions to Support the Flow of Credit to Households and Businesses".
Not sure I've ever seen a bank lend to a jobless person that can't even leave the house due to social distancing. But maybe we'll see some sort of law mandating that in the next couple days.
What a world we live in.
Posted via Steemleo