We forget how extreme and extraordinary, and how unilateral and conducted-in-the-dark the machinations of The Fed were in 2008. This time, many of the measures they employed are no longer at their disposal.
The rules themselves have pushed ever larger parts of the money nexus into the shadows or into untested new instruments - "outside the perimeter" - and that is where the nitroglycerine now sits.
The structure is arguably more dangerous today than it was on the eve of the Great Recession:
- It took $1.5 trillion of emergency loans to stop the vicious cycle. Events moved with lightning speed, in chaos, with zero visibility.
- The Dodd-Frank Act, rushed through in 2010, prevents the Fed from rescuing individual companies in trouble (there must be at least five, and they must be solvent) or lending to non-banks in a panic.
- It can lend only to "insured depository institutions" through its discount window with the Treasury's permission.
What saved capitalism in 2008 was epic action by the Fed to shore up the commercial paper and the asset-backed securities markets, and to head off an implosion of the money market industry.
The situation would be comical if it were not so grave. The Fed and fellow central banks have stimulated a titanic expansion of debt over the last quarter century: an asymmetric policy of letting booms run their course while always intervening to prevent busts, culminating in the final throw of QE.
- Source, Australian Financial Review
