In late November, Presidential candidate Ron Paul wrote an article accusing the US Federal Reserve of implementing a backdoor bailout of European banks through the lowering of swap-rates between its currency and the US dollar. On December 28th, a former Vice-President of the Dallas reserve bank joined in agreement with the Texas Congressman, and specified that the Fed did actually use its power to bailout European banks through its currency swap program.
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. – Wall Street Journal
The purpose and reasons the Fed used a backdoor scheme to provide funds and liqudity to European banks was primarily due to the political and legal ramifications they experienced after 2008, and the lawsuits that brought to light the trillions of dollars the central bank lent to Europe during the credit crisis. No longer able to hide behind a curtain of credibility and defensive statements such as "Such amendments, if enacted, would seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation", the central bank was forced to find alternative ways to provide cash and liquidity to banks outside its jurisdiction without the public, media, or Congress questioning any overt bailout attempts they may try to pursue.
Besides Ron Paul, now the debate over the Fed using its monetary power to bailout European banks has risen a notch with the accusations and validations of such an action by a former member of the central bank itself. Gerald O'Driscoll's assertions of the Fed's actions in late November show that Americans need to be vigilant on future policies that come out of the Fed in regards to any cooperation with Europe, or any other foreign banking interest.
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