Yes, We Are Bailing Out Europe
Federal Reserve chair Ben Bernanke told Congress that the Fed would not bail out Europe.
But he might have been less than forthcoming.
Former Vice President of the Federal Reserve bank of Dallas, Gerald ODriscoll, says that the Fed is secretly bailing out Europe:
O’Driscoll wrote in a Wall Street Journal editorial:
America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
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The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The Fed isn’t bailing out Europe, they are bailing out US banks and prime broker-dealers who have the same trade on as MF Global. The two institutions that ended up with the rump of MF Global’s positions are Goldman and JP Morgan. US dollar swap lines maintain liquidity in these positions. Just as in the Mexican crisis, the Fed doesn’t bail out anyone but US money center interests.
Italian banks (broke) are taking their own loan documents ie loans made…. to themselves…,over to the Italian Government (broke) and obtain a guarantee (worthless) for the value of these loans. They then go up to the ECB (almost broke)and they (Italian banks) deposit these loan documents as collateral for a ECB’s 1% 3 year loan.
The Italian banks then take the funds and re-deposit them (again) back to the ECB at 0.25% interest.
This is now known as the “negative carry trade”.
The Italian banks are paying 1% and getting 0.25% interest for the same borrowed money.
What does that tell you about:
1.-Their sanity ?
2. their available investment opportunities ?
3. The opiniion they have of their cousin banks in France and elsewhere?
that….they prefer… losing 0.75…. than losing it all..to the cousin banks ?.
Meanwhile, Uncle bearded Ben stonewalls the US Senate and injects USDs into the ECB poison soup
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