Forum Post: Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps /// Will The Federal Reserve Devalue Dollar by 40% as Ben Bernanke Promised in 2002?
Posted 10 years ago on Dec. 28, 2011, 12:58 p.m. EST by MonetizingDiscontent
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Federal Reserve Secretly Bailing Out Europe
(((CNBC Video))) http://www.youtube.com/watch?feature=player_embedded&v=_u8tFqOIarc
Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps
First it was Zero Hedge... http://www.zerohedge.com/news/foreign-currency-liquidity-swaps-aka-global-bail-out-plan-b-faqs ...Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again.
Incidentally, O'Driscoll says,
"America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here."
One thing we can say proudly - it has been noticed loud and clear here:
The Federal Reserve's Covert Bailout of Europe
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
From the WallStreetJournal: http://online.wsj.com/article/SB10001424052970204464404577118682763082876.html?_nocache=1325091067684&user=welcome&mg=id-wsj
-DECEMBER 28, 2011-
America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed 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. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 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 the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.
The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)
Will The Federal Reserve Devalue Dollar by 40% as Ben Bernanke Promised in 2002?
Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C.
Deflation: Making Sure "It" Doesn't Happen Here
-November 21, 2002-
In this 2002 speech by --then-- Federal Reserve Board Governor Ben Bernanke is saying that If he ever faced another Great Depression, he would do 5 things... and he has done everything he said he would do so far, now that he is at the helm, as Chairman! Accept for one final thing....
- Interest rates to zero (CHECK)
- Buy securities to expand the feds balance sheet (CHECK)
- Increase the money supply (CHECK)
- Buy the countries debt, QE1 QE2 etc etc... (CHECK)
And the only thing left that Ben promised to do, that he hasn't done yet...
- Devalue the Dollar by 40%
Ben Bernanke 2002: "Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today (2002), it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."