Monday, December 01, 2008

Bernanke's testimony

"...[currency] swap arrangements pose essentially no credit risk because our counterparties are the foreign central banks themselves, which take responsibility for the extension of dollar credit within their jurisdictions."

Essentially no credit risk? What "essence" comprises credit risk for these types of derivatives? He completely discounts the (low probability but still possibility) that the ECB dissolves. This is taking a rather myopic view based on post-communist history. I certainly hope he is merely pandering and selling the Fed's decision rather than completely misunderstanding the risks involved.

And, if there were any doubts regarding the continued politicization of the Fed, the following snippet will dissolve them:

"Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

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