Damage to the U.S. economic and financial system 2020

A revealing report on the mid-March financial crisis Nick Beams World Socialist Web Site November 19, 2020 See the Financial Stability Board’s full report (60 page PDF file)

As the Financial Times noted in a report on the crisis in September: “The US government bond market is akin to the investment world’s bomb shelter, a safe space where everyone can seek refuge when the rest of the financial system is exploding. In March, the bomb shelter itself started to rumble ominously.”

According to the FSB report, the crisis was set off when foreign investors, primarily central banks, sold off almost $300 billion worth of US Treasury debt. “Market dysfunction” was then exacerbated by “substantial sales” of US Treasuries as speculative and highly-leveraged trades, based on taking advantage of the difference between the price of Treasury bonds and their futures, became loss-making.

The large-scale unwinding of these trades, amounting to $90 billion during March, was “likely one of the contributors to a short period of extreme illiquidity on government bond markets,” the report said.

The storm lasted for a “short period” not because of any self-correction mechanism in financial markets but only as a result of the massive intervention by the US Federal Reserve and other major central banks that prevented a meltdown of the entire financial system going far beyond what took place in 2008.

A hedge fund bailout highlights how regulators ignored big risks Jeanna Smialek and Deborah B. Solomon New York Times July 24, 2020
The Dodd-Frank financial law succeeded at making banks safer, but empowered shadowy corners of finance that nearly wrecked the system in March.

Businesses are supposed to cut debt in a downturn. Why not now? Matt Phillips New York Times July 20, 2020
The Federal Reserve’s efforts to stabilize markets have touched off an even bigger borrowing binge than corporate America was already on. Investors have been so emboldened by the Fed’s actions that even companies viewed as especially risky are having no problem borrowing heavily…. The low costs of borrowing will inevitably keep some companies alive that would otherwise have gone bankrupt this year, creating a class of so-called zombie companies that stagger along but are too weak to invest and grow while sucking up cash that could be put to better use elsewhere.

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