On a Thursday in September 2008 the world’s financial system came within hours of collapsing. About $US550 billion went out of the money markets in one morning and at midday a decision had to be made. Would authorities continue with the ‘deregulation’ that they had pursued for decades and let the markets work it out on their own. Or would the Treasury regulate?
The decision was the latter. Paul Kanjorski, former chairman of the subcommittee on Capital Markets, recounted:
“The Treasury ... pumped $105 billion into the system and quickly realised they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic ..."
Had the Treasury not done that their estimation was that by 2pm, $5.5 trillion would have been drawn out of the money market system of the United States, [collapsing the national economy] and within 24 hours the world economy would have collapsed. It would have been the end of our financial, political and economic systems.
This fact has been kept largely under wraps, for obvious enough reasons. Australian banks got the same guarantee, largely because they were able to blackmail the Federal government into giving it to them. The banks did very nicely, thank you, and the property market never faltered, holding up the Australian economy (plus Kevin Rudd’s ‘cash splash’ was a stroke of genius to keep the economy falling into recession in 2008).
What was really important about those event was that it was the Treasury, and not the Fed, that turned out to be the real regulator and authority in the US capital markets – and therefore the global capital markets. So when Donald Trump folded the Fed into the Treasury in 2020, in effect stopping it from being a private central bank, that was a matter of extreme significance.
Yet it went almost unnoticed. There are some snippets of coverage. From the Libertarian Institute:
"The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a "first loss" position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.
In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades. This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump. (Presumably now Joe Biden)"
Here is another article:
“The Fed (by previous mandate), was only able to buy official government securities and were autonomous to the White House. With the new arrangement the Fed was just neutered. The Treasury department will now determine which markets / segments need capital (could be stocks, municipals, specific industries, even corporate debt—doesn’t appear there is a restriction). The Treasury department gets to tell the Fed to print money and how much. All the FED does is print that much money. No decision making or authoritative control. A third party (Blackrock) executes the trades that the treasury department dictates. This gets everything out of the hands of the FED except for the printing of money.”
In this era of quantitative easing, which is effectively using the reserve powers of the central banks to print money, this move is massively significant.
As BlackRock acknowledged in a paper in 2019, before the covid catastrophe, both fiscal and monetary policy have been effectively rendered impotent:
“There is not enough monetary policy space to deal with the next downturn: The current policy space for global central banks is limited and will not be enough to respond to a significant, let alone a dramatic, downturn. Conventional and
unconventional monetary policy works primarily through the stimulative impact of lower short-term and long-term interest rates. This channel is almost tapped out.”
The paper said fiscal policy, government spending, should play a greater role but is also unlikely to be effective on its own.
“Globally there is a strong case for spending on infrastructure, education and renewable energy with the objective of elevating potential growth. The current low-rate environment also creates greater fiscal space. But fiscal policy is typically not nimble enough, and there are limits to what it can achieve on its own.
With global debt at record levels, major fiscal stimulus could raise interest rates or stoke expectations of future fiscal consolidation, undercutting and perhaps even eliminating its stimulative boost.”
That was the situation when the world went into the covid ‘pandemic’. BlackRock called for an “unprecedented response” when monetary policy is exhausted and fiscal policy alone is not enough.
The situation got far worse because of the 'pandemic'. Cue quantitative easing (QE). Here is the Federal Reserve's balance sheet:
The biggest world player in QE, the Fed, is now under the umbrella of the Treasury.
Huge changes are afoot in the global capital markets and it is only possible to get glimpses of what is being done. But the regulators and big players know full well that the system is in trouble and are positioning to try to sustain it.
Given the track record this century, few would have any confidence they can pull it off. Kicking the can down the street is not a solution because sooner or later you get to the end of the street.