Seems there is no actual default provision, instead, the dollar loan can be rolled over indefinitely?

UE Rate->FF Rate”>


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22 Responses

  1. It doesn’t seem like there is any issue of “not getting the money back” since to reverse the swap both the FRBNY and the ECB would just reduce the credits to each other. For example the FRBNY would reduce the credits in the ECB’s account at the FRBNY and the ECB would do the same to the Fed’s account at the ECB. If the ECB was unwilling or unable to cooperate it has no way of preventing the Fed from debiting its account at the Fed and it gains nothing from refusing to debit the Fed’s account at the ECB. Warren was your point about a legal right to not roll over the swap rather than a concern about how we’re going to get the money back?

    1. RS,

      The Fed has done the swaps to help ECB lend dollars to European banks. After the Fed credits ECB’s account at the Fed, the ECB does a back to back swap with the NCBs and the NCBs do FX swaps with credit institutions (banks) in the Euro Zone.

      Now there are so many parties involved in the process, but SWIFT instructions lead to transactions amongst which there is one in which dollars leave the ECB’s account at the Fed to some member banks’ account at the Fed.

      The Fed cannot simply reduce the ECB’s balance because it has gone down. If the ECB had a large balance at the Fed to start with, there would have been no need for the swap lines.

  2. It would seem this is another step towards a global currency as these swaps interfere with the private currency exchange ‘market’. The Greek crisis was used to promote SDR’s (a weak global currency) my guess is to cover the bailout of private institutional investors in member countries but was insufficient in magnitude.

    Potential/real U.S. government deficit spending is being off shored from our Fed to foreign CB’s. These swaps can be used to make interest payments to U.S.investors of European bonds without driving down the Euro relative to the dollar. Instead, the Fed’s holdings of future Euros will accumulate. Are we becoming China?

    These actions go against the idea that the Fed should only use the sale/purchase U.S. Treasury Securities to affect short-term rates.

    These actions are attempts to circumvent the need for fiscal policy, open to public debate.

    It looks like the world is in for a long hard slog as a needed policy debate/education is postponed.

  3. I’m still just as confused by these swap lines as I was last year. Are these really “backdoor fiscal”? The Fed adds to dollars in circ, they get lent out to Euro banks, so shouldn’t that add to aggregate dollar demand?

    1. As I see it, the swaps don’t technically become fiscal until the fiscal bailout occurs. Now with a constant rollover, the ‘bailout’ may never become necessary.

      These swaps only become fiscal if the Euro fails despite Fed support.

      Just as BofA (or any insured bank) can create BofA liabilities that may be bailed out by the FDIC/Treasury/Fed, the European governments/ECB now can create Euros that may likely be absorbed by the Fed in the future.

      Just watched a Noam Chomsky film.

      MMT needs to incorporate more democracy in its design of the monetary framework. The tilt towards current banking interests makes it unappealing. An ELR program may appeal to the bottom 10% of wage slaves but the other 85%, currently outside of the financial power structure, need an additiional incentive. An ELR provides little direct support to those with greater ambitions and talent than the current system or MMT is willing provide.

      MMT needs to address the concerns of a broader audience to become a self supporting movement.

      1. An ELR program may appeal to the bottom 10% of wage slaves but the other 85%, currently outside of the financial power structure, need an additiional incentive

        That’s an good point Winslow, maybe tack on Ed Phelps “wage subsidy” for private sector employees.

        The subsidy, intended to replace the EITC, would be payable to employers who’d pass it through, $3 to $5 an hour for minimum wage jobs… tapering down as wages goes up. As with a negative income tax, the slower the tapering, the higher the income level cut off point (and total cost). Of course, If a wage subsidy was integrated into Warren’s payroll tax holiday, the subsidy could have both a steep tapering and appear at ground level to benefit everyone making up to the annual FICA cap of $106k.

        Ed Phelps, you’ll recall, won the Economics Nobel in 2006 for his work on the Phillips curve and the effect of inflation expectations on the natural rate of unemployment.

      2. I have long believed that an hourly wage subsidy was worth a try. It might eventually replace a lot of other welfare.

      3. Of course the political appeal of an ELR plan is this– the government is already subsidizing the indigent, would you rather Uncle Sam guarantee them a check or guarantee them a job?

        An ELR also provides an answer to the question of what to do about the long-term unemployed. Congress has continually extended the 26 weeks of unemployment insurance coverage. They are balking now at extending it past 99 weeks. As a consequence, there is a cohort of long-term unemployed about to lose benefits. An ELR program wouldn’t have such time limits, so long as you are willing to work, the government is willing to employ you.

      4. There is a disconnect here.

        Federal government is ‘handing out’ some $3.552 trillion a year, a small fraction goes to the indigent or long-term unemployed.

        My take of this flow comes from providing housing as well as technical consulting to private/public agencies/business through various ‘government sponsored enterprises’ as most corporations are.

        MMT would like to change the purpose/fluctuate amount directed at the unemployed in order to stabilize the economy.

        Nice, because it allows the ‘private sector’ to provide services to the recipients with the potential of solving many social problems with minimal costs. Yet these 2nd order benefits, to the greater society, are hard to politicize.

        The topic du jour is the financial system and how it is regulated or structured.

        Given the current structure, it is a sweet deal for a small percentage of the population. There are larger threats to this sweet deal that MMT acknowledges but fails to address.

        We are starting to see the self-defeating policy of deficit reduction metastasize into a destructive force as no alternative appears politically appealing, including MMT. How many would support the alternative to MMT’s deficit spending, raising taxes on those capable of paying? How many would support MMT’s proposal of only giving the bottom rung of workers a job?

        MMT needs to address a larger portion of the voting public by addressing a larger portion of that $3.552 trillion.

        Let’s start with the interest on the Federal debt. Warren writes of reducing this subsidy to zero , and if it was fully developed as a policy of MMT it could have a profound impact on reducing the size of the financial sector.

        But how is that benefit apparent to the general public?

        I see the general population as looking for ‘what’s in it for me’, which reducing interest payments to a few savers won’t address.

        I’ve proposed opening the Fed balance sheet to all citizens with an approved asset list similar to banks. U.S. treasuries would be a good start, allowing citizens to exchange U.S. treasuries for short-term currency at the current Fed funds rate.

        Yes, MMT does seem to be gaining traction in academic circles for its understanding of monetary mechanics, but does the political arm have the appeal necessary to overcome the deficit reductionists and be implemented?

      5. what traction in academy david kim?

        please show me a single academic who has said “oh my gods, textbook i have been teaching is full of nonsense I am converted”

        please, just 1 i would be grateful

  4. McCully supporting bankers.

    “Banks can issue, essentially, perpetual liabilities – call them demand deposits – and invest them in longer dated, illiquid loans and securities, earning a net interest margin. It’s a really, really sweet business.”

    “Deposit insurance is inherently a public good.

    Access to the Fed’s balance sheet is also inherently a public good, because the Federal Reserve is the only entity that can print currency. So essentially, banking has two public goods associated with it.”

    MMT exclusive support of wage slavery, as a means to provide a floor to the economy, needs to be reexamined.

  5. Sorry this is going to be offtopic:

    Could someone please direct me to a discussion where the following point has been discussed. This is an objection that I have read the MMT and Post Keynesian moeny creation, i.e. Loans create deposits, with reserves sought after the fact.

    The only reason why banks are so used to searching for reserves after the fact is because the Fed has been very busy creating lots of new money for so long. Searching for additional reserves becomes an after-thought if the reserves are freely available. The Fed is ultimately in charge of that process in the long term. But do not get confused. Do not let the decisions of banks cloud the process of how money is actually created, and what ultimately limits the process of money is a long quotation here is a long quotation here is a long quotation.

    Similar sentiment is expressed here by Frank Shostak: Do Central Banks Really Inflate? No, Say the Post-Keynesians:

    In essense the Austrians are stating that ultimately, banks can only extend credit because the central bank ultimately allows it. But I think this comes down to their belief on why the central bank targets the price, rather than the quantity. For MMT and PK, central banks have no choice but to target the price, as the money supply is always endogenous.

  6. We seem to have strayed from Euro/Dollar swaps to a debate on ELR! But never mind.

    I don’t agree with Winslow R’s claim that ELR needs to appeal to the more skilled / better paid. The deal under ELR is essentially workfare in nature, i.e. “do this simple manual job else you don’t get paid”. If that’s beneath the dignity of the snobs and the effete, then to hell with them. I spent a portion of my career in the construction industry doing simple manual jobs. Didn’t do me any harm.

    Re Phelps, the weakness in his subsidy is that it involves subsidising large numbers who would have found work anyway. I’ve advocated a subsidy which (I think) gets round this weakness, (and devote a few paragraphs to Phelps):

    1. Re ELR, I think it is less of a question of snobbery than of wasting skills as well as time and money invested in education etc.. If I, an architect, were to become unemployed (which has happened twice before btw.), I would naturally want to look for work in which I could use my skills first, before settling for a bar tending job or the like which I would be taking away from some student who really needs it and who isn’t completely over-qualified for it. How much time should job seekers be given to find their place and how quickly should they be expected to adjust, professionally and monetarily to the sad reality that is the job market? How disruptive and short-sighted is it to shorten or abandon unemployment benefits? Those are the questions relating to unemployment benefits, imo.

      1. Oliver: I think you’re assuming that the fact of doing a bar tending job stops you looking for an architect job. It doesn’t. Looking for work at the same time as working is perfectly feasible. Indeed, according to a paper by J.P.Mattila in the American Economic review “Job Quitting and Frictional Unemployment” to majority of job changers find their new job while still at their old job. Also the actual time the unemployed spend looking for work is a very small portion of the working week (about 20 minutes a week). Not a reason to take the whole week off work.

        Re your claim that having skilled people do bar tending jobs takes such jobs away from students, this will happen to some extent probably. On the other hand the effect of the Phelps subsidy (and my variation on it) would be to increase the total number of unskilled jobs. To that extent, skilled ELR people don’t take jobs from students: the effect is an aggregate increase in employment. More jobs, means more GDP, which should mean higher real incomes for everyone.

      2. Fair enough, but believe me looking for a job is a full time job :-). You have to search all the papers and online forums, you have to write applications, go to the print shop (those who haven’t got a printer at home) during opening hours, call potential employers, be ready for an interview in an instant, be able to start work the next day, etc. An ELR job would have to take all that into account. I don’t see a private employer putting up with any of that no matter whether the job is subsidised or not.

    2. Phelps’s wage subsidy probably doesn’t get anyone unemployed hired, after all the employer still has to pay them minimum wage. Instead its a tool to pay the difference between the minimum wage and a living wage to every worker, in that sense it is a replacement for EITC and other welfare programs.

      Since the early 70’s, wage growth has not kept up productivity growth, this wage-productivity gap is politically dangerous. As Disraeli put it ,if the cottage is unhappy the castle is not safe. A wage subsidy is a way to share economic gains with the working class at less economic cost than the available regulatory tools (higher minimum wages, easier union organizing, etc.).

      1. “A wage subsidy is a way to share economic gains with the working class at less economic cost than the available regulatory tools (higher minimum wages, easier union organizing, etc.).”

        True, if the wage subsidy doesn’t lead to lower underlying wages which it inevitably will do if there is no minimum wage or if there is any residual unemployment. And, seeing as the wage subsidy doesn’t actually create jobs there will inevitably still be unemployment. I’m not convinced any of these proposals (ELR, subsidy etc.) will cure unemployment on their own.

      2. Beowulf: I don’t agree that the Phelps subsidy fails to bring extra employment because the “employer still has to pay them minimum wage”. Granted the employer still hands the same amount of cash to minimum wage people each week, but the net cost to the employer of these people is reduced because of the subsidy. I.e. some people who previously were so unskilled or inexperienced (or unsuited to available jobs) that they were not even worth the minimum wage would become economic, or that’s the theory.

        I’ve just done a quick Google of “Phelps, subsidy” and his objective seems to be raise employment AND boost the take home pay of the low paid. However I doubt whether the latter objective makes sense because there are plenty of people earning above min wages who get hand outs (at least they certainly do in the U.K. where they have kids). I.e. in that an objective of the Phelps subsidy is to raise take home pay to acceptable levels, the subsidy involves bureaucratic duplication of effort.

        Put another way, this duplication contravenes the Tinbergen principle (invented by Jan Tinbergen). This principle runs something like, “For each policy objective, one policy instrument is needed and one only.”

      3. Ralph,

        In the United States, low-income families with children are eligible for the Earned Income Tax Credit (the EITC I alluded to briefly), I forgot that not everyone reading this was familiar with the US tax code, sorry about that. I understand that part of Phelp’s proposal is to eliminate the EITC (its rather expensive, in the ballpark of $100 billion a year) and apply the money to the wage subsidy for precisely the reason you identified.

    1. Yes I know. This is really sad. Deeply admire him.

      FT has a nice obituary.

      Maverick who endured with ideas undimmed
      By Sue Cameron and John Llewellyn
      Published: May 14 2010 05:44 | Last updated: May 14 2010 05:44

      Wynne Godley, who has died at the age of 83, achieved fame for his stringent attacks on the monetarist doctrines of the Thatcherites – he once dismissed their policies as “a gigantic con trick”.

      His dire warnings in the late 1970s that unemployment would rise to 3m in the 1980s earned him the title “Cassandra of the Fens” and were derided – until they came true.

      Then, after years in the wilderness, with his research grant cut and academics giving him the cold shoulder, he returned to the establishment fold as one of the Treasury’s independent forecasters.

      It was a tribute to his intellectual strength that he came through such setbacks to produce some of the most novel and insightful analysis of economies of his generation. What made his achievements all the more singular was that he had started his career as a professional musician.

      Wynne Alexander Hugh Godley was born in 1926, the younger son of Lord Kilbracken, an Anglo-Irish peer. His grandfather, the first baron, had been private secretary to Gladstone before heading up the India Office at the height of empire. Educated at Rugby and New College, Oxford, where he was taught by Isaiah Berlin, he took a first in PPE before heading off to the Paris Conservatoire.

      He became first oboist with the BBC Welsh Symphony Orchestra, but his musical career was cut short because of chronic stage fright. “The reason I stopped was terror,” he said. “I was plagued by nightmarish fears of letting everyone down.” Even as an academic, lecturing to large audiences was not his forte.

      The arts continued to play an important part in his life. In 1955 he married Kathleen – Kitty – former wife of Lucian Freud and daughter of the sculptor Sir Jacob Epstein. Godley was the model for Epstein’s statue of St Michael at Coventry Cathedral.

      Aged 27, Godley left the orchestra to become an analyst with Metal Box, before moving to the Treasury in 1956 as a forecaster. It was the high tide of Keynesianism and his work was described by Sir Claus Moser, then head of the Government Statistical Service, as “brilliant”. He became deputy director of the economics section before moving to the Department of Applied Economics at Cambridge in 1970, where he became a Fellow of King’s College and, in 1980, a professor.

      Yet by now he was out of tune with the times. He was snubbed by the Thatcherite establishment, which took revenge for his criticisms by cutting his research grant. Such was his intellectual strength, however, that he came through it all with his ideas undimmed.

      He divided his time between surveying the US, UK and global economic situation – of which he was a brilliant observer – and developing an alternative macroeconomic theory of how monetary economies function. Much of his analysis was based on stock/flow models of the US and UK economies. These are not forecasting models in the customary sense: rather, they are ways of tracking economies through the sectoral financial balance identities. He used these models to simulate a range of alternative futures, and then considered policies that might be appropriate over a medium-term horizon.

      He also wrote, with Marc Lavoie of the University of Ottawa, a book on macroeconomics that aimed to revive the tradition practised by the original Cambridge Keynesians, notably Nicholas Kaldor, combined with the theory of asset allocation pioneered by James Tobin.

      Godley had an extraordinary, powerful mind, but his lack of a strong formal training in economics bedevilled him throughout his professional life. Godley once described himself as having a sort of “verbal dyslexia” which caused him great difficulty in explaining to colleagues precisely what he thought, and was trying to do.

      Yet he knew exactly. He would take a vast spreadsheet of numbers, study them for sometimes hours at a time and then pronounce: “That figure is wrong,” stabbing at it with an elegant oboist’s finger. He was invariably found to be right. How did he know? The explanation, via his econometrician colleague Hashem Pesaran, was that he had what amounted to a full macroeconomic model in his head, which, by some sort of subconscious process, he computed.

      Wynne Godley is survived by his wife Kitty and their daughter.

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