Cash Crunch

There has also been a wide gap between the prices of certain “exchange traded funds,” which are easily traded, and the securities on which those funds are based. This is irrational, in theory — the equivalent of a 12-pack of soda selling for more than the price of 12 individual sodas. It suggests two things: sellers desperate to raise cash, and an absence of big banks or hedge funds in position to exploit the mispricing.

Gold futures have been falling, despite gold's historical role as a place for safety during tumultuous economic times. Its price has fallen to $1,610 on Thursday from $1,675 an ounce at Monday’s close.

All this suggests that major financial players are experiencing a cash crunch, and are selling whatever they can as a result. That would help explain the seeming contradiction of assets that should go up in value in a time of economic peril instead falling in value.

As the 2008 experience shows, it’s also a type of problem that the Federal Reserve is relatively well positioned to understand and respond to. In its role as lender of last resort, the central bank’s job is to try to prevent a cash crunch in the economy, even if it has to take unusual means to do that.

An announcement by the Fed on Thursday afternoon — it plans to inject up to $1.5 trillion in the financial system by the end of the week and begin buying a wide range of Treasury bonds — was meant to ease the strained liquidity. But in the hours after the announcement, there was precious little evidence it had succeeded.

"Something Weird Is Happening on Wall Street, and Not Just the Stock Sell-Off" by Neil Irwin

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The news that the Federal Reserve (the fed) is to inject $1.5 trillion in the financial system is presented as "unprecedented," as new. But in truth it is not. Also, the intervention did not work. Today the Dow Jones lost a staggering 10 percent of its value; and at this point, all of the gains it made during Trump's presidency are only 2,000 points from being entirely eliminated.

The program to pump money into markets that deal with short-term paper began in the fall of 2019. It has been written about in the Wall Street Journal extensively. The problem is that WSJ and other mainstream publications reported it but did not analyze, let alone critique, the development. They left at this: Short-loan markets (and they are very short-term—often overnight—and are called repurchase markets, or repo) only grease the machinery of the whole financial system, and so the injection of government cash is simply this: putting more grease in the machine. Nothing deeper was said about it. And there was no public outcry, no nothing. In the process, a gigantic sum, $500 billion, was transferred from the public to the markets with little notice. And writers like me, writers who critiqued this bailout (again and again), were simply dismissed because we do not have the credentials of orthodox economists in the schools and press.

"Americans Need to Know That the $1.5 Trillion the Fed Just Handed to Banks Is Actually Old News" by Charles Mudede