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Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


10 Responses

  1. Could the Europeans lend this back to US banks without collateral. Is this a way for the FED to get around the law and political ramifications?

  2. So in other words, the Fed won’t lend unsecured to U.S. members of the federal reserve system, but will to foreign banks? This is nuts…

  3. Still trying to wrap my head around this –

    Could this, virtually instantly, erase the foreign holdings of U.S. debt? Could this be an attempt by the CB’s of the world to prepare for a “Bretton Woods II” by essentially setting all net currency balances to 0? (Like starting a new game of monopoly?) And why is the vaunted “Noble” prizewinner Krugman still talking about “bank recapitalization” and not about this?

  4. Warren, it seems that the probability of the U.S. defaulting on its future loan obligations just shot remarkably higher. And, to help put off that eventual bankruptcy, new USD will need to be created in order to offset the USD that may vanish into the thin air of corruption and fraud. If that is the case, are we currently riding the path towards a dangerous hyper-inflationary bubble? Are credit default swaps on the USA trading higher of late?

  5. Could this be a clever way to get around Maastricht restrictions on ECB, with ECB ultimately selling Euros to pay back the Fed.

  6. all good questions!

    4. there is no chance for the US to default on $ obligations. it’s the ecb that could default on $ obligations when the fed cuts them off someday. or vaporize the euro paying back the fed.

    no way to tell where this is going, except it seems to me an inflationary bias.

    took me by surprise! won’t do a domestic fiscal package to support demand but will do this.

  7. My take…

    A bank can in theory denominate its accounts in anything, even Martian dollars. Doing so puts the bank at risk as there could come a time when depositors decide to shift their deposits to Mars.

    The bank will be caught short Martian dollars.

    In this case, banks around the world offered dollar denominated accounts and have been caught short ‘real dollars’ as depositors have moved their deposits to the stable FDIC insured U.S. banks and money market funds.

    Net effect would seem that banks around the world will be borrowing from the Fed (at the current FF rate?) instead of their own CBs until depositors are assured the global banking system is no longer in danger of collapse.

    The value of the dollar would have soared without Fed intervention. Bankers around the world would have taken huge currency losses as they tried to purchase dollars with their own country’s currency.

    The Fed has intervened in stabilizing the value of the dollar, the treasury’s job. Rather than a sudden strengthening of the dollar, if uncertainty continues, foreign CB’s may slowly sell currency to pay off Fed loans gradually strengthening the dollar. Or depositors will move their deposits back offshore.

  8. Warren,

    This is from wikipedia

    A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender’s recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply out the difference

    You said ” Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse”

    How is it unsecured and non-course at the same time?


  9. 7. makes sense

    8. you should see what wiki says about the consulier- lots of errors there too.

    for purposes of this website unsecured means no collateral, and non recourse means you can’t go after the borrower for payment.

    in this case the Fed is getting euros for collateral, which i suggest can be driven down to 0 if the Fed tries to sell enough to get it’s $trillion (or whatever the figure ultimately is)

    the euros can also be worth 0 if the national govts abandon it, and with an incentive like not having to pay back the US it’s $trillion, the odds are increased.

    it’s non recourse in that if the Fed can’t get it’s funds back selling it’s euros there’s nothing else it can do to the ecb or the national governments, who have not signed the note.

  10. “Fed can’t get it’s funds back selling it’s euros there’s nothing else it can do to the ecb or the national governments, who have not signed the note.”

    By proxy my redneck buddies say all them euro boyz are LIABLE for ECB Default! They are getting thier swamp boats out of storage readying for a raid and drawing up plans for who gets the mona lisa and who gets the eiffel tower. Someone is gonna pay for this. The anger and despair of the joe 6 packs will have to be vented somewhere. They thought hiroshima and nagasaki were bad, wait til sex starved iowa rednecks start running through the streets of germany and france wanting their daughters or sons for payback, oh I can’t bear the thought ;( The children that will be born from french inner city terrist muslims and iowan redneck inbreeds will penalize the world community for generations! The french and germans will cry out to the CIA jackals and SAY NO MAS! anything but that – so the jackals will say OK, we are going to convice those dumb rednecks to invade cuba, venezuela, africa, and maybe russia too and you euro boyz just sit back and go with our votes on the UN security council stuff. Grandma can’t pay euro prices for gasoline, I saw this movie mad max the road warrior, and all actions were ultimately about securing more oil for your posse. Any monetary actions taken by our government can’t be much different.

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