Rotten apples don’t make good cider
DDayen has a post today titled “central banks providing cheap loans to eurobanks”.
In his post he writes “That may be the right thing to do. A lot of European banks are tied up in US infrastructure investment and other US interests. In an interconnected financial world, there’s no way to wall off the European crisis from the US economy. Maybe the Fed is right to step in, along with these other central banks.”
I’ll differ and offer the following regards the difference (and remind everyone of the ‘swap lines’ the Fed already provided Eurobanks during the ‘meltdown’ of 2008 and which were ONLY discovered via the paltry ‘audit’ of the Fed).
Quoting Eschaton, “They Could Just Give Them Free Money”.
“In practical terms there might be lots of things stopping them, but I haven’t yet seen anyone say what exactly is wrong with the idea, other than traditionally central banks only give free money to large banks.”
This is the REAL key because of the domino effect such would have: “Fed again lending $ unsecured to the ECB to cap $ libor”. For those who do not know what LIBOR is, it’s the “London Interbank Overnight Rate”. And dollars to donuts -coming soon to a town near you- your credit rate (cards,adjustable rate mortgages,etc.) is is predicated upon it.
Quoting Warren Mosler, “It remains my position that Congress should not allow the Fed to lend unsecured to foreign central banks without specific Congressional approval.
But the Fed does currently have that authority and they are again using it to keep $ libor from rising.
And that lending must be in unlimited quantities to insure $ libor is capped at the Fed’s target rate.
The Fed doesn’t want $ libor to go up because many US domestic loans are indexed to $ libor,
including adjustable rate mortgages.
That’s why I’ve been proposing the Fed not let its member banks index loans to $ libor, but instead
let them index to the fed funds rate, or some other rate controlled by the Fed.
That would return direct control of US $ interest to the Fed, obviating the need to use unsecured (and unlimited) $US lending to foreign central banks.
By the way, when testifying to Congress the Fed Chairman states the lending is secured, with the Fed getting euro deposits as collateral. And he believes that.
However, the euros are on deposit at the European Central Bank, who is also the borrower of the $ from the Fed.
So if he ECB defaults on the $ loans, the only way the Fed could use those euros is by instructing the ECB to transfer them to another’s account so the Fed can buy the dollars it wants.
So what are the odds of the ECB even taking the call from the fed if they just defaulted on it’s dollar loans from the Fed?
And what can the Fed do if the ECB doesn’t make payment and won’t let the Fed use its euros at the ECB to buy dollars?
It’s like lending your dollars to someone in a far away land who uses his watch for collateral.
But he gets to keep wearing the watch, and he’s out of your legal jurisdiction.”
(from an email received)
Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan
The 1998-2001 budget surplus was the longest surplus since the 1927-1930 surplus. Coincidence?
“The conventional view serves to protect us from the painful job of thinking.”
John Kenneth Galbraith
The financial sector is a lot more trouble than it’s worth. BUT everything being discussed whether it’s ‘reducing the deficit’ or Obama’s ‘jobs’ program is subservient to that corrupt and ethically bankrupt sector of the economy.
UPDATED:I just came across this from the IMF ‘Chief’ Legarde reported in the Guardian(boy does the CMM journalism suck badly); “”Weak growth and weak balance sheets – of governments, financial institutions and households – are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment and job creation. This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction.”
She added that while governments needed to cut their own debts this should not be at the expense of growth, in a barely disguised warning to the US, the UK and other governments with slowing economies that they risked social unrest without more aggressive policies to tackle unemployment.
“I see a number of interweaving strands here – entrenched high unemployment, especially among the younger generation; fiscal austerity that chips away at social protections; perceptions of unfairness in Wall Street being given priority over ‘main street’; and legacies of growth in many countries that predominantly benefited the top echelons of society. These issues add more fuel to the confidence crisis.”
(click on ‘show more’ for the lyrics if you don’t understand what is being sung)