Here We Go Again

Last week was that the Federal Reserve (along with other central banks) provided liquidity swap lines to European banks, allowing them to borrow U.S. dollars at the paltry rate of 0.5 percent interest. Oh that you and I had that opportunity.  The Fed received promises of euros as collateral. Let’s hope that the euro still exists when these lines come due.

The reason European banks seek dollars in the first place is that nobody wants to borrow euros now because of the risk to the currency. Accordingly, for all practical purposes, American taxpayers have made those loans, which allow European banks to make loans in dollars rather than in euros. If the loans succeed, the European banks reap the benefits.  If they don’t, we’re on the hook. Perhaps that is why the Fed’s announcementis written in language only a bureaucrat could love.

The Fed didn’t say how many U.S. dollars have been offered to European governments, but the last time transactions of this sort occurred, Fed swaps to Europe peaked at about $580 billion. In the meantime, as Bloomberg has reported, the Fed has also been providing banks all over the world – including major U.S. banks – with $13 billion in secret loans.

A Fed apologist might say that a global financial crisis needs to be averted and that, if the economy rebounds and the euro stabilizes, there will be economic growth and no losses to taxpayers. Yet in this best-case scenario, the European banks that helped create this mess get access to huge amounts of dollars for a mere half-percent courtesy of us and get to keep any resulting gains for themselves, while the typical American pays 4-20 percent interest to borrow, if we can get financing at all.  In the worst-case scenario, their losses accrue to us.

These actions by the Fed are said to pose little risk to the U.S. taxpayer because the foreign central banks with which the Fed is transacting business are deemed trustworthy.  Big borrowings.  Privatized gains.  Socialized losses.  Haven’t we heard that before somewhere?