Tuesday, September 30, 2008

Fed lending unsecured to the ECB

We hear all about "taxpayers" on the hook and the Fed asking for collateral from U.S. banks and financial institutions before it will lend to them. So the question is, why is the Fed lending dollars on an unsecured basis to the ECB? The current swap program, now totalling more than $620 billion and growing, is essentially an unsecured loan by the U.S. central bank to the central banks of many nations in Europe. How did this slip under the radar? If banks in Germany, Belgium, Spain, Italy and eslewhere start to fail (very likely, because there is no credible deposit insurance in Eurozone countries), then the U.S. taxpayer is on the hook for real!! This shouldn't be happening or at the very least, should happen with oversight.

Does the need for dollars by member states of the EU expose the euro for what it really is: a currency that works well when things are fine, but in times of crisis needs U.S. dollar backing to be viable? Only time will tell, but certainly, if investors perceive the latter the euro will collapse very quickly!

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