On Friday, Minneapolis Fed president Neel Kashkari, who just two months earlier made a stunning proposal when he said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth (at least Kashkari chose the proper entity: since the Fed has launched central planning across US capital markets, it would also be proper in the banana republic that the US has become, that the same Fed also decides who gets how much and the entire democracy/free enterprise/free market farce be skipped altogether) issued a challenge to “QE conspiracists” which apparently now also includes his FOMC colleague (and former Goldman Sachs co-worker), Robert Kaplan, in which he said “QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing. I don’t see it.”
To the delight of Kashkari, who this year gets to vote and decide the future of US monetary policy yet is completely unaware of how the plumbing underneath US capital markets actually works, we did so for his benefit on Friday, although we certainly did not have to: after all, the “central banks’ central bank”, the Bank for International Settlements, did a far better job than we ever could in its December 8 report, “September stress in dollar repo markets: passing or structural?”, which explained not just why the September repo disaster took place on the supply side (i.e., the sudden, JPMorgan-mediated liquidity shortage at the “top 4” commercial banks which prevented them from lending into the repo market)…
… but also on the demand side, which as Claudo Borio, head of the monetary and economic department at the BIS, explained was the result “high demand for secured (repo) funding from non-bank financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades.”
Incidentally, we harbor a slight suspicion that Kashkari, who also admitted to “finding amusement in needling critics calling them conspiracists or goldbugs” (which is a delightfully ironic statement for a person responsible for the biggest asset bubble in history, and one which we are confident in 1-2 years time he would love to retract), was being disingenuous and knows exactly how the Fed is impacting markets, because in what was perhaps the most important news last week which flew under the radar, the WSJ reported that the Fed was considering lending cash directly to – i.e., bailing out – hedge funds, or as we put it, “Fed officials are considering a new tool to ease repo market stress: namely bypassing the existing system entirely, and lending cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC.”
And so we once again get to the real issue at hand, namely the bailout of those hedge funds which even the BIS said were on the verge of failure had the repo market not been unfrozen – and which the Fed was all too aware of – and had the massive leverage that some hedge funds operate under collapsed, forcing an unprecedented liquidation cascade….
“Over time, whoever controls the money system, controls the nation.”
The American Monetary Institute is a publicly supported charity founded in 1996.
The real outcomes in society – whether there will be general economic justice or corrupt financial privileges for the few – are usually determined by the structure of a society’s monetary system.