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Home Publications Blogs Beat the Press Did Political Considerations Affect the Fed's International Bailouts?

Did Political Considerations Affect the Fed's International Bailouts?

Monday, 24 February 2014 06:09

The NYT's article on the Fed's decision to enter dollar swap agreements with other central banks at the peak of the financial crisis in 2008 strangely did not ask this question. The piece notes that swap lines of credit had been extended to Mexico, Brazil, South Korea, and Singapore. It also points out that several countries applied for lines of credit but were turned down.

The article asserts that these decisions were made exclusively over concerns about the impact of these countries' problems on the U.S. economy. While this could be true, it is also possible that political considerations played a role. It would have been interesting to know if the State Department played any role in the decision on the countries to which the Fed extended credit. It's strange that this question is not raised.  

Comments (5)Add Comment
Politics in economic policy?
written by jonny bakho, February 24, 2014 6:51
Policy, economic or otherwise, is acting on values. The values of our governing elites influence policy more than academic debate.

The Republicans are a tribal party: Us Vs Them. That means you reward friends and punish Them.
-jonny bakho
State should have weighed in
written by Dave, February 24, 2014 7:18
If the State Department didn't have a say it would be surprising. They certainly should weigh in on such decisions.
written by kharris, February 24, 2014 12:08
Strange that the question was not raised? Nah, not really. I think what you mean is that you wish it had been raised.

Coverage of the fuller 5-year-delayed version of FOMC minutes is largely based on what's in the newly released transcripts. It would be strange if, in the first reading of the transcripts, some random unanswerable question had been asked. Unanswerable, because from the Fed's point of view, the transcripts already contain what the Fed is willing for the public to know. Unaswerable from the State Department's point of view because, well, it's the State Department. The question is random from the point of view of reporters doing the writing because there are lots of similar questions that could be asked from any number of perspectives. To have asked only the one you want, especially when there will be no answer, would be random.

If YOU want the question asked, go ask it.
I have a question ...
written by Squeezed Turnip, February 25, 2014 8:19
... why does kharris think that an investigative question is random? Does this show that the massive campaign to replace demand for actual journalism with acceptance of non-reflective (so called "non-partisan") echo-chamber chatter has gone quite well?

The l last time I checked journalists have a certain responsibility, and their readers have the right to them to that task.
Summary of capital flow problem / trade imbalance
written by Dave, February 27, 2014 10:10
Just a summary of things I've said before on the capital/debt imbalance with regard to the trade imbalance:

1) We have a bad trade deficit, largely caused by trade with China, which causes them to buy up our treasury bonds
2) At the time the housing bubble began to form, we had a large amount of savings in the US in the money markets looking for a place to go. If the Chinese hadn't bought our treasures, more of it could have flowed into there directly, but it isn't clear that this would have solved the problem, because of 3.
3) Shadow banking, AAA-rated MBS securities combined with using foreign banks as middle men allowed those excess savings from money markets to flow into housing, creating the bubble.
4) MBS securities always yield better than long-term treasuries, so once they got a AAA rating, they were preferred to treasuries anyway. The question is, what would have happened if we didn't have the huge trade deficit?
5) The answer to 4, I believe, is that treasury yields would have demanded a premium to equal the yield compared to the AAA MBS securities. When Greenspan lowered rates to the floor, mortgage rates didn't follow directly as they have historically done. Why? Because nobody believed rates could stay zero forever, but also, MBS securities aren't usually 30 years in term. People payout early, so you get a good rate without risking as much long-term as you do with treasuries (from future rate increases) and long-term bond yields factored in the belief that eventually they would be raised. Without increased spending and borrowing by the government, combined with a premium rate over MBS securities, the money would have continued flowing through foreign banks and into housing anyway.

So while the trade deficit exacerbates things enormously by creating a shortage of legal investments for money market accounts, and this same effect holds when the Fed buys too many treasuries, the money either just sits idle with no return or it searches for foreign, guaranteed investments that travel through the international banking system and sovereign borrowing agents.

The cure? Fix shadow banking, eliminate all government guarantees on MBS securities (except perhaps a tiny, non-distorting bit for poor people). Also, fix the trade deficit.

Once China becomes an international finance rival, we'll have no choice but to raise taxes significantly on the rich and to tone down private and public pension promises.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.