Fed, BoC, and Other Central Banks Ready To Save Europe

Fed, BoC, and Other Central Banks Ready To Save Europe
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It was only a matter of time:

(Reuters) – The world’s major central banks acted jointly on Wednesday to provide cheaper dollar funding to European banks facing a credit crunch as the euro zone’s debt crisis drove EU ministers to urge more IMF help to avert financial disaster.

The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilize global markets in the 2008 financial crisis after the collapse of Lehman Brothers.

Since Germany’s Supreme Court ruled against letting the ECB turn the euro spigot on high without the approval of German’s parliament, the rest of the developed world will be forced to come to the rescue.  What that really means is taxpayers will foot the bill for another big kick of the financial can down the road.  As Mises wrote:

The assistance of inflation is invoked whenever a government is unwilling to increase taxation or unable to raise a loan; that is the truth of the matter.

With bond yields in Euro zone countries creeping upward and outbursts of social unrest due to higher taxes and cuts in welfare spending, the last resort of currency devaluation is being employed yet again.   To paraphrase investor Marc Faber on the mindset of Keynesian central bankers, the solution is always to print money and if that doesn’t work, print more money.  The global currency race to the bottom is as fascinating to watch as it is demoralizing.

  • James E. Miller

    @ Lee

    The Mystery of Banking is on my list too! But from what I have read, all that is happening is the Fed and the other central bank made cheaper for banks to borrow dollars. The extent that money printing increases and enters the economy depends on the demand for dollars. PIMCO's Tony Crescenzi explains a bit:

    "Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing."

    While the base does increase, that doesn't mean said dollars enter into the economy right away as they can be stashed at the Fed as excess reserves.
    The bigger deal I think (because we all know where the dollar is going in the long run) is China reducing banking reserve requirements by 50 basic points after they have been hiking said requirements for the past few years to unsuccessfully head off inflation.

    The coordinated action is more of a show to boost markets but it has greater implications as it shows that when push comes to shove, the solution by those in charge will always be money printing or the enabling and guarantee of money printing. The scary thing is that it is all being coordinate on a virtual global scale now.

    Anyone can correct me if I am wrong as I admit I am no expert on finance.

    • James E. Miller

      Correction, that should have said "is the Fed is making it cheaper for foreign central banks to borrow dollars from it."

      Also, this article explains the whole situation well:

      • Lee

        I think when I was reading the articles, I kept getting hung up the swaps (which didn't translate as money printing to me) and didn't see the part about lowering the cost of borrowing money

        thanks for the explanation and link, it was very helpful!

  • Lee


    I've been seeing many articles about this, but unfortunately I don't have a string enough understanding of the banking system to see what exactly this means (one day I'll get to 'The Mystery of Banking'). I read some articles that talk about agreements on currency swaps, but none of them explained what currency swaps really were, or what it meant.

    is there a simple way to explain what the agreement means in terms of how more money gets printed (especially in terms of what the bank of Canada is going to do)? I keep getting that impression from everything I read… I just can't seem to be able to explain why (even to myself, let alone others!)


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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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