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So, the Fed and its cronies in government intend to muddy the waters, making everything so murky that itâll be impossible to tell who is doing what.
If that sounds like a great backdrop from which to do illegal things and defraud investors and depositors alike, youâd be correct. Hereâs the tentative plan for how the scheme will work.
The Fed, the Treasury, and the FDIC intend to force banks to use the discount window periodically, even if they can get a loan from another bank - or even if they donât need a loan at all.
At first, this doesnât sound like that big a deal and thereâs an easy workaround: borrow the money and then immediately pay it back. Itâd be like walking into a bank, withdrawing $100 from your savings account, and then, when the teller asks if you need anything else today, you make a deposit for $100.
So, get ready for pre-payment penalties and mandatory holds, along with preposterously high interest rates on reserves.
In other words, the Fed will make it so painful to repay your loan early that you essentially have no choice but to keep the money for the entire term. That makes it impossible to distinguish between banks using the discount window in times of distress vs. those compelled to do so.
Why would the Fed do this? Why donât they want us aware of where the problems are in our financial system?
In short, because theyâre everywhere. The Fed knows that theyâve created the mother of all ticking time bombs and thereâs only two options: let it explode in the most violent deflationary event since the Panic of 1907 or diffuse this monstrously large bomb by throwing it in an equally large liquidity bath.
The former option is more painful initially, but healthier in the long run. Undoubtedly though, the Fed wants to do the latter because itâs what the Fed has done literally every time since 1921 when Ben Strong engineered a recession for the first time. (Unless you count Nicholas Biddle, but he contracted credit to spite Pres. Andrew Jackson, not cool off inflation. AnywayâŚ)
One particularly insidious part of these discussions behind closed doors is that technocrats are claiming the regional bank crisis was due in part to many banks not being operationally configured to borrow from the discount window.
What a crock of $#!&.
Every depository institution is set up to borrow from the discount window by virtue of participation in the Federal Reserve System. Sure enough, discount window usage soared in March and April of last year to record highs as banks were collapsing.
Additionally, loans to the FDIC to pay depositors of failed banks also exploded. Both the discount window and the FDIC loans began their stratospheric rise a week before the Bank Term Funding Program was even created.
In that sense, the system worked as intended. The reason the BTFP bailout facility had to be opened was because the regional banks that were in trouble ran out of good assets to post as collateral at the discount window.
The BTFP (something weâve explained in detail in an earlier newsletter) values assets at par, giving those insolvent banks an extra lifeline from the lender of last resort.
Itâs not that the discount window didnât function properly, but that banks were in such terrible shape that even the discount window couldnât save them - the mark-to-market value of their liabilities exceeded their assets, pure and simple.
Mandating discount window use is like a permanent extension, in some sense, of the BTFP. Itâs an attempt to prevent any financial institution from failing, no matter how insolvent it becomes.
Investors be damned. Depositors be damned. Truth be damned.
In addition to hiding all of the problems that they created, this move by the Fed also helps consolidate power, slowly eliminating banksâ abilities to borrow from each other or not borrow at all, but instead keeping their own sufficient reserves.
The banking systemâs power to expand and contract credit on its own through fractional reserve banking makes the Fedâs job of manipulating markets that much harder. Consolidating all bank lending into the central bank provides much more direct control over the creating and extinguishing of money.
The Fed wants to be not just the guiding hand but the sole arbiter of the money supply. Likewise, it wants not just to be the lender of last resort, but the sole lender. The end goal here is to be judge, jury, and executioner.
You can call us alarmists if youâd like or tell us weâre paranoid. But if the last several years have taught us anything, itâs that just because youâre paranoid doesnât mean theyâre not out to get you.
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