WASHINGTON (Michigan News Source) – There is something going on in the financial world that no one seems to be talking about. Or at least at the consumer level. We first became aware of it after hearing about credit unions calling each other to buy out loans and car dealerships who are running into a tightening loan market.

The issue seems to be that there is a liquidity problem. But we needed to find out – was this only happening regionally – or even just in Michigan? Was it just some bad financial management or an adversity to risk among one or two financial institutions?

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In an effort to find out if there is something bigger going on, Michigan News Source reached out to Terry Sawchuk, the founder and Chief Wealth Strategist with Sawchuk Wealth.

What we found out is that, yes, there IS something going on. And it’s not good.

Sawchuk said, “It kind of ties back to what’s happening with the Federal Reserve. What the Federal Reserve is doing is that they’re intentionally tightening credit conditions.” He said it’s a combination of raising interest rates, which makes the cost of borrowing more expensive, along with the Federal Reserve calling the note on the banks. He said, “When you go back to the response to Covid, the federal reserve basically bought a whole lot of treasury securities and they put them on their balance sheet. And so in exchange for that, the commercial banks got a ton of cash and they used that cash to lend into the system so that people could borrow and spend and do whatever they needed to do to facilitate normal business activities. What was happening after Covid was obviously that we shut the whole world down…the credit markets began to freeze up so the Federal Reserve basically created a bunch of liquidity. And now what they’re doing is the opposite.”

It can also be explained, as we have found from our research, as “quantitative tightening” – the opposite of quantitative easing which happened in the past. In layman’s terms, the Federal Reserve is calling the note on the banks and it’s time for them to pay up.

Sawchuk continued, “They’re (Federal Reserve) forcing the commercial banks to take the cash that they have and they’re buying back the government’s securities that were on the federal reserve balance sheet. And so you’re running into a massive net liquidity drainage because the Fed is pulling something like 95 billion dollars every month – they are draining liquidity out of the system.”

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Sawchuk went on to say, “It started in earnest in September but you haven’t really felt the impact of that until more recently…There’s an unwillingness now for banks to take risk because the cost of borrowing is higher but also because we’re headed towards a recession. Anybody who lends money is going to be a lot more cautious and there’s a lot less money available to lend because the Federal Reserve is taking money out of the commercial banks.”

Sawchuk said that this is happening on a massive scale and the reason the Fed is tightening financial conditions is because of inflation. He explains, “Too much money chasing too few goods. In this case, labor is restricted. There are more jobs than there are people available so the cost of labor is going up. We have supply chain issues like car parts not being available and that drives prices up. There’s also energy issues…Because of the war in Ukraine, energy costs have gone up. All of this is creating hardship for people who don’t have a lot of money so the way the Federal Reserve is essentially trying to solve the inflation problem is to slow the economy down. And how do you do that? You tighten financial conditions. You make money and credit less available and you make it more expensive for what IS available. That’s why there is a lack of liquidity.”

Sawchuk said that there was the largest opening of credit accounts on record in the third quarter of 2022. He explained, “So what that’s saying is that the consumer is turning to credit now because their income is less than their expenses and they need to bridge the gap.”

As we head into a recession, Sawchuk believes that what the Feds are doing is going to make things worse. He said, “The fact that they’re tightening financial conditions into what’s already going to be a recession, its’ going to make things more difficult.”

If that’s not a big enough problem to worry about, Sawchuk also exposes something else that’s going on. He says there’s an issue with collateralized loan obligations. It’s just like what happened with the mortgages. He explained, “They’re packaging up risky loans with other loans that don’t look as risky…and they’re starting to see the defaults coming through.”