Is The Fed The Problem Or The Solution?

September 23, 2019

On this morning’s Trey Ware Show, Karl explained why the Federal Reserve was needed to help the banking system last week. The pipes were clogged and the plumber was called. Karl breaks down the bounce in REPO rates.

Trey Ware:                Here is my friend Karl Eggerss. Let’s talk about the markets this week. And I was reading a Future’s report this morning that says, “Market expected to open up higher this morning.” Is that right Karl? What do you think?

Karl Eggerss:                      Yeah, it’s bouncing around pretty flat. But really the big news last week was the good old federal reserve. We had all the, we’ll call them, air quotes, “Issues,” in 2008, with all the banks. And so, now what they’ve done is they’ve regulated them so much that it’s causing some issue that we saw last week where certain banks can’t get enough cash to do their daily operations because they’re forced to hold so much in cash. In other words, the regulators are saying, “You guys don’t know what you’re doing and we don’t want another financial crisis,” which we don’t, but they’re over-regulated now. And so, what’s happening is these banks are required to hold a ton of cash sitting around.

Trey Ware:                         Right.

Karl Eggerss:                      And because of that, there was some issues last week. And so, the rate that banks charge each other to borrow and so forth spiked way, way up and the fed had to jump in and inject a bunch of money. We’re talking billions and billions of dollars to make sure that the plumbing, so to speak, was flowing properly. Now, it was a big headline, “Hey, is this another financial crisis coming or the market, something’s wrong.” It was really a function of too much regulation. A lot of companies had to make tax payments, and there were some other issues going on. So there was a shortage of cash, literally.

Karl Eggerss:                      So the fed jumped in, injected all this money. So it’s really more of an issue of being like, “Hey, Trey Ware has $1,000 in his checking account and he needs to write a $2,000 check. Now over in a savings account, he’s got plenty of money, he wrote a hot check. He just needs time to move that money back from the savings account to the checking. So that’s mainly what happened last week. But it got a lot of headlines and it got a lot of people a little scared to go, “Hey, what’s going on? Why is the fed getting involved like they did in ’08, to that extent?” And that’s really what it was, was more of a short-term shortage of cash, which was pretty interesting and catches your attention. But it was more a function of just where the cash was at the moment and then a lot of regulation.

Trey Ware:                         Very good. Thank you, Karl. Karl Eggerss is with us every Monday at this time to talk about the market and your money right here.