“The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks. The FOMC has authorized increases in all of the temporary swap facilities with other central banks. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Sveriges Riksbank, and $60 billion by the Swiss National Bank. As a result of these actions, the total size of outstanding swap lines is $620 billion.
All of the temporary reciprocal swap facilities have been authorized through April 30, 2009.
Dollar funding rates abroad have been elevated relative to dollar funding rates available in the United States, reflecting a structural dollar funding shortfall outside of the United States. The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets. This should help to improve the distribution of dollar liquidity around the globe.”
From Brad Setser, “More extraordinary moves: $620 billion is real money, and it isn’t even for American financial institutions”, Council on Foreign Relations Blog (29 September 2008).
http://blogs.cfr.org/setser/2008/09/29/more-extraordinary-moves-620-billion-is-real-money-and-it-isnt-even-for-american-financial-institutions/#more-3826
Brad W. Setser is a Fellow for Geoeconomics on the Council on Foreign Relations and a frequent commentator on international economic and financial questions.
The Federal Open Market Committee is the key monetary policy setting committee of the Federal Reserve. In addition to setting U.S. monetary policy, the FOMC also has a key role, which it shares with the U.S. Treasury, in formulating U.S. policies regarding the exchange value of the dollar, and it intervenes in foreign exchange markets in support of that policy. The FOMC is, after the Joint Chiefs of Staff, the most powerful committee in the United States.
The revised and extended Treasury plan to end the financial crisis, known at Regent as Paulson’s Repackaged Pig, was voted down today by the House in a calculated gamble to improve its terms and avoid giving the government unprecedented powers over the nation’s financial sector. Part of the problem with the Pig was not only that its powers were enormous and the oversight useless, but that no one could say how much it would ultimately cost. The original $700,000,000,000 price tag placed on the Pig was a crude guess (Treasury spokeswoman: "We just wanted to choose a really large number.") and in some quarters a low one (one “financial genius” on Wall Street commented it was nowhere near enough; he called for $5,000,000,000,000).
After the no vote on the Treasury plan the stock market swooned, Paulson lost his temper, and Bernanke announced the Fed would prepare for the apocalypse by throwing another $630,000,000,000 at foreign central banks that acted as offshore banking centers for the U.S. After all, foreigners purchased a lot of risky dollar-denominated American bonds during the good years, and now those assets have collapsed in price and no dollars are left in the coffers of the foreign banks that participated in the fun of a booming market. So now that a downturn as set in abroad, the ever-ready Fed will re-fill their coffers with dollars in a swap arrangement whereby foreign central banks give us some of their currency and we give them some of ours. Needless to say, everyone is praying the real economy does not sink into a depression while Congress gets its act together and tries to produce a bill that focuses on really stabilizing the financial sector here and abroad.
Given its performance to date, one must ask the question, “What if Congress fails to deliver a bill?”
In the first instance, the Fed can on its own provide liquidity to the domestic economy the same way it is providing dollar liquidity to foreign economies. Assuming that the tens of thousands of banks scattered across the country do not want to go out of business by failing to extend profitable loans to solvent and operating companies, they will soon begin to do so on their own. Those that can’t because they have lost too much money will die, and the economy will be cleansed of banks and financial institutions that were heavily into toxic assets and should to go under for reasons of imprudent practices. Overall, the bloated financial services sector will be downsized and made far more efficient than it is today and the era of absurd executive salaries will come to an end, all without any intervention by Congress.
In the second instance, once the government stops trying to prop up prices for financial assets, as Paulson’s Pig tried to do, they will fall to some sensible, economically justifiable level. Housing prices were in a bubble, and it is good that they fell. Why is Congress trying to prop them up? Granted many have lost some of the value of their house but others will now find housing much more affordable. The middle class and the poor, for example, will be able to purchase better houses than they could in the past, and the need for the government to subsidize housing for the poor is reduced. What’s bad about that? Similarly, financial assets such as stocks are now cheaper and therefore more affordable than before. There is no reason to believe that the stream of income they will produce in the future had changed. The same or better return on a cheaper asset. What’s bad about that (at least for the young, who did not suffer the recent capital losses)?
In the third instance, whether a bill in Congress is passed or not makes no difference whatsoever to the fundamentals of the U.S. economy. It has today and will have tomorrow the same labor force with the same skills and experience as it had yesterday. Its commercial buildings, factories, and the equipment and furniture in them are and will be the same as yesterday. It has the same natural resources and capital infrastructure as yesterday. It has the same entrepreneurial skills and management abilities as yesterday. And it has the same networks of domestic trade and international commerce as yesterday. Nothing of fundamental importance has changed and nothing of fundamental importance will change, Congressional bill or not.
In the end, it does not matter if the government spends a trillion dollars to “rescue” the financial sector at home and extends another trillion dollars to foreigners to “rescue” their financial institutions. It is, literally, merely money. The bailouts will be helpful if and only if they allow us to make the adjustments necessary to establish a viable economy, one that provides jobs and incomes that lift people economically in a way they regard as fair and equitable to all. It is not at all clear that the bill in Congress would accomplish that.
Bailout or not, if we suffer an economic setback we have the ability and experience to recover and regain prosperity at home and our position in the world. It depends on us, not Congress, and certainly not this bill.
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