The problem with any kind of market manipulation is that there’s no way to end it without unintended and usually negative consequences.
Manipulation by government agencies and central banks always starts out with good intentions. They are trying to “save” the banks or “save” the market from extreme outcomes or crashes.
Of course, this desire to save something ignores the fact that bank failures and market crashes are sometimes necessary and healthy to clear out prior excesses and dysfunctions. A crash can clean out the rot, put losses where they belong and allow the system to start over with a clean balance sheet and a strong lesson in prudence.
Instead, the central bankers ride to the rescue of corrupt or mismanaged banks. This saves the wrong people (incompetent and corrupt bank managers and investors) and hurts the everyday investor or worker who watches his portfolio implode while the incompetent bank managers get to keep their jobs and big bonuses.
But the bigger problem is there’s no way out. One manipulation (what central bankers call “policy”) leads to another. The zero interest rate policy (ZIRP) didn’t work, so the Fed went to quantitative easing (QE). After QE1, QE2 and QE3 (2008–2013) came the “taper” (2014) and then the “liftoff” in rates (2015), followed by “pause” and “patience” when it came to more rate hikes (2016–19).
The latest manipulation is quantitative tightening (QT, the opposite of QE), although it looks like QT is now being tapered. Confused? So is everyone else.
The point is that the Fed has not normalized rates and they have not normalized their balance sheet. It’s just one manipulation after another with weak results and no way out.
This article looks at the latest form of manipulation called a “standing repo facility,” which is another flavor of QE. Under this facility, banks would swap their cash reserves at the Fed for Treasury securities on the promise that they could swap back into cash immediately if needed.
This is just another accounting gimmick to pretend to clean up the Fed’s balance sheet. It won’t be the last manipulation. We’re a long way from that.
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