12/28/2011

The FED's Secret Bailout of Europe

Damnant quod non intellegunt   --They condemn what they do not understand

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. This operation is going pretty much unnoticed here in America.

The Fed is using what is called a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. The Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (usually 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are they doing this? The Fed could  lend directly to U.S. branches of foreign banks. It did a great deal of such lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Much of that lending was also conducted in secret. Or, the ECB could just lend euros to banks and they could then purchase dollars in foreign-exchange markets. The world is awash in dollars, as we all know.

The two central banks are engaging in this chicanery because each needs a cover. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It doesn’t want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

I commented on this whole scenario about a week ago. The bottom line is that Barack Obama and his merry band of Keynesian Kops want to devalue global currencies (a technique we already know has not worked) which will eventually (they hope) inflate our way out of the problem. The end result of course, is simply to postpone the day that the piper comes to the door, except this time he'll be bearing a shotgun. The worst part of this medicine is that the patient will stop getting better (e.g. being fiscally sound) since every time he gets his fix, he "feels" better and goes off his medication.

It's disappointing, even downright depressing as people with above-room-temperature IQ's such as ourselves can do virtually nothing to stop the insanity.