Federal Reserve

We’ll Laugh, We’ll Cry, We’ll Profit

By David Stockman  |  October 7, 2019

So, a second “whistleblower,” this one with “firsthand knowledge” of what remains a third-rate phone call – has lawyered up.

As this latest Mainstream Media-Inside the Beltway tragicomedy shifts gears, I’m on my way to Imperial Washington for the 2019 Irrational Economic Summit. I’ll be delivering the Keynote Address – “After ‘Peak Trump’: Charting Uncharted Waters” – on Thursday evening. Click here to join us via livestream…

In the meantime…

Let’s Be Clear About What’s Going on Here

The Donald’s conversation which shall live in infamy was not “perfect.” Nor, however, in the modern context of American Empire, was it “Treason, Bribery, or other high crimes and misdemeanors.”

But the Deep State will get the Donald.

The trouble is, in the bargain, it’s going to destroy itself and, perhaps too, the Acela Corridor establishment power structure it serves.

It all promises so much volatility. And the Federal Reserve – following Jerome Powell’s capitulation to the Tweeter-in-Chief this past summer – stands ready to do whatever it can to keep “Bubble Finance” alive.

That’s the hope inside the Acela Corridor, at least.

Outside, beyond the elites, Main Street continues to suffer. And there isn’t any reason to believe more quantitative easing and lower – or even negative – interest rates will do anything but lead to more debt.

That’s why, in the first place, the Donald won in November 2016.

That’s why, right now, all things considered, it looks like the Elizabeth Warren Express will storm the Oval Office come January 20, 2021.

Whatever the name, whomever the face, we’re looking at a level of domestic chaos – financial, economic, political, social – like nothing we’ve seen since perhaps the 1850s.

That sort of instability inside the world’s lone superpower tends to destabilize the global order as well.

So, stay as tuned as you can…

It’s the Fed’s Fault

The Donald – the “Orange Swan,” the “Great Disruptor,” and, ultimately, “Mr. President” – is undoubtedly the “X” factor. Whatever you call him, his brand of narcissistic nihilism clearly threatens the whole house of cards.

But we are where we are today because of monetary central planning.

And nothing illustrates the absurdity of the Federal Reserve’s current pursuits like its interest on excess reserves (IOER) payments.

Here goes…

During 2018, the Fed paid out the incredible sum of $43.1 billion to pretend that it was fixing the overnight funds rate. Banks got $38.5 billion in IOER payments for keeping roughly $1.5 trillion of excess reserves on deposit with the Fed.

For the last four years together, the IOER handout totaled more than $83 billion.

Let’s Look at the Fed Funds Market

Meanwhile, other Wall Street non-bank financiers picked up a nifty $4.6 billion for lending cash to the Fed. These loans were collateralized by U.S. Treasury securities from the Fed’s own massive portfolio. It’s what’s called in the game a “reverse repo” program, or “ON RRP.”

This is nothing but a case of carrying coals to New Castle, no matter the obfuscating acronym.

Possessed with its very own printing press, why would the Fed ever borrow a single dime “ON RRP”? The very idea is just plain nuts. But wait…

There’s more…

Why would it bribe banks with $38.5 billion of IOER payments, in effect inducing them to not lend money to private borrowers at lower rates than its target range for the fed funds sector?

That is, in fact, what happened: These folks threw $38.5 billion of good money at the U.S. banking system in 2018 so it wouldn’t lend too cheaply…

All of this nonsense was undertaken in order to insure that fed funds rates stayed exactly within the Fed’s prescribed 25 basis point range.

But it’s trying to peg the funds rate when the funds market is essentially deader than a doornail. Benjamin Bernanke killed it in the fall of 2008 with his own massive money-pumping operation. It was his hair-brained scheme to pay interest on excess reserves…

Even as the Fed was raising interest rates over 2017-2018, there was no sign of tightening in the Fed funds market. During that period, average volumes generally fell sharply, almost to the vanishing point…

The volume that remains is a hothouse simulacrum of a market.

More than 90% of the funds supplied are advanced by government guaranteed agencies (GSEs) called Federal Home Loan Banks (FHLB). As a recent Fed advisory committee noted in an interim report:

Over 90 percent of overnight fed funds transactions are lent by one of the government sponsored entities (GSEs). These entities are precluded from earning interest on excess reserves by depositing funds directly at the Federal Reserve, and thus they tend to lend to institutions (frequently foreign financial institutions) that can earn the IOER rate…

The FHLBs have been parking their excess liquidity at the effective funds rate with eligible commercial banks.

These commercial banks, in turn, arbitraged them into the slightly higher IOER.

That’s about as close to a free lunch as exists in the real world.


It’s also graphic evidence that the Fed’s entire money-market rigging operation is a giant circular scam.

We’ll close this loop in Wednesday’s Deep State Declassified

After “Peak Trump”: Charting Uncharted Waters

I’m finishing up preparations for my Keynote Address at the 2019 Irrational Economic Summit, which is happening the evening of October 10 – right outside Imperial Washington.

This is the most politicized market in history, and the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

The good news is you don’t have to dare the Swamp to join us folks, because you can watch my Address as well as presentations from some of the brightest minds in finance and economics from the comfort of your own home with a Full-Access Livestream Pass.

The stakes are as high as they can be heading into 2020. The U.S. presidential campaign is already well underway. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate and soon to be impeached incumbent will do anything he must to hold the White House.

That’s why I’ve titled my Keynote Address, “After ‘Peak Trump’: Charting Uncharted Waters”.

Leviathan gets bigger, Wall Street gets richer, and Main Street… well, Main Street gets more and more little every day.

We’re rapidly approaching the end of the oldest, weakest economic “recovery” in American history. At this major tipping point, there’s no telling what the Donald’s great disruptions could do to your wealth.

Click here to learn more about the Full-Access Livestream Pass to the 2019 Irrational Economic Summit.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR