A Fistful of Euros
This week, my congressional committee will hold a hearing to examine how the Federal Reserve bails out European banks, propping up spendthrift European governments in the process. Unfortunately, this bailout comes at the expense of American citizens, in the form of higher prices and diminished savings down the road.
A good analysis of the Fed's "swap" scheme first appeared in the Wall Street Journal back in December, in an article by Gerald O'Driscoll entitled, "The Federal Reserve's Covert Bailout of Europe." Essentially, beginning late last year the Fed provided US dollars to the European Central Bank in exchange for Euros − sometimes as much as $100 billion at a time. The ECB then funneled those dollars to European banks to provide liquidity and prevent crises from bank insolvencies. Since the currency swap was not technically a loan, the Fed did not have to embarrass itself by openly showing foreign bank debt on its balance sheet. The ECB meanwhile did not have to print new euros and expose the true fragility of big European banks.
The entire purpose of this unholy arrangement was to obscure the truth: namely that the Fed was bailing out Europe with US dollars.
But why is it the business of the Federal Reserve to bail out European banks that find themselves short of dollars to pay their dollar-denominated contracts? After all, those contracts often were hedges taken to protect banks against weakness of the euro. Hedges are supposed to reduce risk, but banks that miscalculate should suffer their own losses accordingly. It's not our business if the ECB chooses to create moral hazards by providing liquidity to European banks, but why should the Fed prop up Europe's bad decisions!
The Fed has promised to provide unlimited amounts of dollars to the ECB, should circumstances require it. It boggles the mind. Of course, when Fed officials first entered into these swap agreements with the ECB last September, they did so quietly. The American public only found out via websites of the ECB, the Bank of England, or the Swiss Central Bank.
The Fed already has pumped trillions of dollars into the economy since 2008, and US banks currently hold $1.5 trillion of excess reserves. So why don't American banks lend those excess trillions to European banks if they really need dollars? If US banks could earn 1 or 2 percent on those loans, they might just be interested. But they can't compete with the ½ percent interest rate charged by the Fed to the ECB. That's one glaring example of the harm caused by the Fed's ability to create money and loan it at below-market interest rates.
The Fed argues that these loans will be temporary, merely providing a little boost to get Europe over the hump. But that's what they thought a few years ago when such lines of credit to the ECB were set to expire, only to see the Fed reauthorize them. What happens if the European financial system collapses? Will the Fed be left holding a bunch of worthless euros? Will the ECB simply shrug and turn over the collateral it received from European banks, maybe in the form of bonds from Ireland, Italy, or Greece? Have the 17 individual central banks backing the ECB pledged their gold holdings as collateral?
The Fed has placed a hundred-billion dollar bet on the future of the euro, with the strength of the dollar on the line. This is absolutely irresponsible, and directly contrary to market discipline. Let private banks, European or otherwise, take their own risks. Let foreign central banks inflate their own currencies and suffer the consequences. In other words, it's time to apply market principles to banks and money.
Posted by GrandpaSpeaks on 03/31/12 11:18 AM
I hate the concept of "too big to fail" It stifles required evolution. The economy needs a doctor alright.
Posted by DwightMann on 03/28/12 09:00 AM
Why should Americans have to support the whole world? It is a sham, and most people just do not understand how the world has changed, in the way it works, even though they are waking up. . .
RP in 2012
Posted by Nightcrawler on 03/28/12 01:19 AM
Dr. Paul is educating the U.S. citizen. I hope his class listens.
Posted by winnybar on 03/28/12 12:43 AM
Have you noticed that Benanke, Volcker, and Greenspan all speak broken English? Bernanke is supporting the EURO which should have sunk like a ROCK while the US dollar would have skyrocketed and that would have saved America. Bush, Greenspan, and Bernanke worked 8 long years sinking the value of the Dollar and supporting the EURO. Bush like the Clintons and Bush I all broken English speakers. The EURO came in at 80 cents to the dollar in the Clinton administration. Get the picture. All of the above are Germany spies. More at Click to view link
Posted by bewer on 03/27/12 10:16 PM
Please join the Truth Attack!
Posted by Joelg on 03/27/12 08:46 PM
Dr. Paul, I would like to know the answers your hearings get: 1) "why should the Fed prop up Europe's bad decisions?" or 2) "Will the Fed be left holding a bunch of worthless euros? Will the ECB simply shrug and turn over the collateral it received from European banks, maybe in the form of bonds from Ireland, Italy, or Greece?"
Meanwhile I tackle paying taxes, having been informed that the IRS is saving money by making paper forms almost impossible to find (or print them at your own expense). And at the same time, they have added another layer of bureaucracy and more forms. Talk about a recipe to strangle the economy or make us all outlaws.
The irony of it all was that when Bush II instituted "advancements" such as warrantless wiretapping it was because all the regulatory forms and time would cost the government money and slow up government. If the same concerns had been shown for all the regulatory and bureaucratic barriers facing private citizens and businesses, this would be a much healthier and more prosperous country. I guess this is part of the quest for absolute control of absolutely everything by wanna-be absolute rulers.
At least have your hearings give us some perspective on what is going on: Like a pie-chart list of all the bailouts that the U.S. taxpayer has funded via the Fed. So we could see what percent is Europe, etc. Shining the spotlight, however briefly, on murky goings-on at the Fed would be a true public service. I think we are entitled to a little truth. Thank you, and good luck with the hearings.
Posted by mully on 03/27/12 08:37 PM
Dr Paul was our great "white hope". That hope is now vanquished in his defeat.
Perhaps all is not lost; at least many more people now that know about the abuses of government will one day prevail because of the knowledge Dr Paul has made us aware of. Perhaps there will one day be an America that is less fettered to Big Brother. I don't think I'll see it in my lifetime though.
Thank you Dr Paul, Daily Bell, and Lew Rockwell for the education.
Now I will get back to my preparations. Ha ha!
Posted by earnst on 03/27/12 07:23 PM
Nice rant but this isn't the forum for it. Your preaching to the choir.
Posted by rossbcan on 03/27/12 06:44 PM
"Just stop voting already. No point participating in this joke any longer. "
I have come to believe (backed by research), that just like (voluntarily) signing a tax return, voting is interpreted as "consent", for whatever THEY choose to do, or happens.
Is that your intent, when you "voluntarily" do these foolish things?
Posted by Edgar Friendly on 03/27/12 05:04 PM
Ron Paul can't save the country. He cannot even get honest election results. It is up to the people to assert themseleves and implement retribution for NAFTA,GATT the Fed Reserve destruction of our economy..if the lazy, fat, insolent imbeciles in America do not throw off the yoke of MSM manipualtion and revolt, freedom for humanity is lost, this is the imminent situation. From my perspective, there has been much internet information about the US breaking up into various socio-economic blocs; this would seem a natural progression from the economic sabotage currently having great sucess aided and abetted by the O Filtha administration, like bush and clinton before...
Anybody recall Thomas Wolfe's "Bonfire of the Vanities?" the media sensationalism and racial baiting in this Treyvon situation in Florida closely mirrors the story line of the novel and subsequent movie with Tom Hanks and Bruce Willis.
Posted by flying_pig on 03/27/12 12:27 PM
Just stop voting already. No point participating in this joke any longer.
Posted by Merridth80 on 03/27/12 08:04 AM
Dear Dr. Paul:
I know that what you say is the truth!Our Country went from World Creditor to World Debtor in what 20 yrs?
I think we should vote out all politicians, this system is not working for a variety of reasons! No Politician has told us the truth from the top down, BHO/Soetoro to the least of our congress people. Including, you, Dr. Paul! I thought you were in it to win top seat. I understand, now, you were in it to win it for your Son! I'm so glad you respect your family, But this Country needs YOU, now!
There doesn't seem to be a Dark Horse comming out of nowhere!
Posted by amanfromMars on 03/27/12 12:39 AM
Crikey, Ron, how very odd that you do not see and recognise the obverse ... ... . that the greater fear is holding too many dollars which are rendered as a ponzi mountain of worthless printed paper whenever they are realised as being worthless printed paper being used to buy up title to anything and everything.
Although to be fair, such is the magic of any fiat currency/suitcase full of cash. Whenever the "problem" is systemic, is the secret to use it purchasing power better and secure the intelligence which will ensure that it survives and prospers rather crashes and burns with everyone knowing about the great deception which controls them with the invention of crippling imprisoning debt from instant free credit.