Repo market madness; the differences between 2007 and 2019, and why the current fallout is contained

The differences between last decade and now
Prior to the establishment of QE in 2008-09, the Fed was essentially powerless to mitigate the circumstances that led up to the real estate collapse of last decade. Mortgage lenders were borrowing in the short-term markets and when that dried up, they had nowhere else to turn.

Hi Chris!

I found you not long ago, which I’m very happy about! From the little I’ve read on your website, I pretty much agree with everything so far.

I’m really curious have you read, Gary Gorton’s paper called – “E.coli, repo madness and the financial crisis?” Would be great to hear your thoughts about it. Last time we had a repo crisis was August 2007 with bigger market correction not happening until march 2008 due to the flaws of the financial system and how it’s build?

What’s different now in your opinion or could we be there again, same inflection point. Thank you in advance.

Happy new years to you and your family, wish you a prosperous new year with lots of good health 🙂

Tammy

Fed assets totaled $4.166 trillion in the December 25 week, up $28.5 billion from the prior week. Since the Fed ended its balance sheet unwinding effective August 1, the balance sheet has increased by $386.5 billion.

I am familiar with Mr. Gorton’s research, though I only read a synopsis of his research paper. His work was cited on the National Bureau of Economic Research’s website, and this summary is useful for those wishing to read more. From what I can tell, his research conflates with our prior analysis, and helps to explain how a run on the markets can occur when there are no viable avenues of liquidity injections, such as QE.

Last decade’s collapses were manufactured

The Fed’s willful ignorance last decade was obvious to many in real time, but here is where most in the alt-media get it wrong. The elites knew that the growing nation-state fiscal deficits were about to overtake the world’s ability to finance them… Thus, the elites, working through their central banks, needed to bring about the conditions necessary that would allow their monetary system to sustain itself. Hence, the only answer I can come away with is that the elites manufactured last decade’s catastrophes.

We can invest with more confidence when we see the world as a game of Tetris

This brings me to the reason of this discussion. Prior to the collapses of the collateralized mortgage market in 2007-08, there were no central bank programs in place to ameliorate the potential fall out. As liquidity dried up in the overnight lending markets, the Fed was not able to purchase treasuries en masse, as it has been able to do this time around in 2019.

Moreover, the Fed, led by Ben Bernanke since early 2006, steadfastly refused to lower the Fed funds rate to help with the nascent deteriorating lending market circumstances. As recently as early 2007, the Fed Chair publicly stated that the housing market was not in trouble, and at the time, I observed what I thought to be willful ignorance on the part of the Fed. As short term rates rose, the yield curve flattened and thus, many types of the mortgages that had fueled the rampant speculation were no longer advantageous in keeping mortgage payments low.

This brings me to one of my blog’s major theses, and this is an important point to comprehend. Based on my observations from last decade, the only conclusion I can draw is that the collapses were manufactured and purposely amplified through antithetical monetary policy.

With the passage of the TRA of 1997, and beginning in 1998, homeowners were entitled to large capital gains exclusions on owner-occupied real estate. Novice homeowners began to speculate and flip their own residences and Home Depot stock took off.  Compounding the formation of the real estate bubble was the excessively dovish Fed policy in the wake of 9/11. What seemed odd to me at the time was how the Fed kept rates at historic lows until 2004. The Fed then reversed course and raised continually for almost three years. By then, it had planted the seeds of the market’s destruction.

Job well done.

The Fed’s willful ignorance last decade was obvious to many in real time, but here is where most in the alt-media get it wrong. The elites knew that the growing nation-state fiscal deficits were about to overtake the world’s ability to finance them, under normal circumstances. The world’s net savings rate and balance sheet were no longer adequate to fund the borrowing needs of the global governments. Thus, the elites, working through their central banks, needed to bring about the conditions necessary that would allow their monetary system to sustain itself. Hence, the only answer I can come away with is that the elites manufactured last decade’s catastrophes. Under normal circumstances, global investors never would have accepted concepts such as QE and negative interest rates, but if the population were scared thoroughly enough, they would accept these programs… and more. I say, job well done!

Of course, the elites needed an expert insider to collapse it all and rebuild it. This is why Ben Bernanke was chosen as Fed Chair in early 2006. He was hired to engineer the collapse and oversee the drastic transformation of the central bank’s role in controlling the economy for the elites. Only a person of Ben Bernanke’s caliber could handle the task. There are too many coincidences here.

My biggest concern for 2020

I am observing that commodity inflation is beginning to pick up somewhat on the margin. Gold has begun to move higher and I am concerned we could see another run. If commodity inflation picks up on a sustained basis, and if the measured price index numbers rise more than the Fed’s published targets, the elites may have to engineer another deflationary correction to keep this system in control.

Why? The primary objective of the elites is to keep the nation-states in business with them and their central banks in control of the whole process. As of now, the elevated asset markets provide a lot of investable collateral for investors to buy sovereign debt, but if the published inflation and price index data rise too high, they may tank it all, so they can introduce even more programs.