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Last week’s swap line number reported by the Fed was down to $521 billion from $608 billion. While still a very large number, it is coming down, and hopefully will continue to do so.

However, the continued fall in commodities prices, particularly crude oil, means dollars are ‘harder to get’ for the foreign sector, as they must export more product to the US for the same amount of dollars. And with the US consumer weakening, obtaining $US via exporting to the US will be that much more problematic.

Here is what Chairman Bernanke said yesterday about the swap lines.

Federal Reserve Policies in the Financial Crisis

In our globalized financial markets, the provision of dollar liquidity has international as well as domestic aspects. To improve dollar funding conditions in important foreign markets, the Federal Reserve has approved bilateral currency swap agreements with 14 foreign central banks. Swap facilities allow each of the central banks involved to borrow foreign currency from the other; in this case, foreign central banks such as the Bank of Japan, the European Central Bank, the Bank of
England, and the Swiss National Bank

And the Bank of Mexico, and other lesser CB’s.

have borrowed dollars from the Federal Reserve to re-lend to banks in their jurisdictions.

Yes, it’s a case of $US loans to foreign governments.

This is functionally no different than the Fed buying, for example, Mexican $ bonds.

Because short-term funding markets are interconnected, the provision of dollar
liquidity in major foreign markets eases conditions in dollar funding markets globally, including here in the United States.

Yes, that is true.

Lending to those less credit worthy does decrease their demand to borrow USD.

And that’s exactly the reason the Fed is lending virtually unsecured to lesser credits- to get interest rates down?

On a risk/reward basis this makes no sense to me.

There are far less costly ways to get USD LIBOR down.

Importantly, these swap arrangements pose essentially no credit risk because our counterparties are the foreign central banks themselves, which take responsibility for the extension of dollar credit within their jurisdictions.

So lending to the Bank of Mexico poses no credit risk?

And the ECB is shell company not guaranteed by the national governments.

And they’ve been criticizing the banking industry for poor underwriting criteria- this is far, far worse.

And would Congress approve the purchase of foreign USD bonds solely as a means to lower USD LIBOR? Is Congress aware that the Fed is authorized to do this?

Hopefully we get lucky and all the central banks politely pay us back.


15 Responses

  1. Ive looked at the ECB us$ auctions as of today.

    Today they published the latest 84-day auction (Sett.Dec 4) for $67.5B. This was to re-fund the oldest 84-day auction of Sept. 11 that went for $10B, but that was before the Fed agreed to “full allotment”/unlimited funds.

    ECB current totals:

    3 rolling 84-day auctions outstanding: $157.5B (67.5+70+20)
    28-day: $52B (Next one Dec.18)
    7-day: $84.5B (next one this week Dec 3)

    So they have increased (again) the longer term funding even though they put $70B on the last 84-day auction.

    Totals of all outstanding auctions:
    $212B as of Nov 18
    $224B as of Nov 20
    $236.5 as of Nov 28
    $294B as of Dec 2

    Link here


  2. Thanks Mat!

    I was feeling better as the total was coming down, but this is again ominous.

    Ed, don’t know

  3. April 30th deadline:

    The April 30 2009 expiration of these “temporary” swap facilities has now been lined up with several of the Feds domestic facilities also. See Bloomberg article excerpt below:

    “Dec. 2 (Bloomberg) — The Federal Reserve extended the term of three emergency-loan programs to April 30 from January 30, aligning their expiration dates with other central bank efforts to mitigate the credit crisis.

    The Primary Dealer Credit Facility and Term Securities Lending Facility, created in March, and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, begun in September, were lengthened “in light of continuing strains in financial markets,” the Fed said today in a statement in Washington.

    The three loan facilities, part of the central bank’s efforts to cushion financial markets from the worst crisis in seven decades, had about $304 billion in loans outstanding as of last week. The Fed already authorized other programs through April for supporting the commercial paper market and money-market funds and for swapping dollars with 14 central banks.”

    It looks like April 30 is going to be an important date for global financial institutions. Without an extension to this deadline, the last 3 mo. (84-day) operation will be able to take place at just about the time that the new administration is sworn in. Maybe current staff are “punting” the issue to the Obama admin.?


  4. Warren,

    CNBC is reporting that the 5-year CDS on US Treasuries is 62 bp, while the yield on the 5 year is 1.75%, so you get 35% more yield betting that the US government won’t default. Isn’t this crazy?
    The market is not only betting that the US government will repudiate its debt sometime in the next 5 years despite record low interest rates and the fact that it funds itself in its own currency, it appears to be betting that there will be no attempt in the interim, either through the fiscal or monetary channels, to increase inflation.

    I mean, there has to be some chance inflation will return over the next 5 years given, for example, all the uncollateralized lending to the Eurozone via the swap lines.

    Going short the 5year and receiving fixed on the swap appears to be a fantastic inflation hedge. You potentially win on both sides. The more inflation goes up, the higher nominal yields go up, yet at the same time, the faulty expectations of default will likely recede as it dawns on the market that solvency is not the issue.

  5. Art Laffer argues that lower Fed Funds will raise financing costs:

    “A target Fed funds rate of 0.​75% would force a number of money market funds (​especially Treasury-​only money funds) to waive fees in order to avoid zero or negative yields. Almost all money market funds would be severely impacted should the target Fed funds rate drop to 0.​5%, and the $​3.​6 trillion money market mutual fund industry would be virtually wiped out with a target Fed funds rate below 0.​5%…. [​A] devastated money market mutual fund industry would have grave ramifications for the commercial paper market. Firms would be forced to seek short term debt financing from banks, which charge more and currently operate with tight lending standards. Pushing the target Fed funds rate below 0.​50% could, therefore, cause firms to face higher financing costs, not lower.”
    Finally, Laffer says, “Thus, it’​s unlikely that the Fed will go much below 1% and we believe that the Fed will at most do one last 25 basis point cut. This doesn’​t mean that the Fed has run out of ammunition and is incapable of influencing short-​term economic activity. Several alternative policy strategies are available to the Fed, including printing money, swaying interest rate expectations, and targeting the yields on longer term Treasury (​or private sector) securities

  6. agreed on cds, agreed cpi will move up with a deficit that restores gdp and energy consumption

    might be more direct to short cpi break evens a few years forward than fool with the tsy’s.

    i know art laffer is intellectually dishonest regarding monetary operations, but i don’t know why. makes no sense at all, but he must have his reasons.

    he knows all that’s in soft currency economics- in fact, he was involved in writing it (interestingly, it was don rumsfeld who sent me to his firm to write it originally).

    he knows fiscal is the stuff of quantity theory

    etc. etc. etc.

  7. he knows all that’s in soft currency economics- in fact, he was involved in writing it (interestingly, it was don rumsfeld who sent me to his firm to write it originally).

    Wow! Interesting can you go into more detail here?

  8. I spent an hour or so in the steam room at the Chicago Racquet Club in the early 90’s with Don Rumsfeld (he was very busy so we met during that opening in his schedule) and went over soft currency economics, after which he directed me to several economists he worked with. Laffer’s firm was one and they accepted my proposal to write it up.

  9. Now, that is interesting. (That meeting sounds like something out of the movie “Wall Street”…) I wonder, did you ever get the impession that he understood what you were talking about, or that the message “stuck”?

  10. Another thing that’s always interested me about SCE: were you aware of Abba Lerner’s work before you wrote it, or did you essentially rediscover the concepts of “Functional Finance” on your own?

  11. He very much understood it very quickly which is why he recommended me to his associates.

    Never had heard of Lerner, Post Keynesians, or anyone else.

  12. Hmm – he obviously had his hands full over at DOD, but I wonder if he ever had the chance to talk with Paul O’Neil or the rest of Bush’s economic team? (Not that that idiot would have been able to understand anything anyway…) Maybe it was Rumsfeld who convinced Cheney that”Deficits don’t matter”? Intriguing.

    And about Lerner, etc: it’s interesting that his ideas about Functional Finance were fashionable among economists back when we under the Bretton Woods system, when it wasn’t really applicable. It only fell out of fashion in the 70’s, when it would finally have worked as advertised…

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