The neoliberal model of economy and finance, which has increasingly dominated the world since August 15, 1971, from its centers in the City of London and Wall Street, is heading toward a nasty implosion. This is the only conclusion one can reach from reviewing the recent actions of central bankers, particularly at the U.S. Federal Reserve, which reflect heightened panic and hysteria, especially among bankers and traders. In a rare Sunday announcement on March 15, the Fed said it will purchase $500 billion in Treasury securities and $200 billion in mortgage-backed securities, following the failure by traders and banks to sell an offering of 30-year Treasuries last week, as few buyers came forward.
At the same time, the Fed announced it will lower the rate on short-term emergency loans at its discount window from 1.75% to .25%; indicated another cut in the prime interest rate will come next week, following the .5% cut last week; and will coordinate swap lines with other central banks to prevent disruptions in overseas dollar-funding markets. This latter move will cut rates on overseas dollar loans, to insure that foreign banks will have an adequate supply of dollars to loan to overseas corporations.
These moves come on the heels of last week's Fed pledge to provide $1.5 trillion in short-term loans to banks in return for Treasuries, to be repaid after one-to-three months. At the same time, the Fed provided up to $200 billion in overnight and two-week repo loans—which was still short of the demand for liquidity—plus $37 billion in Quantitative Easing funds, above the $60 billion monthly offering it is providing, and is mooting that it may soon accept corporate bonds and other securities as collateral for loans.
What is lost in these astounding numbers is that the liquidity, which may be desperately needed in the short term, to stave off an immediate full-scale depression collapse, will not solve the problem it is supposedly addressing, of "restoring investor and consumer confidence", to cause an upturn in spending. This is because a.) consumers are over their heads in debt, and increasingly falling behind in credit card debt payments, as well as in auto, home and student loan repayments; and b.) most of the liquidity will flow into new, speculative gambles by shadow banking operations and strapped corporations, which will only increase the amount of debt due in the future, without generating the means to increase real wealth production to cover the new debt. This latest plunge into liquidity insanity by the Fed is a return to the approach taken after the 2008 crash, of bailing out the financial institutions which caused the crash—including the Too Big to Fail banks, insurance companies, and "shadow banking" operations—while withholding credit from the producers which are part of the real, physical economy.
The post-2008 explosion of liquidity has driven total corporate debt from $48 trillion in 2009 to over $75 trillion in 2019. A portion of that growth is in purchases of corporate bonds, including those rated at BBB, a notch above junk levels. In 2011, BBB-rated bonds accounted for 1/3 of the market; by 2020, it is now 1/2 the market. Private equity funds, hedge funds and other shadow banking institutions have been loading up on these riskier bonds and other high-risk instruments, as they are seeking higher returns than they can get from purchasing government bonds, which have low-interest rates. The huge volumes of overnight lending in repo markets are needed by borrowers, as they are not earning enough profit to cover the servicing costs of their debt.
Now, with the "recession" likely in sectors such as energy, auto and hospitality/travel, driven to some extent by the effects of the Corona Virus, many of the corporations will default, threatening a domino-style collapse of the whole system. Lotfi Karoui, the chief credit strategist at Goldman Sachs, warned in a report to its clients, "Default and downgrade risks have increased to their highest levels since the start of the current business cycle." The IMF reported that, in a recent stress test, it found that 40% of all corporate debt is at risk of default in case of a "downturn", which is now, in fact, underway.
The neoliberal model of globalization, with its just-in-time economy and other austerity measures, combined with banking deregulation and bank bailouts, outsourcing and deindustrialization, has failed miserably, just as Lyndon LaRouche forecast it would in his comments on Nixon's decision to end the Bretton Woods system on August 15, 1971. This decision was imposed on a panicked Nixon, who was advised by monetarists such as former Fed chair Arthur Burns, future Fed chair Paul Volcker, and free market/austerity fanatic George Shultz, who warned him that the dollar would collapse unless it was decoupled from the gold reserve standard, and that the fixed exchange rate system—which had allowed unprecedented levels of growth in the post-war advanced sector economies—must be replaced by a floating exchange rate system. It is the floating exchange rate system that opened the door for speculators to introduce increasingly wild forms of "financialization" and "securitization." By pushing through a series of banking deregulation measures, beginning during Volcker's time at the Fed, banks were able to use their client's deposits as a basis for increasing leverage, which produced one bubble after another, all of which collapsed, beginning with the stock market crash of 1987, and continuing with the popping of the Asia bubble in 1997 (in which George Soros played a leading role), the Russian bond/LTCM bust of 1998, and the dot.com bubble, which blew up in 2000.
When the next bubble, that triggered by mortgage-backed securities, popped in 2008, LaRouche pushed for a return to Glass Steagall bank separation. Glass Steagall, passed as part of President Franklin Roosevelt's "100 Days" anti-Depression legislative package in 1933. It served the nation well, placing limits on what speculators could do with savings and deposits in the nation's banks and savings and loans, by establishing an iron wall of separation between commercial banks, savings and loans, and investment banks, until it was weakened by neoliberal ideologues in the 1980s and 1990s, and finally repealed in 1999, which set the stage for the speculative frenzy of the post-9/11 G.W. Bush years, ending with a bang in 2008. Instead of listening to LaRouche then, the neolibs again had their way, as Obama, both parties in Congress, and the Fed rejected LaRouche's call for a return to the American system, with a Hamiltonian credit policy and directed credit to the real physical economy, with a special emphasis on infusions of funds for science driver projects. Instead, they chose to save the speculators, with a massive bailout—a choice made once again by panicked Fed officials on March 15, with the Ides of March bailout.
The attempt to save the system with ever-larger bailouts, is equivalent to trying to revive a corpse with massive blood transfusions. It were better to bury the corpse, and finally proceed with the reforms proposed by Lyndon LaRouche.