Why didn’t the Fed release a statement on the dollar liquidity bailout?

September 16, 2011

Felix here. I’m about to head out of town for a couple of weeks, on a mini European tour. I’ll try to check in occasionally, but I’m not sure how often that’ll be, so I’m experimenting with guest postings. With any luck, there’ll be some fabulous stuff coming up from Mark Dow and Barbara Kiviat. But also, I’m trying to take advantage of all the great blog posts that Ryan McCarthy is finding as he edits Counterparties. The idea is that if we find something wonderful, we’ll ask if we can reprint it, while linking back to the original. Edward Harrison has already said yes, so here’s his post today on the Fed. Enjoy!

By Edward Harrison

Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I haven’t been active on the e-mail chain, but I did find some of the commentary interesting.

I had a few comments of note I wanted to address, but here’s why I am writing this post:

“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.”

When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).

I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.

Here’s what’s happening:

  1. European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.
  2. In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.
  3. Even so, the ECB has now been forced because of the wholesale market bank run now ongoing in Europe to go further. In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks.
  4. But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.
  5. Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.

If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen. And that means, European politicians need to get that rabbit out of the hat soon because things will most certainly continue to deteriorate.

P.S. – It is now 154PM EDT and the Fed press release is STILL not there. You would think they would issue a press release if this really were a coordinated effort, right? Check here.

Comments
11 comments so far

The lack of any release adds credence to my theory that the powers that be want nobody to look too hard at the US situation. Worse fundamentals than the EU, a currency currently at lows against the Euro – despite the current onslaught of speculation and speculators trying to drive down the value of the Euro, and a nasty edge to US right wing politics that cuts the hand that wields it as well as the hopes of those it attacks. I wish it weren’t so, the world needs a strong US.

Posted by FifthDecade | Report as abusive

Dear CLUELESS Ed Harrison:
The current swap program was announced by the fed on june 25, 2009, then extended twice for a year on may 9, 2010 and june 29, 2011, and so is operative until august 1st, 2012. The recent announcement by foreign central banks merely give a schedule for 3 auctions. THERE IS NOTHING NEW TO ANNOUNCE.

Posted by alea | Report as abusive

Dear RUDE alea,

My friend wrote: “since the swap was already in place and would make no statement.”

I wrote “Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way.”

If you actually read the article instead of making rude comments, you would see I have addressed that issue about the lines being in place AND extended TWICE.

Edward

Posted by edwardnh | Report as abusive

So basically you are bitching about the fact that the FED is not re-announcing an old swap facility? Is that how we should read your article?

Posted by Danny_Black | Report as abusive

The point of the article completely is that this ‘ccordinated policy trumpeted by Europe and feted by markets with a good size rally was a non-event. The Fed did not issue a press release because they don’t have to.

“the other banks are just a cover.. This policy didn’t have to be announced this way. It was only to calm markets and buy time.”

Posted by edwardnh | Report as abusive

The point of the article completely is that this ‘ccordinated policy trumpeted by Europe and feted by markets with a good size rally was a non-event. The Fed did not issue a press release because they don’t have to.

“the other banks are just a cover.. This policy didn’t have to be announced this way. It was only to calm markets and buy time.”

Posted by edwardnh | Report as abusive

Ok sorry, been conditioned to article complaining that the Fed is doing some super secret “bailout” that turns out to have been announced on their page.

Anyway given how much the press adds to the volatility of the current markets by distorting noise into some sort of hypothetical signal it is good to see it go the other way.

Posted by Danny_Black | Report as abusive

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