Peter Bromberg's UnBlog

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 var...

Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have denoted that the recession is over. Now that the DJIA has broken the 10,000 mark, we can expect to  have full confidence that economic growth is here to stay. But the credit markets are in a lot worse condition than some indexes  suggest. Buried within the October 3, 2008 bailout bill, which set up the Troubled Asset Relief Program (TARP), was a provision permitting the Fed to pay interest on bank reserves. Within a week, the Fed implemented this new power and  essentially converted bank reserves into more government debt. As the fed funds rate hovers around zero and existing loans in technical default continue to sit in bank portfolios, why should banks make new loans when they can make money for free with the government? They can now borrow from the Fed and  earn a huge spread by borrowing virtually unlimited amounts of money for nothing and simply lend that same money back ...