At first I always respect and appreciate Tom McClellan‘s insightful analysis.
However, I do not agree with the following comment on NY Fed – especially ‘killing liquidity’.
Actually, there is a great historical reference: 2008. The NY Fed sold more than $300B of Treasuries that year, killing liquidity (and Lehman Bros.). See https://t.co/NeDokNqrwX https://t.co/KCqDE7QSA7
— Tom McClellan (@McClellanOsc) 2018年4月28日
Actually I basically share the idea that Federal Reserve System(FRS) almost always creates and bursts bubbles, but I believe they at least are trying to ease the damages. In Tom’s article “Fed is Behind, But Still Screwing Up” there is a comparison chart of the stock price(S&P500) vs Fed’s UST+MBS assets during the great recession. Yes, I know the fact that NY Fed(the operational desk of FOMC) sold a lot of US Treasuries and MBS until H1, 2008.
But there is another aspect of “What Fed were doing behind these massive selling?”
Did they just tighten the liquidity during the crisis from H2, 2007 to H1, 2008?
I doubt that. I believe they tried to save those “Too Big To Fail” monetary systems, BUT they could not do that just because their measures were too limited and were not enough.
The chart below indicates what FRS did at the beginning of the Great Recession and how their policy changed aftermath.
This chart is a bit small so I will explain each data lines.
FACT 1: FRB did not reduce the liquidity in terms of “Total Assets held by All Federal Banks”
FACT 2: FRB did provide the short-term liquidity to the banking system as a Liquidity Swaps, Other loans, Reverse Repurchase(Reverse Repo), etc.
FACT 3: FRB’s traditional monetary policy was not flexible(limited) until Ben Bernanke @benbernanke removed the limit of the Total Assets held by Federal Reserve Banks.
FACT 4: FRB had no choice but to sell their US Treasuries to provide short-term liquidity during the first half of the Great Recession.
FACT 5: After Sep 2008, FRB started to buy EVERYTHING including US Treasuries, MBS, Agency loans. But it was too late. (We already know.)
(Ben was the chosen one to provide massive liquidity to save the system – by creating the long-lasting Everything Bubble since then. This is the current problems.)
I can blame FRB in terms of their too small/too late policy change. Some would think that FRB intended to worsen the crises. That’s okay. But I want to let you know FRB at least tried to provide short-term liquidity to save the falling banking system and did not remove total liquidity.
And if we learn from this history, the first half of the next crisis (burst of the Everything Bubble – bonds, equities, currencies…) should be a hard to swallow one because FRB almost always fails to take measures after the systemic shock occurs. Then they come and pour massive liquidities and pump the banking system again.