The total amount of capital fabrication by the US Federal Reserve has now topped US$5.2 trillion, after it announced another $700 billion in direct stimulus through the purchase of treasuries and mortgage-backed securities.
Desperate to instill a firm reversal into stock markets after the blatant and manipulative stock market purchases late Friday that saw some equities close 70% higher than their average price throughout the day, the Fed now demonstrates that the extent of the available tools at their disposal is limited to stimulus and zero interest rate policy.
But most alarmingly for consumers is the suspension of the minimum capital reserve requirements of banks, better known as Capital Buffer Requirements.
According to the Fed statement: “In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.”
While making that capital – in excess of $1.3 trillion – available to the banking system, it also removes the safety net of assets that banks can have on hand to sell in the event of a “run on the bank”, or a situation where, because asset prices on the books of major banks might fall below a minimum threshold and trigger margin calls, those reserves were to be held to prevent the bank from collapsing.
While optically encouraging, it removes one of the key last defenses should the collapse in financial markets contine.
But the next step, as we have oft repeated, is the direct acquisition of stocks in the market, instead of the indirect manipulation currently practiced on behalf of the government by the Presidents Working Group on Financial Markets, the entity mandated to stabilize the market in the event of extraordinary volatility.
With markets down around ten percent today so far, there could be much farther to fall if these measures – which so far have been met with an acceleration in panic selling – continue to have zero effect on actual selling sentiment.
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