Banks Were Having Problems Six Months Before COVID-19
By: Justin Honse
Tags: Economy, Life, Federal Reserve, Banks, Stock Market

Credit and trade are perhaps the two most important aspects needed to function to prevent economic collapse. In September 2019, the US credit market seized up. Then in March 2020 due to COVID-19, trade collapsed.

Banks in the US have supposedly been more stable in recent years, in part due to higher reserve requirements meaning more money being kept on hand for the fractional reserve lending system they operate under. What is significant to note however, is that the banks have not been doing the heavy lifting — the shadow banks have. Shadow banks are not some conspiracy theory, they are nothing more than the term used for other financial institutions that do not operate the same way as a commercial bank, (i.e., they typically don’t offer customer accounts for checking and savings, etc.). Nor are shadow banks subject to all of the same regulations that the big banks are. But they’ve been dealing in a ton of liquidity — in some cases, more so than the big banks themselves.

The sudden 500% rate spike in the overnight lending market essentially meant one of two things: either there was a liquidity problem, or else there wasn’t any pristine collateral for lenders. Either way, what it screams is that on the day of September 17, 2019, banks suddenly did not trust one another for their common overnight lending, used to square up their reserves. The usual rate for this lending is about 2%, and it jumped to 10%.

As we can all surmise, great things are *surely* ahead when the commercial banks don’t want to lend to one another.

No economists have claimed to truly understand what caused this rate spike; suffice to say, our economy is balancing on the tip of a needle regularly already. Just as consumers don’t have savings tucked away for emergencies, we‘ve all recently learned that businesses only have about one month of cash reserves available in their “rainy day” funds, and for a while now, corporations have been buying back stock instead of additional investment in research and development, to bump share prices.

Ultimately this means that our economy really wasn’t up for a jolt even before COVID-19 struck, and if we had some kind of jolt that was big enough to panic the banks yet didn’t make it to mainstream news, that really says something — although I don’t quite know what it is. With our balancing act, it really wouldn’t take much.

And this was all before the pandemic of course. There was not a whisper of it yet in mid-September 2019.

I happened to be paying attention to Fed-related news, and so it seemed evident to me that trouble was likely ahead.

I was not at all surprised then, when the Federal Reserve was on TV in mid-March, just as the Coronavirus had reached US shores, and they immediately jumped straight to asking for trillions of dollars in help.

That seemed a little fast, don’t you think? Considering we didn’t really know the level of threat the financial system faced from the pandemic?

We can say they learned their lesson from 2008, but I think that’s a bunch of horseshit. The reality is, although the Fed didn’t want to call it “Quantitative Easing” like before, QE is exactly what they’ve been doing — and not because of COVID-19 — since that night in September.

Billions of dollars, each night, to the big banks six months before the virus. And that is obviously something you can verify for yourselves, though it was not in the mainstream news very much.

The good news, I suppose, is that a pandemic gave them a damn good reason for saying they needed a lot of money fast. Otherwise it would’ve been ridiculous, and we would have collectively scoffed at the idea of giving trillions to the banks when everything seemed fine otherwise.

And so clearly this is a tenuous situation with some unknowns; and you can’t help but think what’s really going on behind the scenes, and what we are not being told.

I fully expect another economic event between now (September 30) and the end of 2020 — any day now. There have been too many shenanigans, and we don’t know the whole story, and what we do know is that the banks were already seemingly screwed well before the pandemic, events after notwithstanding.

For now, we can try our best to hang in there. It’s hard to say whether we will have a stock market crash, or if it will just be an increase in bad news from the real economy, where the rest of us live and work. Let us hope not.

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