62.1 You Won’t Believe it: Fed Admits QE is Unhelpful
———Part 1 Summary———
Two Federal Reserve researchers claim the Fed, “can effectively reduce the [fragility] of the financial system by reducing the size of its balance sheet.” REDUCING, not growing! To understand their conclusion we discuss: money dealers, interbank loans and collateral.
———Episode 62 Intro———
“I glanced at the list, running over names (probably misspelled) that meant nothing to me, with my hand on the butt of my righthand gun. That one now contained a very special load. According to Vannay, there was only one sure way to kill a skin-man: with a piercing object of the holy metal. I had paid the blacksmith in gold, but the bullet he’d made me – the one that would roll under the hammer at first cock – was pure silver.” The scene is from The Wind Through the Keyhole, a 2012 Stephen King gunslinger novel. It’s not unheard of for the horror/fantasy-master’s characters to call on silver to battle something from the dark and murky gray.
From his 1986 novel, IT: “But that, of course, is only a joke, and not a very good one; there is only one story left, at least one he remembers, and that is the story of the silver slugs – how they were made in Zack Denbrough’s workshop on the night of July 23rd and how they were used on the 25th.” A great yarn, to be sure, but as members of an advanced civilization we KNOW there’s nothing in the shadows with blood-red eyes and tentacles. Then again… that’s precisely why Count Dracula moved to cosmopolitan London in Bram Stoker’s 1897 classic.
You see, the superstitious peasants of Transylvania knew the preternatural was real. Not so post-Enlightenment England where mucus-oozing pores and frightful claws were disclaimed. And what better place to hide disgusting aberrations, but in the shadows of denial and willfully forgotten knowledge?
Today, enlightened monetary-scientists placate us with soothing expectation policies that the banking shadows harbor no ill-proportioned beasts. But supposing there were. Is there a silver bullet we could roll under the hammer? In Part 2 of this, the 62nd Episode of Making Sense, Jeff Snider discusses one candidate: the Eurodollar Futures market. But first, two researchers for the Federal Reserve uncover the horror of quantitative easing. Then we conclude with the fantasy of government stimulus.
———Ep 62.1 Topics———
01:08 What are “Money Dealers”? How are they different from “Primary Dealers”?
02:29 Is there any “cash”, any “currency” in money dealing? Not in the modern monetary order.
05:03 To lend ‘money’ it is not necessary to have ‘money’, merely math and risk considerations.
08:06 Where does the Federal Reserve fit into an offshore interbank US dollar loan? Nowhere.
10:23 Prior to 2008, interbank funding could be provided on an unsecured basis…
12:29 After 2008, risk models compute that collateralized lending is ‘the only game in town’.
14:39 Derivative use by global banks grew exponentially prior to 2008, and ‘not at all’ since.
19:02 Primary Dealers supply collateral to banks so that the banks can secure interbank funding.
20:48 The Primary Dealer collateral lent out to banks may itself be borrowed as well (by the PD)!
22:36 What security is there for the collateral pledged to use? More collateral!
26:09 The collateral system that backs interbank lending IS NOT BACKED BY ANY CENTRAL BANK.
28:02 The Federal Reserve has only recently begun to look into US Treasury (collateral) use.
30:43 In March 2020 the collateral use of Treasuries reached its nadir (Dealers went on strike).
34:21 Two Fed researchers conclude the Fed should reduce its balance sheet to help the system.
37:52 The damage QE does to the financial system by removing collateral is new idea (to the Fed)
———Ep 62.1 References———
Seeing Interest Rates Counter To What They Actually Are: https://bit.ly/2QX730x
Federal Reserve – What Drives U.S. Treasury Re-use?: https://bit.ly/2PMHCOK
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7
Jeff Snider, Head of Global Investment Research for Alhambra Investments and Emil Kalinowski. Art by David Parkins. Podcast intro/outro is “Shadow of a Gunman” by Sight of Wonders and “Night Remains” by Farrell Wooten at Epidemic Sound.