The danger of unsecured swap lines to foreign banks is getting some press now. Again, there is incredible moral hazard here. The incentive for Euro-area banks to fund dollar obligations (and to loan dollars on favorable terms to their "preferred" clients) in a haphazard manner is there.
The Fed has a tremendous amount of faith in the established global economic structures. I agree with their moves, but the fact that the risks were not properly presented or addressed is troubling.
Europe's Growing Crisis Puts the Fed at Risk
BY JACK WILLOUGHBY
TO AID THEIR AILING COMMERCIAL banks, central banks in Europe have relied on huge currency swaps, borrowing nearly $400 billion from the U.S. Federal Reserve. But as European commercial banks and European currencies deteriorate, repaying all that money to the Fed is becoming ever more difficult.
"[Fed Chairman Ben] Bernanke's assurances aside, I don't see how they can easily be repaid," warns Gerald O'Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.