This one’s for the bloggers-

Dollar swap lines are functionally unsecured loans to foreign govts. that the Fed can do unilaterally. Congress only finds out well after the fact. Last time around they did $600 billion, including lending (unsecured) to nations Congress never would have approved.

The problem is the Fed Chairman insists they are secured because we get local currency deposits at the foreign central bank as collateral.

That’s like putting up your watch as collateral for a loan but you still wear it.

Chatter About the Fed/ECB CCY Swap Line
If reinstituted, it is a basic spot/forward FX trading line.

What this does is to give the ECB the power to lend USD in Europe. It
has 2 potential benefits:

1.Not all banks in Europe who require USD funding has access to the Fed
or the FF market

2.They don’t have to wait until NY opens if panic breaks out in Europe
over USD funding.

There is a third benefit. Politics. It let’s the market know that the
central banks are on the case, and the Fed doesn’t want to see the
FRA-OIS spread spin out of control.

5 Responses

  1. At least the Fed chooses who to extend the credit too.

    The US by agreeing to purchase SDRs from the IMF, are functionally extending unsecured loans to all IMF members (186 countries).

    Isn’t that even riskier?

    1. Its like in quantum mechanics how light is both a wave and a particle, depending on the observer. Here, its numbers in spreadsheets when its for something Ben wants, its soaring public debt when its for something he doesn’t.

      1. Exactly. The Fed could have stepped in when Lehman failed and the interbank market froze, and provided liquidity as lender of last resort instead of forcing a fiscal bailout.

  2. Warren,

    Again…for what it is worth…as an amateur looking in…your emails and posts are better than ever!

    New ideas…but all succinctly and clearly expressed!

    This analogy makes a novel,intricate concept elegantly simple!

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