Remember the halcyon days of 2008 when “Too Big To Fail” Wall Street banks cleaved off their impaired “assets” and moved them to the bad bank? Citigroup is one bank that immediately comes to mind.
Well let me put the latest financial disaster brought about by the Covid-19 shutdown of the economy into context.
There are no more creations of bad banks on Wall Street. The bad bank is now the Federal Reserve.
In the last 8 weeks the Fed — working with Treasury Secretary Steve Mnuchin — has digitalized more money than could be physically printed in ten years.
- The Fed and Treasury put an additional $16,500 burden on each US taxpayer and turned around and gave some lower income taxpayers a $1,200 check.
- The Fed and Treasury also created $2.5 trillion and dispersed only $355 billion to small businesses. Where did they rest go? Look to Wall Street banks just like 2008-2009.
- Fed is also on the hook to purchase $625 billion a week in US Treasury bonds, municipal bonds and corporate bonds.
- At this buying rate, the Fed will own all federal, state and local public debt by September. Through the corporate debt buying binge — including junk bonds — it will own all of that available market by the end of the year.
- The Fed has also pledged $200 billion a month to US banks to inject short-term liquidity along with backstops to Fannie Mae and Freddie Mac to buy trouble mortgages. This latter move now makes the Fed the largest landlord in the world.
The Fed and Treasury are the 800-lbs. gorilla in the markets buying any and all troubled assets instead of forcing weaker financial institutions to be bought up by less weaker firms.
Needless to say this pandemic will further concentrate wealth to top of the food chain as many small investors are forced out of the market by their need for cash during the economic shut down.