An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Thursday, November 21, 2013
Pam Martens — Fed Minutes Reveal a Dangerous Power Grab by New York Fed
Just when it seemed one could no longer be shocked by the corruption, hubris and lack of accountability in the American financial system, along comes yesterday’s release of the Federal Reserve’s minutes for the October 29-30 meeting of its Federal Open Market Committee (FOMC).
While mainstream media focuses on what the minutes revealed about when the Fed might begin to reduce its monthly $85 billion in bond purchases, receiving scant attention is a brazen power grab boldly stated on page two of the eleven pages of minutes.
Back on October 31, wire services reported that the temporary dollar and foreign currency swap lines that had been put in place between central banks on a temporary basis during the financial crisis had been turned into standing arrangements.
The Associated Press explained the action as follows: “Six of the world’s leading central banks, including the U.S. Federal Reserve, say they will provide each other with ready supplies of their currencies on a standing basis, extending arrangements set up to steady the global financial system during post-2007 turbulence.”
In other words, without public deliberations, an action that was adopted as a temporary, emergency operation, now had become a permanent part of world finance – on the basis of minutes and details yet to be seen by Congress or the general public…..
Here's Plato from 360BC: "If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency."
So then what I would imagine would happen is eventually the finance ministers from nation A would contact nation B to see if they wanted to conduct an exchange of their respective currencies that each had accumulated over time... probably one for one...(eg one drachma for one denari) or I guess the receiving country could have simply re-struck the foreign coins with the local imprimatir and deposited it into the their own Treasury jars...
So yes it looks like these swaps go back a looooong way... not that any of these morons at the Fed know any of this though...
Couldn't this sort of arrangement be used to create a pseudo gold standard? If each CB/Government is in debt to the next in the circle, and they all have to reduce their public spending to service external (foreign fiat) debt (thereby creating disinflation/deflation), wouldn't that advance the interest of the (lending) 1% the same way a gold standard did?
More of an end run around the fx market. Cbs can provide pretty much unlimited liquidity to each other using currency swaps instead of having to go to the market for for a foreign currency if needed. I don't think that it's a problem in itself. I think that the issues arise when cbs just take the reins for themselves behind the scenes. It rings up the question as to how much national cbs and international orgs like BIS and IMF should control the monetary system. There should at least be a discussion about this politically instead of a few people in high places just taking charge.
This is good news for the eurodollar market (even if it only confirms old news - central banks had already announced their disposition to extend swap lines on a permanent basis a couple of years ago) .
The ECB - even though it does not "print" dollars - will now have the necessary amounts provided by the Fed " on a permanent basis". It will be able to keep functioning as a lender of last resort for banks based outside the U.S. that do create loans and deposits out of thin air - in dollars.
This will also likely facilitate the "tapering" announced by the Fed - but still not implemented. Foreign banks will be less afraid of buying back dollar-denominated RMBS presently held on the Fed's books because they know the ECB can help them out - in dollars - if push comes to shove and these securities drop in value just like they did in 2008.
On balance, then: one step ahead for globalization and better control of the international system through central bank cooperation. Whether common citizens will have reasons to cheer remains to be seen, however.
"I thought currency swaps had been normal practice between central banks for decades."
Ralph - I think the Fed may have done the first currency swaps even before Nixon abandoned Bretton Woods. I believe it had to do with attempting to keep the gold price from rising by making the dollar appear stronger. I can look up the details and report back.
Matt - What's your take on Germany requesting the NY Fed to return 640 tons of its gold worth about $28 Billion. NY Fed says they can only return the gold in dribs and drabs and that it will take 7 years. What's that all about? Is the NY Fed using Germany's gold as collateral for transactions with other counterparts? I'm thinking maybe 7 years is how long it will take to mine and refine that much gold?
"This will also likely facilitate the "tapering" announced by the Fed - but still not implemented. Foreign banks will be less afraid of buying back dollar-denominated RMBS presently held on the Fed's books because they know the ECB can help them out - in dollars - if push comes to shove and these securities drop in value just like they did in 2008."
Jose - Thank you for posting that comment. Terrific analysis!
I thought currency swaps had been normal practice between central banks for decades.
ReplyDeleteRalph,
ReplyDeleteHere's Plato from 360BC: "If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency."
So then what I would imagine would happen is eventually the finance ministers from nation A would contact nation B to see if they wanted to conduct an exchange of their respective currencies that each had accumulated over time... probably one for one...(eg one drachma for one denari) or I guess the receiving country could have simply re-struck the foreign coins with the local imprimatir and deposited it into the their own Treasury jars...
So yes it looks like these swaps go back a looooong way... not that any of these morons at the Fed know any of this though...
rsp,
Audit the Fed.
ReplyDeleteHere you go Ed, send it over to the Ron Paul people:
ReplyDeletehttp://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2012.pdf
rsp,
Couldn't this sort of arrangement be used to create a pseudo gold standard? If each CB/Government is in debt to the next in the circle, and they all have to reduce their public spending to service external (foreign fiat) debt (thereby creating disinflation/deflation), wouldn't that advance the interest of the (lending) 1% the same way a gold standard did?
ReplyDeleteMore of an end run around the fx market. Cbs can provide pretty much unlimited liquidity to each other using currency swaps instead of having to go to the market for for a foreign currency if needed. I don't think that it's a problem in itself. I think that the issues arise when cbs just take the reins for themselves behind the scenes. It rings up the question as to how much national cbs and international orgs like BIS and IMF should control the monetary system. There should at least be a discussion about this politically instead of a few people in high places just taking charge.
ReplyDeleteRalph, I assumed this was happening already, too.
ReplyDeleteThis is good news for the eurodollar market (even if it only confirms old news - central banks had already announced their disposition to extend swap lines on a permanent basis a couple of years ago) .
ReplyDeleteThe ECB - even though it does not "print" dollars - will now have the necessary amounts provided by the Fed " on a permanent basis". It will be able to keep functioning as a lender of last resort for banks based outside the U.S. that do create loans and deposits out of thin air - in dollars.
This will also likely facilitate the "tapering" announced by the Fed - but still not implemented. Foreign banks will be less afraid of buying back dollar-denominated RMBS presently held on the Fed's books because they know the ECB can help them out - in dollars - if push comes to shove and these securities drop in value just like they did in 2008.
On balance, then: one step ahead for globalization and better control of the international system through central bank cooperation. Whether common citizens will have reasons to cheer remains to be seen, however.
"I thought currency swaps had been normal practice between central banks for decades."
ReplyDeleteRalph - I think the Fed may have done the first currency swaps even before Nixon abandoned Bretton Woods. I believe it had to do with attempting to keep the gold price from rising by making the dollar appear stronger. I can look up the details and report back.
Matt - What's your take on Germany requesting the NY Fed to return 640 tons of its gold worth about $28 Billion. NY Fed says they can only return the gold in dribs and drabs and that it will take 7 years. What's that all about? Is the NY Fed using Germany's gold as collateral for transactions with other counterparts? I'm thinking maybe 7 years is how long it will take to mine and refine that much gold?
ReplyDelete"This will also likely facilitate the "tapering" announced by the Fed - but still not implemented. Foreign banks will be less afraid of buying back dollar-denominated RMBS presently held on the Fed's books because they know the ECB can help them out - in dollars - if push comes to shove and these securities drop in value just like they did in 2008."
ReplyDeleteJose - Thank you for posting that comment. Terrific analysis!