Powell saves the market
By: Robert Pritchard
A new report from the BIS
The Bank for International Settlements (BIS), i.e. the bank of central banks, recently published its latest report. Now the BIS is an authoritative institute that, partly because of its position, has a good insight into the ins and outs of the financial world. Because of their position, they generally know more than you and I do. In the last decade, for example, the institute already warned of the possible outbreak of a credit crisis. This time the BIS came up with an astonishingly detailed description of the situation on the stock exchanges in the recent period. According to the BIS, the financial markets have been on the brink of collapse. And not for the first time.
Whatever it takes
In 2012, the Governor of the European Central Bank saved the financial world from a possible collapse with his now famous statement “whatever it takes”. It will probably never be confirmed but Mario Draghi did not speak these winged words on his own initiative. According to strong rumours, the assignment did not come from one of the European capitals either, but directly from the White House. There sat someone who got quite the jitters from the fact that the European economy seemed to sink completely into an ever deeper swamp. The lines between the powerful of the earth are short, very short sometimes.
In recent weeks, the US central bank, the Federal Reserve, announced far-reaching support measures. With this, QE4 has officially been launched. Not only was the interest rate lowered to zero, but the central bank is also going to buy up government and mortgage bonds on a large scale again. This time, however, the Federal Reserve goes further than previous times. Corporate bonds and Exchange Traded Funds are also part of the package. Bridging loans will become available for states and cities, loans will be granted to small and medium-sized enterprises and last but not least, the central bank will expand its repo operations abroad. An unprecedented stimulus package not comparable to previous support packages.
International repo operations
These international repo transactions in particular are crucial. There is too little room to elaborate on them here, but one can assume that in this situation the Fed operates as the lender of last resort. Without the Fed, consumers in several European countries would have gone to the ATM without the Fed. The deeper the crisis, the greater the shortage of dollars worldwide. A nice indicator for this is the exchange rate of the dollar. It rises as the crisis increases in size and vice versa. It is for this reason that the dollar is probably the safest refuge in times of unrest. Once again.
Mario did it before
Anyway, with his unprecedented support operation, the Federal Reserve has done what Mario Draghi did to them eight years ago. The minutes of the Federal Reserve showed how much the central bank was concerned about the condition of the American economy in particular. An unknown and vicious virus was able to uncover its shortcomings. Initially, Powell’s measures met with a great deal of incomprehension among analysts and investors. Why bring such a heavy artillery into position? Now it turns out that the central bankers knew very well what they were doing. They did the right thing.
Powell seems to have saved the financial world from imminent destruction. As far as we know, the central banker doesn’t wear a mouth cap yet, but his actions are remarkable. Originally he made his appearance as a rather colourless figure, but in the meantime he has grown into someone capable of very great deeds. Brave and decisive. But what are the consequences? The central bank’s balance sheet has swollen to 6200 billion dollars. And that’s probably just the beginning. In fact, the United States has gone into monetary financing. The debts of the United States are rising to historic highs and are being bought up by the central bank. The steam is coming out of the money presses. Who’s going to pay this bill?