As quite a few readers probably know, Brad Setser--then of RGE Monitor, subsequently with the CFR, and now working for the White House's National Economic Council--gave me my first break in blogging. Then, as now, we shared an obsession with China's trade relations with the United States. Hence, a guest post I did for him concerned my bread-and-butter material of Sino-American trade conflicts. Working for the White House, Dr. Setser is naturally more guarded in expressing his personal opinions nowadays lest his comments be misinterpreted as deviating from a tightly controlled line. The limited output we get from him like this post prior to the Pittsburgh G-20 is understandably supportive of Obama administration efforts. It is likely that we disagree on major points of American policy nowadays, but I learned a lot from him nonetheless. Hey, if arch-Chicago School doctrinaire Milton Friedman had Andre Gunder Frank of leftist "underdevelopment" fame as a PhD student, then I suppose I'm not much of a stretch.
I bring this up because, sometime ago, he had a somewhat famous post concerning "Where is My Swap Line?" in the aftermath of the onset of global financial crisis. If you will recall, the Federal Reserve extended swap lines to friendly foreign countries to help them deal with difficulties obtaining dollars. The Federal Reserve describes these "temporary reciprocal currency arrangements" with other central banks thusly:
We are of course nearing the first of February when these swap lines end. The gist of Setser's post was that, despite the onset of crisis, the United States, the only country in the world that can print dollars, still had a very important role in ensuring that mechanisms of global finance did not seize. Despite all the talk about America being a has-been you get from this and other blogs, America was still in a position to provide global public goods via relatively inexpensive access to dollars using swap lines. Or, at least to foreign central banks that were democracies on good terms with Washington.On December 12, 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets, and subsequently authorized dollar liquidity swap lines with additional central banks. The FOMC has authorized through February 1, 2010, the arrangements between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.
These swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.
Having provided you with perhaps more background information than you want to know, the Wall Street Journal now reports that these swaps--which at one time totalled $500 billion+--are going the way of the dodo unless these lines are renewed once more:
The Federal Reserve is on track to end a program begun during the financial crisis that provides U.S. dollars to institutions overseas through foreign central banks. In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1.
As of Jan. 20, the Fed held $1.25 billion in dollar "swap" agreements with foreign central banks, down from $63 billion in early September and $583 billion in late December 2008 as the financial crisis was worsening. Before the crisis, many foreign financial institutions depended on short-term money markets to borrow dollars to fund their holdings of U.S. dollar assets, like mortgage-backed securities. These markets froze when the crisis hit and many foreign banks and investors found themselves short of the dollars they needed to finance their holdings.
The central banks stepped in, with the Fed offering dollars to foreign central banks like the Bank of England and the European Central Bank, which in turn lent dollars to financial institutions in their local markets. The move helped to stem the credit-market panic. The Fed said in December it was "working with its central bank counterparties to close its temporary liquidity-swap arrangements by February 1." With the Fed's next policy meeting coming on Tuesday, Jan. 26th, and Wednesday, Jan. 27th, it is likely to formally announce plans to shut the program down.
Optimists will conclude that the credit crisis is ending because commercial lending in dollars worldwide is no longer in short supply. Perhaps; but pessimists like me naturally see America receiving its comeuppance somewhere down the line as the price for near zero interest rate policy to help make this happen. Speaking of which, maybe I should send the good Dr. Setser an e-mail to see what he thinks of Paul Volcker putting one over Geithner and Summers although I'll probably get a "no comment"!