Two Disgraceful Anniversaries
Make the Fed Work for You, Not the Bankers
“The jerks got away with it!” said Salon writer David Dayen in 2013.
The occasion was the fifth anniversary of the central event during the 2008 financial crisis — what your editor called “the panic vortex.”
On that day, Lehman Bros. went under. Merrill Lynch nearly went under until the feds arranged a shotgun marriage with Bank of America. The giant insurer AIG was likewise circling the bowl. And so on…
Yesterday was the 16th anniversary.
As Dayen wrote in his retrospective, “The financial crisis featured a group of self-styled innovators who thought they devised perfect financial instruments that would only yield big returns and never any losses (in reality they did devise that, only it's called ‘the United States government’).”
So true. It was 2008 that brought the word “bailout” into common usage. It’s when Americans woke up to the true nature of this country’s financial sector — privatized profits, socialized losses.
And all made possible by the Federal Reserve.
“The Lehman collapse catapulted the Federal Reserve on a mission to, in its own narrative, save the economy from further collapse,” recalled our former colleague Nomi Prins on the 10th anniversary in 2018.
“In fact, its creation of $4.5 trillion to purchase U.S. Treasury- and mortgage-related bonds from the big private banks in exchange for continued liquidity was the biggest subsidy in U.S. history.”
Yup. The Fed became the proverbial “lender of last resort” — an idea given life by Walter Bagehot, the English businessman and writer who was editor of The Economist magazine during the 1860s and 1870s.
The “Bagehot rule,” as it’s come to be known, says that in times of crisis, central banks should lend freely…
- to solvent institutions
- against good collateral
- at penalty rates of interest.
The Fed and Treasury didn’t just break the Bagehot rule; they ran it through a buzz saw, doused the remnants with kerosene and set them alight. The Fed’s alphabet-soup rescue programs — they went by acronyms including TSLF, CPFF and TALF — funneled billions of dollars…
- to dead-ass broke banks
- which put up garbage for collateral (if anything at all)
- and paid a pittance for interest.
The “too big to fail” institutions emerged on the other side even bigger — led by JPMorgan Chase and Goldman Sachs.
The 2008 playbook was put back to work five years ago today — when the banks ran into trouble with exotic financial instruments called repos, short for “repurchase agreements.”
The big banks and hedge funds rely on the repo market to finance their trading, tapping billions of dollars in a day.
On Sept. 16, 2019, the repo market froze up. Usually, repo rates stay closely aligned with the fed funds rate set by the Fed. At one point that week, the repo rate soared to nearly five times the fed funds rate.
Experts still argue about what went wrong five years ago today and who was responsible. The point is that the Fed started printing still more money — not a lot, to begin with.
But then the onset of COVID in early 2020 gave the Fed cover to furnish the banks with an even more gargantuan subsidy of $5.1 trillion.
This week here in 2024, the Fed will embark on a course of action that is, in its own way, a favor to Wall Street. On Wednesday at 2:00 p.m. EDT, the Fed will begin a new cycle of interest rate cuts.
All else being equal, Wall Street likes lower interest rates. It’s not as good as the Fed outright printing money as it did in 2020 and 2008… but lower rates do make it easier to borrow money. And borrowed money is what greases Wall Street’s gears.
We could expend all of our 5 Bullets today on outrage over the Fed’s bailouts and special favors. But what’s the point? The system is what it is and nothing we say is going to change it.
Here’s the point: If the Fed is about to alter the flow of trillions of dollars through the U.S. economy… you might as well position yourself so that some portion of those trillions are showered down on you.
Markets Today: Trump, Gold
Neither the markets nor the media appear moved by the latest attempt on the life of the once-and-possibly-future president.
Granted, this time no one actually got off a shot at Donald Trump. Still, it’s as if such events are becoming a ho-hum part of the landscape. The Drudge headline seems a little… disappointed?
Given the lack of market impact, we won’t dwell on it today, except to ask this: Why did the self-styled free-speech advocate Elon Musk instantly nuke the suspect’s X account?
In retrospect, there are two reasons gold started soaring toward all-time highs on Thursday and Friday — an increasingly worthless U.S. dollar, and the prospect of World War III.
Going into Thursday’s trade, the bid on the Midas metal was in a tight range between $2,515–2,520. Within hours, it sailed over $2,550. On Friday it rallied further to $2,577.
On Thursday, the U.S. Treasury announced that Uncle Sam took in $307 billion in revenue during August… while he spent $687 billion. August revenues were up 8% from a year ago… while spending rose 254% from a year ago.
Meanwhile, Uncle Sam’s annual interest expense on the national debt topped $1 trillion for the first time. (The government’s fiscal year runs from October–September, so the figures are now in for 11 of the 12 months of fiscal 2024.)
As we showed in chart form during last Wednesday’s post-debate edition, the pace of federal spending increases is now on a permanently higher trajectory than it was from 2000–2019. COVID wasn’t a one-time expense, after which it was back to “normal.”
The release of the budget figures on Thursday cemented that reality for anyone who was paying attention.
Thursday was also the day Russia’s Vladimir Putin said that if Washington agrees to let Ukraine conduct air strikes deeper into Russian territory than it has so far… then Moscow would consider itself at war with NATO and the United States. (We teased out the dire consequences in Friday’s edition.)
Gold is perceived as a safe haven in extreme times — whether they’re the result of currency debasement or the prospect of heavy-duty warfare. Today, gold is holding onto last week’s gains at $2,578. Silver is also steady at $30.69 while the HUI index of gold stocks is down microscopically at 327.
As for the broad stock market today, the major indexes bring new meaning to the word “mixed.”
The Dow is up nearly a third of a percent at 41,530 — within spitting distance of its record close notched on Aug. 30. But the Nasdaq is down nearly 1% at 17,513. The S&P 500 splits the difference, down a quarter percent at 5,614.
It wouldn’t be surprising if we saw choppy trade today and tomorrow going into the Fed’s rate-cut announcement on Wednesday. This morning, the futures markets are leaning toward a more aggressive half-percentage point cut and not a quarter.
➢ Moments ago, Elizabeth Warren demanded three-quarters of a percentage point, thereby giving the Fed leeway to claim it’s not “being political” ahead of a presidential election if it goes for a half. See how that works?
Crude has once again pushed back above $70. Bitcoin is back below $58,000.
Time to Stock up on Groceries?
From the Department of “There’s No Voting Our Way out of This”...
The Wall Street Journal recently commissioned a poll that found areas of commonality between supporters of Donald Trump and Kamala Harris.
One item that caught our eye: Asked about their support for “penaliz[ing] companies that engage in price gouging on food and groceries”… 72% said yes, including 93% of Democrats and a majority of Republicans, 57%.
Even more staggering is this: When the pollsters asked if they’d support such penalties “even if food shortages could result,” support dropped from 72% to… 58%. Still a majority.
Hmmm… As you’re aware, Harris has made grocery “price gouging” a thing during her campaign. Might want to start stocking up at the grocery store now in case she wins — because if you do after she wins, you’ll likely be accused of “hoarding.”
The pollsters asked a couple of similar questions — whether people would support certain policies even if there were undesirable second-order effects.
Harris’ proposal to give $25,000 to first-time homebuyers gets support from 49% of registered voters… and 38% said they’d still support it “even if it increases the national debt.”
Hmmm… What would the response have been if the condition was “even if it raises the typical home price by $25,000”? Because it would — whatever you subsidize, you get more demand for. That’s been the problem with “the three Hs” — housing, health care and higher ed — for the last 30 years.
The pollsters also inquired about Trump’s proposal to exempt Social Security benefits from income tax. This gets support from 83% — and it declines to only 68% with the condition “even if it increases the national debt.”
As with the housing question, the framing is lousy. What if the condition was “even if it means lower Social Security benefits in the future”?
Because that’s what would happen: The income tax that retirees pay on Social Security benefits goes into the Social Security trust fund. Take that away and Social Security’s revenue shortfall would blow out from “manageable” levels to “impossible.”
As long as we’re discussing public policy…
Here We Go Again
The reaction to Saturday’s edition was weirdly hostile — though not altogether unexpected.
The mildest criticism came from someone who took exception to the play-on-words subject line, “Harris Harasses the Middle Class.”
Says another: “I think Emily Clancy believes those making over $100,000 are in the high-earner bracket. In California, for a family of four, that puts them firmly in the poverty category… ”
She never said such a thing. She said only that 11% of the benefits of the Child Tax Credit expansion go to “low-income” families earning under $40,000, while 44% go to families earning over $100,000. If you have a problem with that fact, take it up with the Census Bureau, not us.
Most of the other criticisms — including from this reader — took issue not with the facts laid out, but ancillary concerns: Why don’t you talk about Trump? (Answer: Because everyone else does.)
This really should go without saying, but apparently it can’t: Just because we pen something in this e-letter that’s critical of one major-party candidate does not mean we’re in the tank for the other one. The outrage when we took after J.D. Vance for his half-baked and autocratic proposals to raise birth rates generated an equally unhinged reaction: Why don’t you talk about Kamala and fracking? (Again, because everyone else does.)
We’ll leave it at that today — other than to say everyone needs to take it down a notch.
Avoidable Armageddon
“Chilling and necessary essay,” a reader writes after Friday’s edition. “Meantime the masses obsess over Swift or Legend endorsements or the false or fair framing of felines as food.
“We, the people, with our hyper-short attention spans, always seem to focus on the trivial and ignore the important. Thank you for helping move the needle on awareness on this Black Friday.
“Iodine and Geiger counters won't save us where we live between a major naval shipyard, the airfield of the F35s and a Marine training center. Here's to hope that cooler heads prevail.”
“I wholeheartedly agree with your thoughts and insights regarding the escalating nuclear Armageddon,” says another.
“I also especially agree with Daniel L. Davis’ statement that ‘there is nothing in the conflict between Russia and Ukraine that is worth the loss of one NATO or American city to a nuclear blast. Period. Full stop.’
“While this should be obvious to the hoi polloi, what may not be obvious is that there may be something worth a nuclear blast to the (political) elites. The denizens of one of these blast zones may be expendable to keep the money flowing.
“That is we have long heard the rumors about how much (political) money is laundered through Ukraine. Perhaps it is an amount that they are not willing to let go of without a fight?
“Any thoughts about this, or am I getting too deep into the weeds?
“Love the 5! Keep up the great work!”
Dave responds: Never attribute to malice (or greed) what you can otherwise attribute to stupidity (or hubris).
Yes, of course, the military-industrial complex is a lucrative gravy train. But the more fundamental problem is that there aren’t enough people in power these days who are scared ****less by the prospect of war in general and nuclear war in particular.
All the presidents I cited on Friday as tamping down the nuclear tension — JFK, LBJ, Nixon, Reagan — served in one capacity or another during World War II.
But every president over the last 30 years dodged the draft during Vietnam — with the exception of Barack Obama, who was 11 years old when the all-volunteer force came into being. All, including Obama, embraced the infamous line Madeleine Albright uttered to Colin Powell in 1993: “What's the point of having this superb military that you're always talking about if we can't use it?”
No, that’s not an argument for the draft. It’s just an observation about the zeitgeist.
As I suggested Friday, try getting a million people into New York’s Central Park these days to demand nuclear disarmament — as happened in 1982.
On a personal level, I remember my high-school classmates during that time frame making origami doves, boxing them up and shipping them off to the White House and the Kremlin.
For whatever reason, legions of people have forgotten Reagan’s warning that “a nuclear war cannot be won and must never be fought.” We can only hope enough people will remember before it’s too late…
