The Federal Reserve announced a $290 billion expansion of swap lines with foreign central banks today, adding facilities to acquire foreign currency in transactions with the British, European, Swiss and Japanese central banks. The move adds to the swap line of $300 billion created last fall to provide dollars to the same foreign central banks, and brings the total of such swaps run through the Federal Reserve to about $690 billion. I think there are some serious political questions related to these issues, but first I'd like to briefly discuss the recent developments and their context.
The move is another in the series since the spring and summer of 2007 when Bernanke began to use the Federal Reserve's capital accounts as a supplement to interest rate reduction in loosening credit. In the process Bernanke seems to be transforming the Federal Reserve system away from being a supplier of credit to the system and toward becoming the preferential supplier to a part of the system. This has been addressed byJames Hamilton, among others:
"The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. The whole purpose of these facilities is to redirect capital to specific perceived priorities. I am uncomfortable on a general level with the suggestion that unelected Fed officials are better able to make such decisions than private investors who put their own capital where they think it will earn the highest reward. Apart from that general unease, I have a particular concern about the motivation for the Term Asset-Backed Securities Loan Facility, whose goal is to generate up to $1 trillion of lending for businesses and households by catalyzing a revival of loan securitization. I grant that securitization was an enormously successful device for funneling vast sums into sundry loans. For example, securitization successfully turned 80% of quite shaky subprime loans into Aaa-rated assets. To put that in perspective, only five U.S. companies currently have the ability to issue Aaa-rated debt. So yes, a device that transformed weak loans into Aaa-rated debt was marvelously successful at attracting capital from all over the world into U.S. private lending."
I don't agree though, that the issue comes down to unelected officials versus the free markets, as Hamilton argues it does. I believe that the politically corrupt US system, which has been unable to agree on anything but short term so-called solutions to perhaps the deepest crisis it has ever faced, is being undermined by what used to be called corporatist or fascist technocratic administrative measures while the political institutions are distracted by dog and pony media shows. Bernanke, I think, has been using the $12.8 trillion ($42,000 per capita) facilities he has created (with Timmy Geithner) to undermine, restructure, and turn the Fed into a world central bank.
What Bernanke has been doing has caused some concern in Congress, and is going to produce hearings to take a look into what he has been up to. This activity has attracted support on both sides of the aisle. House Speaker Nancy Pelosi told Huffington Post on April 2nd that she is going to arrange hearings on the Fed's "authority" after the recess. The article identified other Congressmen involved. April 3rd, the Wall Street Journal's blog put out its own analysis. Since Congress has the power, through hearings and investigations, authorizations and appropriations, to decide what should be funded and how to fund it, the Fed's facilities appear to be doing an end run round the Constitution, both by creating the facilities themselves, and implicitly, attempting to commit the US to future indebtedness by extra constitutional and illegal methods.
Executive pay and bonusses have been elements of the dog and pony show. There are indications that the TARP program from last September is also part of the "dog and pony" show. While Congress has been tied up debating fine points, Bernanke has been pursuing an unparalled restructuring of US finance without interferencefrom anyone, no questions asked,on a far larger scale than even he and Paulsonasked for in their original 3-page enabling legislation draft, which was rejected by Congress. Doing it through the Fed has kept Congress out of the loop.
The restructuring is indicated by the transformation of the compostion of the Federal Reserve's balance sheet since 2007 and especially since September of 2008.
The Fed's Changed Balance Sheet
(from James Hamilton's econbrowser)
There is a discussion of these changes Hamiltons econbrowser site, where this graphic comes from, and is attributed to with gratitude, please do note the way the weirdly colored parts have been added since the end of 2007,and how this has meant replacing plain vanilla Treasuries and repurchase agreements (RP's) with the toxic crap so many have been so rightly exercised about. Bernanke says these positions will unwind themselves, others at the Fed say the Treasury will have to buy them. 'AIG' indicates the insurance company's derivative portfolio on what is counted as a "net basis". Maiden Lane I is the derivative portfolio of Baer Sterns. Otherwise these color swatches represent the Fed's facilities. There is thus some relationship between the balance sheet, as represented here by Hamilton, and the $12.8 trillion ($42,000 per capita) in activities extended through the facilities. So there is leverage, either through the gearing of a reserve multiplier, or through turn-over, and there is a committment to supporting banks' derivative, or toxic asset, exposure. Foreign exchange swap lines could be turned over daily for example. Maiden Lane and AIG could be leveraged 50 to 100 times because the Fed is only counting what it calls the net position.
There are 15 of these facilities. Here is a brief description of them provided by the Federal Reserve, with their names, who can participate, what the qualifications are, etc.
Of these 15 facilities, 11 are open to "primary dealers", and a sub-set of the 11 to depository institutions. The primary dealers are banks the Fed works with to buy and sell Treasury notes and bonds through auction. They are the interface with the creditors of the United States Treasury. The largest of these are well-known, China, Japan, oil producers, Russia, etc. There are 16 primary dealers. This list is from another PDF page provided by the Fed. 5 of them are domestic banks. The other 11 (Greenwich Capital was the US arm of Royal Bank of Scotland before that bank was nationalized.) Now the US banks might be bigger, but the foreign ones have got them out numbered.
Here is the cut and paste job:
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
NOTE: This list has been compiled and made available for statistical purposes only and has no significance with respect to other relationships between dealers and the Federal Reserve Bank of New York.
There will for sure be some who say this is an issue of the bailout and those darn foreigners taking advantage of our generosity and open-handedness. I don't think it is anything of the sort. Dollar toxic assets have been used to undermine the world and national economies, including those of US creditors. People like to look at the world as the sum of the parts that make it up, country by country, as if each were autonomous, with its own policy. But it is well-known that this is not true. It is quite evident that what we now call "globalism" used to be called "imperialism" or "colonialism", that what we call "free trade agreements" used to be called "imperial preference" and even that what we used to call the Global War on Terrorism used to be called "Gun Boat Diplomacy", especially as applied in Iraq, Iran and so on.
Bernanke seems to be trying to create a new round of financing for the US by reviving the methods of securitization which failed so spectacularly in 2007 and 2008. Geithner's part in this process was documented by the Washington Post last week. It is not generally remembered that in the summer of 1982, while Margaret Thatcher was dispatching the Royal Navy down to the Islas Malvinas to protect the democratic and British sheep from Argentina's dictatorial and militaristic torturing generals whose soliders were trained at the School of the Americas in Georgia, that Mexico, Argentina and Brazil, kind of defaulted, because they couldn't pay their debts. The US banks, starting with Citibank and Chase, lost more money that summer and fall than they had made in their entire earlier history. And that's why we have securitization.
Non-performing liabilities and assets were moved off bank balance sheets securitized and sold on to some on else. Bernanke is trying to reorganize the regime that came into existence under Ronald Reagan and Margaret Thatcher through debt defualt and war, and which has subsequently transmogrified through successive failures (S&L Crisis 1988-92, Second Mexican Crisis, Long Term Capital, Russian Default, Asian Crisis, Internet bubble), and military adventures like the first Gulf War, and in the process we got securitization, portfolio insurance, swaptions, off-balance sheet liabilities, synthetic derivatives, CDO's and CDS, and de-regulation. What they are trying to fix are previous fixes to what got broke 27 years ago at least.
At each of these "turning points" laws and regulations which were in place and had been ignored, were just pushed aside in favor of maintaining the appearance that everything would continue to be handled as it had been. In the absence of workable political soultions, adminstrative methods, extra-legal activities and corruption got strengthened. Bernanke has been involved with that since 1992, and Geithner from about the same time. I think the question is whether this is a country which should be run by a permanent caste of bureaucrats whose tenure and policies seem impervious to elections, or whether the country has some other, higher purpose, other than being a global empire and enforcer for a global financial power. I hope that further inquiry into this area where Bernanke and Geithner are working on behalf of the 16 primary dealers should help to shed light on such matters,