Saturday, May 08, 2010

Central Bank Swaps

There are rumors about concerning the Fed and the possibility that it may open foreign currency swaps with other central banks.

I have raised this issue many times on this blog, specifically here, here, and here.

AGAIN, I sound the alarm: The Fed is going to take on enormous foreign currency risk WITHOUT AUTHORIZATION FROM CONGRESS. This alone might be pause for concern, but there is also the issue of oversight on the back are the dollars from the swap agreements going to be used and what assurances concerning their use are given by the ECB? This is no mere swap between small market players where counter-party risk can be managed. We are discussing Central Banks taking massive, potentially destabilizing, risks in the name of stopping "contagion".

This will be labelled "coordination" or some equally innocuous term by Central Banks, but this is incredibly dangerous and the fact that there is no official oversight of this activity, or a hurdle that activates congressional involvement (say, 100 Billion. Anything above that requires other eyes besides the cloister of the Fed examining the deal) speaks a great deal about how powerful the Fed has become. A banks that was formed to promote economic growth and provide price stability to the United States currency now sees fit to perform global economic rescues without direct authorization from any branch of the U.S. government.

Let me make clear I have no problem actually providing this swap - if the U.S. can benefit from its position as provider of both physical security AND financial security, it will remain in the most enviable of positions. However, the process and lack of risk disclosure is worrisome.

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