Alan Grayson: "Where is the half a trillion dollars the Federal Reserve lent to foreigners?"

I found this exchange intriguing. First, the unflappable Bernanke looks stressed. I can’t put my finger on why, but the Congressional attacks seem to be getting to him. Second is the stunning lack of candor as to why the dollar swap lines were put in place, that there was massive dollar deleveraging happening. It would not be hard to paint a picture as to why letting that proceed without the Fed intervention could have had very bad consequences for US citizens. Or to say the offshore market for dollar based funding does affect US rates via arbitrage, that everyone including the Fed is now in an awkward position because markets have grown beyond national boundaries, but the market for dollar borrowing is now effectively global and involves a lot of non-US players. That would have been simpler and avoided what might be perceived as scare-mongering (even though that time was scary).

Instead, Bernanke basically stonewalls and refuses to offer reasonable explanations. Not sure if he is treating the Congress as stupid or not entitled to know, but he backs himself into a real whopper with his non-defense defense (see 2:55 to 3:20).

Update: I see from some of the comments that there might have been some misunderstanding or lack of clarity in my drafting. The Fed had nothing to hide here. The reason for implementing dollar swaps lines isn’t that hard to explain and were quite legitimate. Of all the things the Fed has done, this one is where there is nothing to be gained by not being forthcoming. Yet Bernanke’s answer was vague and he denied that the spike in the dollar had to do anything with the swap lines. Of course, teh causality runs the reverse way: the deleveraging led to very high demand for dollars, and the Fed was intervening to alleviate that, but saying the two had no relationship to each other is simply untrue.

It would have been tactically smart for Bernanke to be forthcoming on a line of questioning where he had nothing to lose.

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  1. Dave Raithel

    I'm not here to defend Bernanke, but Grayson's use of "hand out" is fraudulent. Swaps are not hand-outs, and I doubt that New Zealanders each got a check for 3 grand. To counter perceived bad monetary policy with phony populism or oblivion to global economics, in my book, gets no more respect than Bernanke's stonewall.

  2. Anonymous

    He got euros for every dollar – cost us nothing but the exchange rate risk…

    On which he is now getting killed.

  3. jck

    Grayson comment regarding New Zealand is particularly idiotic since swaps with the NZ central bank were never activated and had 0 oustanding as of december 31 2008.
    Certainly, Bernanke could easily have made Grayson look like the moron that he is.

  4. Steve

    It's really comforting to see a moron of this magnitude in the House — doesn't he have a staff hired at taxpayer expense to explain to him what a swap is? Why are people like this writing our laws, instead of managing an IHOP?

  5. Richard Smith

    Grayson seems to think a swap line is a loan. I think Bernanke is flummoxed by the idiocy of the question. Me too.

    Now, the non-US beneficiaries of AIG's bailout-dependent claims paying ability: that would be an interesting one.

  6. tchok13

    2 questions:
    If the exchange rate is set on both ends, isn't there no actual risk?

    If the FOMC cannot loan or invest the corresponding foreign currency, does that not limit credit lines state side?


  7. Minh

    On Mr Bernanke job prospect, the BBC has an interesting article today.
    I guess his mind is made of steel. And if I may add a comment on the BBC article, it is illadvised to change a general while the battle is still ongoing. The strategy that Mr Bernanke is implementing may be successful if the money he pumped in the banking system can be pumped out on the right moment.

    Another person with less objectivity and mathematical skill may screw up the required next operation of this strategy, so far have been proven to work rather well.

    So let's see what/who is coming to the FED in January.

  8. Anonymous

    I don't think Bernanke looked stressed exactly…more like a combination of bored & exasperated.

    It's tough to give answers to questions when your most apt answer is either: You, sir are an idiot. or a lengthy remedial course in international monetary policy.

    Grayson is trying to make something out of an issue he doesn't understand at all & Bernanke can't tell him so.

    Bernanke decides to go along with Grayson's superficial understanding of the subject & keep the debate at the low level…which is why he characterizes the appreciation of USD at the same time as the swaps as a coincidence. I think that is a valid description of the situation from someone who doesn't want to describe exactly what the relationship might be because he doesn't think his audience (Grayson) will understand. Kind of like the way we tell kids that babies are in fact, yes, brought by storks.


  9. Uncle Billy, Mental Widget

    What is the relationship? And more interesting — who made a killing on the arbitrage?

  10. Minh

    @IM Ben had havested the profit that some one like Soros may have planted.
    It's safer to say it's a coincident. :-)

  11. Anonymous

    I thought Grayson understand economics a bit better. However, at least he reads the report which is more than most of the other lawmakers do. I wish he picked on another subject than these swaps. The Fed should be abolished all together.

  12. Anonymous

    There's effectively zero risk for the Fed in central bank currency swaps, as long as the Fed does not use and lose the foreign currency.

    The Fed gets X amount of foreign currency and gives out Y amount of USD to foreign central bank. The Fed returns the same X amount of foreign currency and receives the same Y amount of USD from foreign central bank.

    Any change in foreign exchange rates has zero impact as long as the Fed does not use and lose the money. Only if the Fed is out of foreign currency and has to use USD to buy foreign currency to settle the swap then there's an impact.

    The only real risk to the Fed is if the foreign central bank uses and loses the USD, implodes, and no longer has the authority to print money to buy USD to settle the swap.

  13. LeeAnne

    Bernanke is too clever by half. Grayson and he deserve each other.

    Earlier, when another questioner asked Bernanke about exorbitant overdraft charges in the context of consumer protection, obviously way below Bs pay grade, the snake slithered that companies would be required to show better earnings to protect the public.

    Last time I looked that subject is about protecting investors.

    He has the demeanor of someone who just shot himself up with demerol.

  14. Mao

    I'm not sure about the swaps to the ECB, but in Asia, I think the swap lines made open from the Fed to, for eg. the Korean central bank, really helped to settle the markets here. The won was seriously weak, at about 1500 KRW/USD vs the pre crisis rate of 1000 KRW/USD, and this was because, as Bernanke says, USD was in really short supply due (I think) to risk aversion and dollar hoarding. There was a lot of concern over Korea's ability to pay back its foreign USD denominated debt. Korea might have gone into a financial and currency crisis if (among other measures) the swap lines had not been opened. I don't think they were fully drawn down, but they added psychological support. If they had not been opened, and Korea had gone into financial crisis, I think the risk of contagion to other Asian economies would have been very serious. I'm not sure Grayson and perhaps other US senators recognise the systemic risk at the time — not in the US necessarily (that was separate), but also in global financial markets, in which the Fed plays a role due to the USD's status as reserve currency for many Asian central banks. I'm not sure that argument holds for Europe, but the swap lines were definitely important for Korea at least.

  15. Anonymous

    Steve said
    "It's really comforting to see a moron of this magnitude in the House — doesn't he have a staff hired at taxpayer expense to explain to him what a swap is? Why are people like this writing our laws, instead of managing an IHOP?"

    But they are managing an IHOP…granted a gigantic one but an IHOP nonetheless…no?

  16. Edwardo

    I agree, Bernanke wasn't rattled, he was bored and likely frustrated by the plethora of inane questions. Doesn't anyone up there know how to properly stick it to him, for *%@!'s sake?

    For some reason, self appointed financial guru Karl Denninger thinks Representative Grayson is great. Karl, wherever you are, you really need to rethink, your man crush on Grayson, because, if he were, in fact, so stellar, he would have, as others here have suggested, picked a better topic to discuss and he would have done so with a semblance of understanding.

    Rep Grayson might also have avoided committing the most embarrassing mistake of all which is asking questions that one does not already have the answer for, and that do not, in any event, advance one's case.

    To wit: Grayson stupidly asked:

    Who gave you the authority (to make the swaps)? Congress gave them the authority!

  17. Anonymous

    Steve said
    "It's really comforting to see a moron of this magnitude in the House — doesn't he have a staff hired at taxpayer expense to explain to him what a swap is? Why are people like this writing our laws, instead of managing an IHOP?"

    But they are managing an IHOP…granted a gigantic one but an IHOP nonetheless…no?
    As in "I hop" to Goldman's Tune, you hop to Goldman's tune, they hop to Goldman's tune etc…..

  18. Anonymous

    Perhaps Grayson is a ringer. I mean, just look at his tie. Yeah, Ben always looks medicated, not dopey like George, just kinda elevated, like he's a f*cking hologram.

  19. VG Chicago

    As one very familiar with the lands where that half a trillion dollars went, please allow me to explain what is going on:

    On his European trips, Oh’Bama needed a warm welcome from America-hating places such as France, Germany, Spain, and Britain (yes, Virginia, the Brits do hate Americans, so stop paying to see Hugh Grant’s movies already). So this half a trillion handout was in order to buy their “affection”.

    Let’s first talk about France, where love is in the air, and Parisian brilliance will likely enrapture gullible American tourists into spending uncountable sums of US dollars on things such as 15 dollars cups of poorly-brewed coffee and stale French patisserie. Oh, Paris, the city of lights… that is, if one avoids the decrepit, homeless-ridden, stray-dog-roamed parts of Paris… just one kilometer west of the Eiffel Tower. Anyway, not only did Oh’Bama feel an urge to pay billions and billions just to shake hands with that mentally ill Sarkozy but he even felt that his Harvard-educated Michelle needed to meet that Carla Bruni fluzy whore that throughout her life proved to be good at one thing only, and we all know what that thing is. So half a trillion was in order. In particular, some 20 billion to France’s banking jewel, Societe Generale (the bank where a lone junior trader managed to lose 6 billion before anybody noticed). So France didn’t boo Oh’Bama on his trip… at least not as loudly as they used to. Money well spent!

    Then there’s Britain, that nation of gossip-loving, low-class, sexually perverted alcoholics that have become so allergic to work and creativity in general (except for fancy financial garbage dreamed up in the City), half of the nation now lives on welfare, and the other half is dependent on alcohol. Anyhow, Oh’bama needed to send them a hundred billion so that Mr. Nobody Brown would shake his hand in exchange.

    Now let’s move on to Germany. A nation that lives on past glory, a country running on fumes. There was a time when “German” was still synonymous with hard work and high quality. However, today’s Germans have gotten used to 32 hour work weeks, 3 hour siestas (which is ridiculous for a Nordic country), and government handouts galore. So, the Fed considered it wise to send a few hundred billion to Germany as well, in order to prop up their otherwise excellent socialized medical system. This at a time when 50 million Americans have no access to health care whatsoever, and probably another hundred million have lousy access. Well, I haven’t yet heard a thank you from Angela Merkle, but that’s OK… bitch!…LOL

    Finally, let’s examine Spain, the “pearl” of the EU, a true European miracle (along with Ireland, the other rapidly-declining, third world miracle). This pearl of Latin nations (where Latin is synonymous with lazy, corrupt, dirty, bureaucratic, and stupid) has deluded itself into believing that it’s third rate beaches will propel it into first world status. Well, there goes that real estate bubble! With unemployment at 20%, property values collapsing, manufacturing base moving to Eastern Europe faster than you can say Adios, Spain is now reverting to its only natural state: a backward, dirty, and poor nation. Nonetheless, Bernanke felt he should send them a few tens of billions too. Maybe they can use that to rebuild their Armada, and conquer the other dirty, lazy, decrepit Latin nation in the neighborhood: France…LOL

    So there. That’s why your leaders felt it was sensible to send half a trillion dollars abroad in loans, money we are highly unlikely to ever recover.

    I realize I am harsh (but just) in this posting, but I am doing this only to enable you, my fellow chumps to wake up and realize that you are being screwed over by your own leaders, and that these dirty, lazy, yet smooth-talking Europeans have pulled a fast one over you during this past year.

    Vinny Gold – “no nonsense common sense”

    PS –better not use my “no nonsense common sense” slogan without paying me 50 cent royalty first…LOL

  20. Mark

    This does not seem like a big deal on either side.

    The Bernanke comment was silly. Obviously, there was a relationship between the sudden exchange rate change and the swaps. But this does not seem all that important.

    Grayson is harping on a relatively minor detail, and seems to be in over his head. But there is something to his point. Currency swaps expose the Fed to credit risk (however slight). This is just one more example of the Fed's unchecked ability to play with massive sums.

  21. Anonymous

    This is what happens when you have the reserve currency.

    So far the US dollar is the only game in town.

    No country would inflate their own currency to pay us back, now would they?

  22. Francois

    Grayson didn't show a very good grasp of what is a swap. (How's that for an understatement?) However, Bernanke missed a great opportunity to be helpful by taking a 30 seconds to explain what it is and what it's used for.

    Instead, he appeared evasive and uninterested. Not a good PR move.

  23. Anonymous

    Doesn't the Fed tend to lose money on swaps?

    That is they take place when the market is scared and moving to the dollar because it's a safe haven currency. They are reversed when the market feels more secure, and therefore less interested in the dollar.

    How are rates set in a case like this?

  24. -

    Just a little bit of Stockholm Syndrome here….

    Why should Bernanke defend himself when you all do it for him?

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