(email exchange)
Yes, a very obvious move for anyone with any sense of logic.
Again, we see continued evidence that the higher ups do not understand their own monetary operations.
Some of the remaining issues:
The TAF should at a minimum be unlimited and offered at a fixed rate, and the collateral requirements can be expanded to any bank legal assets.
The Fed should get Congressional approval to expand their treasury lending facility and lend any security in unlimited quantities at an overnight rate at a small
spread below their target Fed funds rate.
The Fed should cut off the (unlimited) swap lines to foreign central banks before it’s too late.
>
> On Wed, Nov 5, 2008 at 11:43 PM, Scott wrote:
>
Press Release
Federal Reserve Press Release
Release Date: November 5, 2008
For release at 10:00 a.m. EST
The Federal Reserve Board on Wednesday announced that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.
Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.
The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC’s target federal funds rate.
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I do not see them curtailing the swap lines for two reasons.
First: There is political leverage to be derived from these inasmuch as we can say, “If you are our friend or ally, you get help. If you’re not, you get nothing.” Note who did NOT get these swaps: Russia, Venezuela, Argentina.
Second: At least among the main central banks of the world–Fed, ECB, BOJ, BOE–there is this idea of an elite club, whose members, it would seem to me, would find it inconceivable not to help each other out. I could be wrong, but I believe that is true.
Most Americans, therefore, should understand, unequivocally, that their interests are subverted for the greater interest of this club. That’s just how it is. Would most Americans benefit from a stonger dollar? You bet. Should they expect a stronger dollar if it means upsetting “The Club’s” way of dealing with other? Not a chance in hell.
On the contrary, only a collapsing dollar would cause them to even think or changing policy that might, in some way, upset the way The Club operates together.
Which leads me to believe, Warren, that you may be right after all in your forecast of a dollar collapse.
Warren,
When is too late? You indicated earlier that swap lines like these always end badly when the “lender” chooses to cut off the supply (think you used central/south america example).
If swap lines do end, how do EU countries go about getting dollars?
Rich,
The institutions short dollars just go out and buy whatever quantitiy of dollars they need in the forex markets. That may necessitate asset sales, but there are plenty of dollars freely available for anyone who wants them. And if their assets in local currency don’t cover their dollar liabilities then guess what? They’re insolvent and probably should be left to fail, like we did with Lehman. So the question is, why the heck are we holding them up??
Thanks Mike for the clarification. Agree on not propping them up.
By the way, I came to Warren’s site through you. I used to read your commentary on realmoney.com.
Hey Rich, that’s great! Glad to see you’re here! You’ll get real insight, not like that pablum on Realmoney. Don’t forget to check out my blog at http://www.mikenormaneconomics.org
Thanks, Mike!
When the swap lines end, europeans have to sell euros and buy dollars.
And if they default the ECB has to do same to pay off the Fed.