Fed Says It Can't and Won't Provide Bailout Funds to Support European Banks
Federal Reserve Chairman Ben Bernanke told Republican senators on December 14, 2011, that the Fed can't and won't provide bailout funds to support European banks or nations, lawmakers said. "We're all concerned, is the American taxpayer going to be bailing out European nations and banks," Senator Lindsey Graham told reporters after a meeting with the Fed chairman. "He said, no, he doesn't have the intention or authority to do that," Graham said. [Source]Central Banks to the Rescue?
November 30, 2011CNBC - The attempt by major central banks to ease strains on Europe's credit markets certainly cheered financial markets on Wednesday, but what does the coordinated action actually do?
In essence, the US central bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank -- which can then provide cheaper dollar loans to cash-strapped European banks. (For a fuller explanation of how the ECB borrows from the Fed, click here.)
The participation of the central banks of Canada, England, Japan and Switzerland is more of an effort to show that all the central bankers are working together than any expectation that there will be lots of dollar borrowings under their facility.
The goal is to ease the credit crunch in Europe. Lots of European banks make dollar denominated loans, in part because US interest rates are so low. The banks do not usually finance these loans in the way you might think -- by lending out the deposits of their retail customers. Instead, the loans are financed by short-term borrowings from other financial institutions.
When European banks make a dollar loan or purchase a dollar denominated asset, they typically borrow the dollars on the what's called "international wholesale deposit market" -- which is a fancy word for borrowing from other banks that have dollars. Alternatively, they can borrow in their native currency and then use foreign exchange swaps to hedge the currency risk.
Now that Europe is in the throes of a debt crisis, it has become much more difficult if not impossible for many European banks to borrow dollars in the wholesale markets. To make dollar loans, then, they have to turn to the European Central Bank. What's more, the cost of the foreign exchange swaps has increased, making it more expensive to make dollar loans based on euro assets.
Normally, central banks only make loans in their domestic currencies. But in times of international stress -- the credit crisis of 2008, for instance- - central banks around the world set up swap lines that allow them to borrow from each other, creating the ability for them to make loans in other currencies.
In short, European banks were finding it too expensive to make dollar loans, which hurt their ability to lend dollars and encouraged them to sell euros. This depressed the value of the euro and restricted credit in Europe. The ECB arranged to borrow dollars more cheaply from the Fed, so it could ease this market.
So was this some giant giveaway to profligate Europeans of US taxpayer money?
Not quite. In the first place, European banks are major lenders to the US corporate market. When they cannot participate in dollar loans to US companies, US credit also contracts. What's more, these are loans to the ECB, which is unlikely to default. Finally, the Fed isn't lending out "taxpayer dollars" at all. Rather, it is lending out newly created dollars at very low interest rates.
That doesn't mean that US taxpayers are not risk here, of course. The new dollars have the potential to spark inflation -- which could result in higher interest rates and higher taxes as the government combats inflation. But in the current economic environment, the risk of inflation is very slight.
"Banks lend by creating credit. They create the means of payment out of nothing." -- Ralph M. Hawtrey, former Secretary of Treasury, England
"Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon." -- Robert H. Hemphill, former credit manager, Federal Reserve Bank of Atlanta
"Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back." -- Sir Josiah Stamp, former President, Bank of England
"The Founding Fathers of this great land had no difficulty whatsoever understanding the agenda of bankers, and they frequently referred to them and their kind as, quote, "friends of paper money. They hated the Bank of England, in particular, and felt that even were we successful in winning our independence from England and King George, we could never truly be a nation of freemen, unless we had an honest money system. Through ignorance, but moreover, because of apathy, a small, but wealthy, clique of power brokers have robbed us of our Rights and Liberties, and we are being raped of our wealth. We are paying the price for the near-comatose levels of complacency by our parents, and only God knows what might become of our children, should we not work diligently to shake this country from its slumber! Many a nation has lost its freedom at the end of a gun barrel, but here in America, we just decided to hand it over voluntarily. Worse yet, we paid for the tyranny and usurpation out of our own pockets with "voluntary" tax contributions and the use of a debt-laden fiat currency!." -- Peter Kershaw, author of the 1994 booklet "Economic Solutions"
"The real truth of the matter is, and you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson. History depicts Andrew Jackson as the last truly honorable and incorruptible American president." -- President Franklin Delano Roosevelt, November 23, 1933 in a letter to Colonel Edward Mandell House
"The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy." -- Pringle, Robert; and Deane, Marjorie: The Central Banks; Viking, 1994, page viii.
"When you or I write a check there must be sufficient funds in our account to cover that check, but when the Federal Reserve writes a check, it is creating money." -- Boston Federal Reserve Bank in a publication titled "Putting It Simply"
"Some people think the Federal Reserve Banks are U.S. government institutions. They are not ... they are private credit monopolies which prey upon the people of the U.S. for the benefit of themselves and their foreign and domestic swindlers, and rich and predatory money lenders. The sack of the United States by the Fed is the greatest crime in history. Every effort has been made by the Fed to conceal its powers, but the truth is the Fed has usurped the government. It controls everything here and it controls all our foreign relations. It makes and breaks governments at will." -- Congressman Charles McFadden, Chairman, House Banking and Currency Committee, June 10, 1932
".. We conclude that the [Federal] Reserve Banks are not federal ... but are independent, privately owned and locally controlled corporations ... without day to day direction from the federal government.." -- 9th Circuit Court in Lewis vs. United States, June 24, 1982
"... You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out." -- President Andrew Jackson, upon evicting a delegation of international bankers from the Oval Office"Give me control over a nation's currency and I care not who makes its laws." -- Baron M.A. Rothschild (1744 - 1812)
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