The Federal Reserve Now Owns 15 Percent of the U.S. Treasury Market; At Its Current Rate, It Could Own the Whole Market in Less than Two Years

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by Pam Martens and Russ Martens, Wall St On Parade:

“The More I See Of The Moneyed Classes, The More I Understand the Guillotine.” ~ George Bernard Shaw

According to the U.S. Treasury, as of February 29, 2020, there was $16.9 trillion in marketable U.S. Treasury securities outstanding. Of that amount, at the end of February, the Federal Reserve held $2.47 trillion or 14.6 percent – making it, by far, the largest single holder of U.S. Treasuries anywhere in the world.

By this past Friday, the Fed’s ownership of the Treasury market had increased to $3.12 trillion. It had grown by an unprecedented $650 billion in one month’s time. And on March 23, the Fed announced that it would buy unlimited amounts of both Treasury securities and agency mortgage-backed securities “to support smooth market functioning.”

But exactly how can a so-called “free market” function smoothly if the country’s own central bank is cornering the market. Salomon Brothers paid a $290 million fine and came close to getting slapped with criminal charges by the U.S. Department of Justice in 1992 for manipulating prices in the Treasury market. And make no mistake about it, the Fed’s massive purchases are having a demonstrative impact on driving up prices in the Treasury market while driving down yields – meaning the income that determines if senior citizens in America can buy real groceries or have to live on one pot of soup for the week.

At the end of 2007, before the Wall Street crash in 2008, a senior citizen could invest $10,000 in a 10-year Treasury note and get $400 a year in income, or 4 percent. Today, that same $10,000 generates just 0.67 percent or $67. Seniors who were living on their Treasury income have experienced an 83 percent drop in income while food costs and pharmaceutical costs have soared.

If the Fed keeps up this pace of Treasury buying, it will own the entire Treasury market in about 22 months. If you look at the New York Fed’s list of the Treasury securities that are being submitted to it for sale by Wall Street’s trading houses versus the amounts the New York Fed is buying, you will see that Wall Street is puking up Treasuries in something akin to projectile vomiting.

This is clearly another one of those unanticipated consequences of a corporate-controlled Senate that passed the massive tax cut for corporations and the one percent in December 2017 and created a $1 trillion+ deficit as far out as the eye can see with no plan for who was going to buy all of the gargantuan amounts of Treasury debt that had to be issued as a result.

Because yields on Treasury securities have collapsed by 83 percent since the financial crash, investors, including risk-adverse senior citizens, have been driven into the stock market in order to capture the higher dividends paid on stocks. That’s also been great for the richest top 10 percent of Americans who own the vast majority of the stock market.

And now that the stock market is plunging from the Fed’s artificially inflated bubble, the Fed has climbed out on an even crazier limb and is actually accepting stocks (equities) as collateral for loans at 0.25 percent interest from the trading houses on Wall Street.  It’s even using the exact same facility as it did in 2008, the Primary Dealer Credit Facility or PDCF.

The PDCF was one of a hodgepodge of programs set up by the Federal Reserve and administered by the New York Fed from December 2007 to at least July 2010. In total, the Fed shoveled out $29 trillion cumulatively through all of its programs to bail out Wall Street banks, their foreign derivative counterparties and foreign central banks – without any authorization or even awareness by Congress of the staggering sums of money the Fed was pumping out.

The public and Congress only found out about the unchecked money spigot at the Fed when Senator Bernie Sanders attached an amendment to the Dodd-Frank financial reform legislation of 2010 that forced a release of the Fed data to the public and mandated an audit by the Government Accountability Office (GAO).

The Dodd-Frank legislation showed a clear intent to rein in the Federal Reserve in its ability to make future surreptitious loans to bail out Wall Street. According to Section 1101 of the Dodd-Frank legislation, both the House Financial Services Committee and the Senate Banking Committee are to be briefed within one week’s time on any emergency loans made by the Fed, including the names of the banks doing the borrowing. The section reads:

“The [Federal Reserve] Board shall provide to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives, (i) not later than 7 days after the Board authorizes any loan or other financial assistance under this paragraph, a report that includes (I) the justification for the exercise of authority to provide such assistance; (II) the identity of the recipients of such assistance; (III) the date and amount of the assistance, and form in which the assistance was provided; and (IV) the material terms of the assistance, including — (aa) duration; (bb) collateral pledged and the value thereof; (cc) all interest, fees, and other revenue or items of value to be received in exchange for the assistance; (dd) any requirements imposed on the recipient with respect to employee compensation, distribution of dividends, or any other corporate decision in exchange for the assistance; and (ee) the expected costs to the taxpayers of such assistance…”

According to the latest H.4.1 form from the Federal Reserve, it has given out $27.7 billion in loans from the new PDCF since it was created on March 17. It’s time for the Senate Banking Committee and House Financial Services Committee to come clean with the American people about the collateral that has been pledged on these loans and who is getting the money.

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