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Tuesday
Jan032012

Former Fed Vice President Tells CNBC That Bernanke Is Secretly Bailing Out Europe

CNBC Video - Gerald O'Driscoll - Dec. 28, 2011

O'Driscoll is the former vice-president of the Dallas Fed and is currently a senior fellow at the Cato Institute.  Below is an excerpt from his WSJ op-ed.

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WSJ

By GERALD P. O'DRISCOLL JR.

The Federal Reserve's Covert Bailout of Europe

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

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Reader Comments (5)

Bernanke is as devious as Obama and must go! We need transparancy in our government as much as we do in the private sector or Washington will never be made whole. Politics is now all about money and it can never work to the benefit of our country as a whole unless that is changed. While the FED operates independently of Congress, it is obvious that there is collusion with certain segments of our elitist lawmakers and that too must change if we are to salvage this country.
Jan 3, 2012 at 2:30 PM | Unregistered CommenterCraig
This latest in furtive Fed bailouts was not only predictable, but predicted, right here:

http://dailybail.com/home/senators-say-bernanke-promises-fed-wont-bailout-europe.html ("So when [Bernanke] says the U.S. won't ball out Europe, that means the U.S. bailout of Europe with American cash has already started.")
Jan 3, 2012 at 2:59 PM | Unregistered CommenterCheyenne
This is the "new year's better communication" by the Fed. It's the Fed talking down long-term interest rate yields 4 times a year now.

http://www.washingtonpost.com/business/policy/fed-minutes-show-policymakers-will-start-forecasting-direction-of-key-interest-rate/2012/01/03/gIQAEREbYP_story.html?hpid=z3
Jan 3, 2012 at 2:59 PM | Unregistered CommenterSuperman
Well said, craig.
Jan 4, 2012 at 12:40 AM | Registered CommenterDailyBail
Bernanke isn't bailing out Europe.
He is bailing out his European Bankster buddies.

I hope you understand the difference.
Jan 5, 2012 at 11:57 PM | Unregistered CommenterFliteShare

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