For a third time in two years the Fed is opening up its forex swap lines with the ECB to offer dollar liquidity to European banks and institutions that are caught in a dollar squeeze. If this did not happen the dollar could potentially soar as these institutions--and perhaps the ECB itself--would have to enter the Forex markets and buy dollars.
A strong dollar would be good for American consumers, right? It would be good for the Administration, which could point to a rebounding greenback and take political credit for that, right? But no! They're totally clueless as they sit by and allow this to happen without even taking notice.
What are these forex swaps anyway? Very simple: the Fed gives dollars to the ECB in exchange for euros--an unsecured transaction that leaves the Fed with potentially huge forex losses.
The real question is, where is Ron Paul? Peter Schiff? Jim Rogers? And all the other Fed critics? Here's a situation where they really have something to sink their teeth into (the U.S. government is bailing out European financial institutions while Americans go jobless and hungry) and they say nothing. It's really outrageous!!!
Mike, I am not sure they are clueless on this. The Fed likely feels it has to act in order to prevent a European collapse, which would be bad for both the US and the entire global economy. As the issuer of the world's reserve currency, the Fed is the lender of last resort to the world as well as the US?
ReplyDeleteTom,
ReplyDeleteThe ECB could buy all the dollars it needs via the forex market, but it doesn't want to because that would hurt the euro and give the appearance that the euro is "backed" by the dollar. The more this occurs, the more people should realize that the euro really is backed by the dollar.
This is a fascinating story, Mike, and I think they're silent because it doesn't fit their hyperinflationary thesis.
ReplyDeleteMike,
ReplyDeleteI'm glad you're appalled at the Fed's actions in this instance. Perhaps your anger should be solely directed at the misguided planners at the Fed than at its most consistent critics. I am heartened that even non-Austrians are starting to view the Fed with a more jaundiced eye though.
What part of the Federal Reserve Act grants the power to open forex swap lines with the ECB? I was flipping through the act's sections and found congress is lengthy on domestic concerns but not so much on foreign concerns. Maybe some broad interpretation of Section 2a.
ReplyDeleteWelfare,
ReplyDeleteYou're a relatively new reader of this blog. I was speaking out against this back in late 2008 when they started these swaps. I have been talking to people in Congress and trumpeting it on Fox News, but very few people have listened. The only lawmaker who ever brought this up was Rep. Alan Grayson of Florida. He's a Democrat and just lost his re-election bid.
Mike,
ReplyDeleteI liked Alan Grayson in some respects. He was at least honest even if I didn't agree with him on many things. He often hit the nail on the head with his criticism of the Fed. He was one of very few congressmen who understood finance and central banking. Wasn't he a client of Schiff's for a time?
This may get back to oil and the OPEC people.
ReplyDeleteHow do these Euro institutions rack up such large USD liabilities in the first place? When they tapped these lines after Lehman BKed, they hit it for 100s of BILLIONS of USD. This is a remarkable amount. Lets remember, these Euro institutions dont have branches here! They are not doing real depository banking functions in the US. What are they doing to get this upside down in USD?
China pretty much just buys Treasuries with their half of the US current account deficit (40-50$B/mo.). Its got to be the OPEC money as oil accounts for the other half of the US CAD.
My hunch is a ten year trend where OPEC entities place their excess USD they get from their huge USD current account surpluses (with oil at $85 or more!) with European financial entities (UBS, Barclays, Credit Suisse, SocGen, Deutche Bank, etc..) to stay at arms length from any US courts in case of another terror attack and the victims sue. US courts cant get to them because they keep their assets in "street name" with foreign firms/foreign funds. Seems like this could be a bigger issue with the OUTRAGEOUSLY higher oil prices over the last 5-10 years.
The Fed assists them in what may be a giant 'asset protection plan' for the Cartel by opening this credit line for their custodial firms in Europe. Nice job Ben!
This also makes it harder for US firms to compete for the asset management business of the OPEC people as the European firms can point out their relative safety from US court judgements AND their open credit line with the Fed. Again, thanks a lot Ben!
We shouldnt allow this.
Mike,
ReplyDeleteI tend to agree with Tom but after seeing your response, I can definitely understand your point and am glad to have gained that perspective.
http://www.youtube.com/watch?v=pXSO1GSc8ys
ReplyDeleteread about doug french and the austrian school.
merry x'mas.
Happy holidaze.
ReplyDeleteThis post shows what we are blogging about here. The mechanics of underlying economic invariants which _should_ equate to a strong dollar, BUT DO NOT because of market rigging politically or otherwise.
Attention - WWS.
Anyway, on the other hand this blog points out that in addition to CHINA holding vast savings in U$D treasuries which allows them to wag the US dog ( as China creates tax free zones to lure US mfg into China ) ,
we can see that OPEC is holding vast savings in U$D treasuries, so too they wag the US dog and do not
contribute to our economy by spending.
Because these evil regimes do not spend in our economy, we have a divided house in the USA. We have to resort to deficit spending as espoused here.
Therefore, we need to stop buying China and stop buying OPEC ...period whatsoever.
Ending speculative enterprise which contribute nothing to our economy ( this is taken from Norman for the past 5 years ) and getting into PHEV cars ( taken from Franko ) ... we have the case and example of how to make our dollar strong and leave these regimes in the dust.
If you really what to end the US getting wagged by the tail and really give no other option to these regimes than to follow democracy and liberty, then we really would have a very strong dollar policy like the SPIKE of late 2008 but for a sustained period of time.
That would be temporarily destructive but maybe these regimes would be on their knees and stop milking us out of our own liberty and standard of living such as free healthcare for all.
We have the capacity but for little reasons that Norman explains we do not bring that capacity to all in the USA which is not democracy !
We need not subsidize OPEC, the EURO, or china.