Listen: Financial Times, Ten Percent And Two Percent discussed on Thom Hartmann
"So. a story that I saw this morning I mentioned this earlier in the program but I really didn't quite know what to make of it and but a really caught my attention was at the top of find the Financial Times about an hour ago the number two story right now it says the costs for borrowing cash in exchange for U. S. treasuries overnight known as repose repurchase agreements it would jump as high as ten to as high as ten percent an increase of four fold and as a consequence of this the fed just dumped seventy five billion dollars into the into the U. K. the economic system or into the banking system I don't understand this and I wanted to find somebody who did so professor Richard wolf is with us our our old friend who the economist and and author of numerous books professor will for an end to democracy at work dot info is website welcome back to the program can you explain to me what's going on here. well I can try but partly the mystery is the deliberate decision of the federal reserve not to explain maybe it doesn't even know what's going on at that but to be simple about it. banks in the United States in some large corporations find themselves day to day sometimes short of money they have a special needs that they have some special problem probably one they didn't foresee and but they just need the money for a day or two to sort it out and so there is an enormous market for short term borrowing and my short term I mean a day or even sometimes a matter of hours and there is a market that has developed over the years where these kinds of large borrowers can go into the market and borrow short term money as I say for a day or two or three or four what suddenly happened Monday morning of this week was that the normal availability of that kind of a loan which was running in the neighborhood of a little bit over two percent per year for a few days. there wasn't the money available in all the usual places for more all the usual banks who had more they need then they needed to lend it to the banks who at less than they needed and so suddenly the ones who needed to borrow the money because their need was urgent had to pay not two point one or two percent but suddenly as you correctly said it went up to ten percent then it wobbled for a while at five percent so that is the question is what is going on to make it suddenly so much more expensive to borrow short term money and let's remember any bank that has to pay that kind of extreme interest will pass the costs on to its customers at least as far as it can know whether the harms the minute I'm sorry go ahead here comes the mystery here comes the mystery why the big question that everybody wants to know is what in the world is going on. and the answer is we don't know we're getting from the financial usual financial sources all kinds of calming explanations the federal government is running a big deficit so the treasury is printing lots of treasury securities and somehow people have been buying those and those people would have otherwise lent their money overnight so it is a temporary shortage whatever it was the federal reserve got extra regionally anxiety ridden knowing that high interest rates were what led us into the crisis and crash of two thousand and eight so what they did was to prompt many tens of billions of dollars literally created the money slot the banking system with this new money by buying the treasury securities at banks already owned in order to replace money in their accounts for the treasury's that the federal reserve was buying and that's the kind of behavior you see in a government agency that much money literally in minutes that usually signals and I'm going to be very polite now extreme uncertainty strains and unusual behavior in financial markets given that recession is what's on everybody's mind everybody can imagine and they showed that this might be the beginning of something genuinely scary. the last time an essay I I'm doing this from memory that span of ten years old eleven years old but my recollection is the last time I actually was reporting about repose you know about these these give a rip repurchase agreements was in two thousand eight that the that the same market froze up and that was why Henry Paulson was out there traveling in front of the cameras saying please Congress we need billions of dollars I am I remember right. yes you are and one of the concerns which has been heightened by the federal reserve's failure to give the public any kind of that official analysis not that we would necessarily believe them but it is very troubling that they're not even offering which of course fuels the notion that they can't tell us what's going on because it would worsen the problem namely that we have a two thousand and eight situation and let me remind everyone that your memory is correct but it was more serious as we then learned despite the calming denials that were issued then much as they have been over the last twenty hours the reality was that. everybody in the big financial now the big banks the big corporations had finally figured out that we were on the edge of a major meltdown and it was too dangerous to lend the money you know overnight even to the biggest safest banks and corporations that you had lint such money to for years because you realized and this was particularly after the collapse of the layman bank that who ever you'll learn to might tomorrow morning before they need you back declare bankruptcy and you would never see your money again to to deal with that risk suddenly bar were lenders were very hesitant and borrowers add as you correctly said suddenly to pay off four times higher interest rate then they were used to because of the nervousness that was beginning to grip financial markets now in your opinion if if we are looking at something like what happened in two thousand eight the way in there the precipitating event although it wasn't the closet in the cause was all the structural in insufficiencies that you and I have talked about a number of times over the years but. is it possible the triggering event instead of in the collapse of a bank like Lehman or the rumor of a collapse of potential collapse of a bank which makes a lot of sense given what you just said is it possible that the that the the in this case though it's not bad that it is the possibility of a war on behalf of Saudi Arabia with Iran. it's sad but I think the better way to look at it is it with the old adage about the straw that breaks the camel's back it's never this thing or that thing if you look at the trade war between the United States and China and the house like that is wreaking across the world of manufacturing not just in the two countries but in India in Germany and all the other countries reporting the negative effects of that and now you see a what drone warfare can do to the oil in the Middle East and you remember that the world is due for another capitalist recession because they happen every four to seven years and we're now nine years or eight years out of the last one you put all those together and then you begin to house the worry whether what might in other circumstances have been a relatively minor glitch isn't this time the sign that finally all of that bad news and bad events happening out there are beginning to make major players financial and non financial ally take extraordinary steps like being on willing to lend the money so that suddenly the bank you went to together overnight loan tells you no way am I giving you a loan on no matter what your interest rate is so you don't have to scurry to the next big banks they will say well we're not as worried as the first one if you pay as ten percent instead of two point two percent well then we'll give it to you you're gonna then begin to see that this isn't a flash in the pan a one shot you this is the beginning of the next big downturn and until the federal reserve and he says otherwise and beat gives us a real evidence we have to keep that as one possibility for what's going on so over the next few days or week because all. this happened just literally overnight I mean this this just happened last night so for the next couple of days or weeks what should we be looking for in terms of indicators that you know it's time to run for cover. the first thing we should look at is to see whether the interest rates the overnight we pull rates come back down to about somewhere between two and two and a half percent which is where they were the second thing we should look at is how many tens of billions of dollars the federal reserve is pumping in to get that effect and the third thing we should look at is whether it's working in the sense of going back down or it's bouncing around if it's bouncing around laurel up and down then that's probably a sign that the nervousness is spreading and that it is now going from one bank to another and that can go very very fast my guess is we'll have a much better idea where we are at the end of this week than we do now unless the federal reserve's anxiety covers all of this all over with some news blackout which I would take as a very very scary side while professor Richard wolf it is so."