Sat Apr 2nd, 2011 at 08:09:42 AM EST
Mike Norman Economics: Foreign institutions were the biggest borrowers from the Fed during the financial crisis
New disclosures that come out of a recent Freedom of Information Act ruling shows that during the height of the financial crisis the Fed lent billions of dollars to foreign institutions.
The data shows that the Fed's discount window was accessed heavily during the Lehman crisis back in October 2008 and through the spring of last year. Two of the biggest borrowers were the European bank, Dexia SA, which took $26.5 billion in a single day and Depfa, a subsidiary of German Hypo Real Estate Group. They borrowed $24.6 billion.
So basically the US Fed rescued a couple of large European banks from their own stupidity by opening the discount window to them during QE1.
Let's unpack that statement a bit.
- The US Fed - a foreign institution which has no responsibility to ensure European financial stability - is doing more to stabilise the European banking system than the ECB, which does have a responsibility to stabilise the European banking system.
- At least two major European banks were running dollar carry trades that would have blow up in their faces during the Lehman Panic, if the US Fed had not generously extended rediscount facilities to these banks (which, remember, are not the Fed's problem).
- The ECB apparently did nothing to kill these carry trades, nor to accumulate hard currency reserves matching the European banking system's foreign currency liabilities. In other words, had the Fed not rescued our banks from their own stupidity, the ECB would have been unable to prevent a ForEx panic. This despite the fact that the is probably overvalued (we have balanced foreign trade in the middle of a serious depression, which probably indicates that our structural trade balance is in deficit).
To sum up, the ECB seems to prefer uncontrolled currency panics to controlled devaluation on its own time table.
I can haz a central bankster who understands central banking?