Grant’s Interest Rate Observer founder and editor, Jim Grant, recently spoke with CNBC’s Rick Santelli about the tsunami of Fed liquidity that has been washing over markets since mid September. Jim Grant astutely notes that as banks and the federal government increasingly come to rely on the Fed for funding through the repo market and ‘Not-QE’ program respectively, the Fed is becoming the lender of first resort in our economy, not the lender of last resort.
Some excerpts from Jim Grant:
“(Fed nominee Judy Shelton) is the author of a very well timed book many years ago, The Coming Soviet Crash (1989). What she pointed to, among other things, was the lack of price discovery and the prevalence of command and control. Now, this speaks to the repo system because the Fed is in the business of brute force. It buys tens-of-billions of treasury bills every month. It… imposes on the market all manner of other billions of dollars to shore-up the repo system. What it might do instead… is offer funding but at a penalty rate. The fed has become, apart from being arsonist and fireman, …the lender of first resort. It’s supposed to be the lender of last resort.”
“We have endless QE, the lowest interest rates in 4,000 years. We have non-stop Fed butinskism, and the defenders of that faith are called conservative (monetarily).”
One of the reasons why the Fed is ‘forced’ to keep injecting liquidity into the repo market is because they themselves lowered the benchmark repo rate so low that private capital is unwilling to lend into the space. After all, it is not a coincidence that the Repo market first blew out the day before the Fed cut repo rates by a quarter percent in September.
One manipulation necessitates another, which necessitates yet another. Before you know it, our $20 trillion ‘free-market’ economy finds itself being funded on a single interest rate that gets re-evaluated every month or so by a dozen bureaucrats in Washington DC.