Guest Post: Representative Alan Grayson on His Questions to Bernanke Over Dollar Swap Lines

From Congressman Alan Grayson, member of the House Financial Services Committee and representative to the 8th Congressional District of Florida:

Hi, Alan Grayson here. I just questioned Ben Bernanke in a Financial Services Committee hearing over the Federal Reserveís use of swap lines. You can watch the clip here.

There was some good discussion on the subject, and I enjoy reading the posts and the comments.

I asked the question because I genuinely wanted to know which foreign banks (or others) or else got the $500,000,000,000 in loans, and what they did with the money. Chairman Bernanke said he didn’t know. This is puzzling. Yves Smith wondered why Bernanke stonewalled, as did this anonymous economist.

For the record, I do not think the currency swaps in question — half a trillion dollars to foreign central banks — was what caused the US nominal dollar exchange rate to “appreciate”. In the past year, dollar appreciations have been perfectly correlated with declines in the Dow, the seizing up of financial markets, and a diminishing in investor appetite for risk. The Fed’s actions were almost certainly in response to this. What happened was, banks all over the world suddenly want to hold either T-bills or dollars, taking as little risk as possible, and not wanting to hold riskier assets such as the Pound or Euro. Everyone wants this at the same time, so to alleviate the demand, the Fed gives other countries half a trill in dollars in return for half a trillion their currencies… This, if anything, should slow the appreciation of the dollar, which is a good thing.

I cannot fathom why Bernanke could not just elucidate this, except to say that perhaps Bernanke is taking his marching orders from someone else and doesn’t himself quite understand the rationale…..

This conventional storyline might be correct. Or China might have threatened to sell its Treasury bonds, so the Federal Reserve might have lent this money to friendly banks to backstop the Treasury market. Or you can spin out any number of possibilities here. We don’t actually know which one is correct. That’s the point. The Constitution grants to Congress power over the currency and power over the public purse strings for a reason – because we are accountable to ordinary citizens through the ballot box. The Federal Open Market Committee isn’t.

$500,000,000,000 is ten times the size of the entire State Department budget. Publicly elected lawmakers proposed and debated over 100 amendments to the much-smaller State department budget. Thatís how democracy is supposed to work — not through secret deliberations in which 12 unelected bankers trample on Congressís Constitutional authority to appropriate funds, approve treaties, and coin money.

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  1. Todd Wood

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  2. pepster

    Rep. Grayson

    Keep up the pressure on Bernanke, Geithner and everybody else involved with "fixing" the financial mess we're in. I've felt that Congress has been too much of a lap dog during Bush II's years and I want to see you all now bite back.

    A concerned citizen,

  3. Richard Smith

    Rep Grayson:
    Great to see you respond this way.
    Totally with you on oversight.

    But – swap lines *aren't loans*, and they aren't *handouts*. Quick primer in an obvious place

    The Fed is taking currency risk and counterparty risk to the extent that the swap lines are drawn down, but you didn't ask the right question.

    If you really want to make him sweat, ask him about the beneficiaries of the AIG bailout. Some of them are likely to be foreign banks and they *really are* beneficiaries of US taxpayer largesse – for no obvious reason.

    Follow up – how will the Fed keep you guys posted on how bad things are getting at AIG. The losses may well get (a lot) bigger than the $180Bn currently funded.

  4. Anonymous

    Rep Grayson,

    Keep the pressure on the Fed and the Executive.

    Some ideas for future questions:

    – What is the expected return on the $1.25tr of MBS being purchased?
    – Is QE working, and will it be extended?
    – If we need to wind up a large institution in the next 3 months, could we do it?

    Many Thanks,

  5. Anonymous

    Rep. Grayson, you are my hero for carrying out your duties, unlike 99% of your colleagues. It's really a rather sad state of affairs that a Congressman doing his duty is so remarkable.

  6. Anonymous

    Rep. Grayson,

    Completely agree with you.

    Next time please ask Mr.Bernanke how the congress could trust that the fed would do a better job in protecting consumers ( while they are protectiong the intrests of their boared members who head major bank) when they have not demonstrated anything by their actions in the last few years. Especially with the mortgage fraud that brought this crisis ( not all of it though bu the excesses)

    Auditing the fed is absolutely necessary we want to know who were at the table(lloyd balnkenfein) when they were discussing to bail out AIG and pay 100cents on a Dollar to it's creditors (Goldman Sachs)

  7. Anonymous

    A very plausible explanation for the currency swaps is given here:
    I quote a specific paragraph:
    This is effectively a reversal of what was witnessed post‐Lehman bankruptcy, when foreign central banks needed dollars in order to support the cash calls that were occurring at foreign commercial banks by their US entities. As chart 1 shows, the decline in time deposits that occurred at US “branches” of foreign banks matches the dollars called back from the foreign banks, which mirrors the liquidity provided by the Fed to foreign central banks. Basically, US time‐deposits were being used to support funding of US assets overseas (e.g., RMBS owned by hedge funds in London). When concern was raised, after the Lehman bankruptcy, about the surety of those US based deposits, given the lack of equity in foreign branches and non‐US bankruptcy law, those deposits were withdrawn causing a huge demand for dollars overseas, which is where the Fed’s CB liquidity swaps stepped in (not to mention LIBORs elevated setting)
    Since December there has been a reduction of Fed liquidity swaps of about 270 $bn, which matches the flow of dollars back overseas by the Foreign bank’s US based branches (funded through deleveraging here in the US as opposed to a resurgence in deposits). This is the primary reason why banking reserves in the US have declined, why the fed funds rate (et. al.) has traded at the high end of the range, and why some people are worried that the Fed’s monetary expansion has been falling behind the curve.

  8. Anonymous

    Good save, considering that when Grayson was asking Bernanke questions, it doesn't appear that Grayson knew what he was talking about.

  9. Taylor

    Sometimes you get the bear, and sometimes the bear gets you.

    Grayson responding here shows that he is listening and can learn from his mistakes, unlike most of the other showboats. That is smart. I detect the hidden hand of an ex-blogger.

    Do please keep up the good work.

  10. Anonymous

    Why couldn't Bernanke just explain the flaw in the questioning?
    Why is it acceptable for the Treasury and the Fed to go before Congress and simply say as little as possible, offer no clarifications, refuse or put off supplying information requested by our elected officials?
    Why can't we know the details of what is on the Fed's balance sheet?

    What are we afraid of and why do we allow this to continue?

    Rep Grayson understands there are issues and seems to be seeking answers. Why is he the exception?

  11. abbyd

    I am getting tired of everybody bashing Grayson. You little weenie finance types should get off your holier-than-thou podium. The Fed doing a 500 billion dollars worth of currency swaps with foreign central banks is not necessarily innocuous OR good. It has a huge impact on Forex markets, as well as on the carry trade.

    Look at the facts:
    First, Bernanke either couldn't explain or didn't want to explain the real reasons FOMC did the currency swaps (although some little blogboys are more than happy to come to his aid, giving him the benefit of the doubt). Second, Bernanke, in his reply, said "the LOANS go through the central banks", so he either misspoke, or he regards the swaps as loans also (this would imply the Fed is sitting on the Euros they got in the swaps, while ECB loaned the dollars out immediately). Third, Bernanke says "we are lending to American citizens in EXACTLY THE SAME WAY". This could be a misstatement, but it may not be. He may interpret his actions as essentially Quantitative Easing on a global scale…

    So Grayson got a little confused about New Zealand's swaps, and he could've chosen a better line of attack. How many Congressional Critters chose to say anything to the Sith Lord? I applaud his intentions, and I denounce the bloggers who wish to ridicule him.

  12. Anonymous

    Rep. Grayson,

    First, kudos for your persistence in these matters – it's a breath of fresh air.

    I know you only have five minutes at a time, but if you get the chance, hopefully you will inquire at some point about the banks preparing to siphon off profits that even if they don't prove temporary and illusory, could bolster their capital position and reduce the need for future bailouts. Bernanke and Geithner keep talking about the importance of capital, then look the other way as the banksters abscond with it.

    Speaking of the five minute rule, is it at all practical for the committee(s) to hold special hearings during which selected member get a much longer time to question?

    Again, kudos!

  13. Steve

    Just what we need: oversight by politicians who don't know the difference between a currency swap between central banks, and a loan. And who, after being told the difference, still call a swap a loan.
    You go get 'em, tiger. Make a name for yourself.

  14. Mike Dillon

    Congressman, keep pushing !! More than a few will thank you for it.

    BTW, your office should have received a request from me within the last week. If you could you have someone look at it at the earliest convenience it would be appreciated. I know that your constituents would absolutely benefit from it.

    Please feel free to have someone contact me should there be any questions.

  15. Cat

    I don't expect anyone in Congress to be able to wrap their brains around the financial mess so far created. I doubt there are 30 people in the entire world who clearly understand every single part of the problem.

    Congress need to have faith in the officials overseeing the melt-down. Is that faith justified here? I sense, no it is not.

    Toss the whole bunch. Start over with new faces. I don't see any other way.

  16. Anonymous

    Alan…I am not an American…but I must say you are probably one of the most sensible people in washington.

    could you believe, how Bernake said that the rate of fall in $ was a coincidence???!!

  17. DownSouth

    The fed rolled the dice with $500,000,000,000 of taxpayer's money. That gamble could have turned sour. Fortunately, it didn't. But the Fed nevertheless did expose the American taxpayers to huge risks.

    I live in Mexico which was a recipient of, if my memory serves me correctly, $30 billion of the swaps. The peso had plummeted from 10 to the dollar to 13 to the dollar in the weeks before the swap was announced. After the swap was announced, the peso at one point declined to 15.5 to the dollar. It is important to note that, at that point, $30 billion of pesos purchased at an exchange rate of 13 to the dollar would be worth only about $25 billion. The peso has since recovered to about 13 to 1, so it looks like the Fed dodged lightning. But what if it hadn't? The Fed would be sitting there holding billions of dollars in losses.

    If I understand Grayson correctly, he is questioning whether the Fed should have that kind of authority to expose the American taxpayer to such huge risks. And if it does indeed have that kind of authority, maybe he believes it's time for Congress to clip its wings a little bit so it won't fly so fast.

  18. Anonymous


    Good to see difficult questions asked in an open forum. Next time try this one: Why are the people who never saw the problems asked to offer solutions instead of those who saw the problems?

  19. skippy

    The semantics and prose of questioning aside for those that find want in its application ( would we really want economists/bankers as politicians enforce?). How well is the world working with them at the helm to date?

    @Rep. Grayson,

    I concur with your general line of questioning: what the hell is the Fed doing and why are they afforded such power in our society with out introspection by the duly elected Federal government officials. Their power seems to supersede even the NSA. Their positions and rational must be brought into the light and become record for debate or accounts to be settled at a later date.

    It is hearting to see your attention to the voices in the blog wilderness, hopefully they can be of some assistance in your endeavors.

    Skippy…curious politicians often run the risk of spontaneous combustion, do to environmental friction eh, hope you have fire extinguisher handy.

  20. RebelEconomist

    Your poorly-informed line of questioning may have discomfited Bernanke, but missed what could be the real scandal about the swaps, which is how their terms are set. I have been asking about this since the swaps began but have not yet discovered how it works. If the Fed swaps are like a conventional foreign exchange swap, the opening and closing exchange rates assume that both sides invest their currency at money market interest rates. If this is not being done, then one side or the other may be losing money. The percentage amounts may be small, but the swaps are so large that the dollar amount could still be substantial. Since the swaps seem to be agreed in advance of the dollar lending by foreign central banks, it is easy to see how some of the currency might end up not being invested. Instead of grilling Bernanke on where the dollars had gone – which he need know no more about than you know what your bank has done with the dollars that you deposited there – you could have asked him what the Fed has done with the euros, pounds, etc that it has received through the swaps.

  21. VG Chicago

    It's a shame Bernanke feels that lending half a trillion to what I often refer to here as "lazy and peasanty Europeans" is more important than making that money available for lending to hard-working, decent Americans right here in the United States.

    I think we should bring our currency and troops home, go back to protectionism, and watch the rest of the world crumble.

    Vinny Gold
    PS — for those who haven't yet figured this out, the reason I take pokes at Europeans so often here is simply because I get a great deal of amusement out of seeing hypocrites' faces squirm. I too was a European once, which I have proudly renounced once I became a citizen of the greatest nation on earth: the USA. Now please excuse me while I go crank up the volume to my favorite song: Lee Greenwood's "Proud to be an American"…

  22. Hugh

    $500 billion is a lot of money and there is certainly a lack of transparency, but what I would like to know about is the $3.2 trillion that has been used to backstop money markets. No one seems to know what if anything is going on with this program. But this is a real number taken from the following post at Calculated Risk:

    which in turn got it from the FDIC's Summer 2009 Supervisory Insights report. This represents something like 40% of current aid to the financial industry and nobody seems to know what is going on with it.

  23. Hugh

    Richard Smith, I agree. I keep harping on this but AIG's last 10-K for 2008 showed it still had $234 billion in regulatory relief swaps to European banks. Given what is going on with those banks, I would like to know what the current status and prognosis is for them.

    Also with regard to AIG, on the insurance side, I have been concerned that it did a lot of its own re-insurance internally using offshore entities. I would like to know what the real state of its reserves are at this point.

    Re the currency swaps, I guess I was less concerned about them. Euros and yen have value to them. The toxic sludge that has been parked on the Fed's balance sheet, not so much. In any case, if the swaps were done as the dollar was appreciating and then reversed as the foreign currencies appreciated, I would think the Fed made money on the deal. But then I remember Bernanke was involved and then I'm not so sure he couldn't lose money on something like this.

    I suppose I would ask the Congressman what he thinks about the Fed as an extra-Constitutional tool of executive branch fiscal policy. The Constitution gives the Congress the power of the purse, but with the Fed acting as essentially an extension of Treasury, the executive now has its own purse independent of the Congress. I'm not arguing this from a libertarian perspective because I'm not a libertarian. I see this as a straight Constitutional question.

  24. Anonymous


    "Canonical research findings suggest that American entrepreneurs who establish popular online markets for customized education will catalyze the creation of many good jobs in America, and will end the reign of America’s kleptobankers. Some of the researchers: Clayton Christensen, Paul Romer and Paul Krugman."

  25. jlivesey

    When I watched the video of Rep. Grayson, both the face and the presentation – especially the forced friendliness and insistent "misunderstanding" of the difference between a loan and a swap – kept reminding me of someone.

    Then I remembered. Huey Long.

  26. Anonymous

    Shit, I'm not an economist and don't understand half of this stuff either. But I do feel that a lot of it is deliberately obfuscated, rather than too complex to understand. Keep asking questions. If it's not the right question, ask another one. Thank you Rep Grayson and please don't let up!


  27. Anonymous

    You know it's pointless to ask the Federal Reserve anything since they can't be thoroughly audited and the Treasury hides behind that.

    Might as well asked them how the wife and kids are and how their friends at GS are doing.

  28. Doc Holiday

    The Buck friggn stops @ The Discount Window:

    Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Ac-cordingly, fair values, earnings, and any gains or losses resulting from the sale of such securities and currencies are incidental to the open market operations and do not motivate decisions related to policy or open market activities. In addition, the Bank has elected not to present a Statement of Cash Flows because the liquidity and cash position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities.

    From: Federal Reserve Bank of San Francisco 2008 Annual Report

    Financial Turmoil and the Economy

    The Discount Window and the connection to Fannie is where I'd look for Hanky Panky…

    Full Disclosure: No brain cells were used during this copy/paste routine.

  29. Doc Holiday

    Was it $500 Billion you lost?

    he GSE and Agency Securities and MBS Purchase Program was announced on November 25, 2008. The primary goal of the program is to provide support to the mortgage and housing markets and to foster improved conditions in financial markets. Under this program, the FRBNY will purchase the direct obligations of housing-related GSEs and MBS backed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Government National Mortgage Association (“Ginnie Mae”). Purchases of the direct obligations of housing-related GSEs began in November 2008 and purchases of GSE and agency MBS began in January 2009. There were no purchases of GSE and agency MBS during the period ended December 31, 2008. The program was initially authorized to purchase up to $100 billion in GSE direct obligations and up to $500 billion in GSE and agency MBS. In March 2009, the FOMC authorized FRBNY to purchase up to an additional $750 billion of GSE and agency MBS and up to an additional $100 billion of GSE direct obligations.

  30. Doc Holiday

    Oh crap, now I can't stop…

    As early as December 2007, the Federal Reserve established the first of a number of new liquid-ity and credit facilities, the Term Auction Facility (TAF), to address the dislocation in the term interbank market. This facility was set up as an auction and served as another vehicle for extending discount window loans to depository institutions.

    Federal Reserve invoked Section 13(3) of the Federal Reserve Act to lend in “unusual and exigent circumstances” to “in-dividuals, partnerships, or corporations” that are “unable to secure adequate credit accom-modations from other banking institutions.” Under this authority, the Federal Reserve initiated a number of special credit facilities to extend credit to a broader range of counter-parties, against a broader set of collateral.

    Eligible collateral includes highly rated ABS backed by certain consumer and business debt and could be expanded to certain assets backed by residential or commercial mortgages. An SPV will be created by the Federal Reserve Bank of New York to purchase any assets acquired through TALF lending with the first $100 billion of funding for the SPV provided by the U.S. Treasury.

    Re: Collateralized, recourse loans (what the hell is this?)

    I'm afraid I'm lost too, but try Hussman:

    As of November's 10K report, Bear Stearns had $9 billion in unsecured short-term debt, and $66 billion in long-term debt. The $12 billion in shareholder equity, of course, is gone. Any portion of the debt that is unsecured should be the first to fall. If Bear Stearns is worth $2 a share to somebody (provided $30 billion of “non-recourse loans” from the Fed), and yet Bear's bondholders and even the unsecured lenders can still expect to be paid off on over $75 billion of debt (J.P. Morgan assumes that obligation as part of the buyout), then the public guarantees aren't required in the first place. What is required is that Bear's bondholders take a loss, as they should, rather than the public doing so…

    Full Disclosure: I have no idea why I posted this trash, but good luck to yah on finding the dough in the Black Hole! If I can be of further help, just ring me up:

    You Know My Name (Look Up the Number:

  31. Steve From Virginia

    Congressman Grayson;

    First of all, thank you for sticking your neck out and accepting both comments and criticisms. I appreciate your endeavors and I hope you carry on with them.

    I have watched some of your questioning of various officials and I am dismayed because your line of questioning never gets to policy issues. You ask 'data' questions of policy makers that they cannot answer simply because someone else deals with data. The Bernanke questioning is a good example of this.

    Asking him about the Fed providing capital (instead of liquidity) to JP Morgan- Chase or AIG would be interesting. Asking him about the current dollar carry trade or the laundering – by Goldman – of Fed liquidity into the stock market or commodities. Ask him how he will unwind the swaps with all the damaged banks – without having the same banks immediately collapse as a result. How about asking him how he can protect the dollar – from the carry trade – without rasing interest rates.

    In otherwords, ask him questions he and his staff can answer, be less prosecutorial and see what happens.

    Bernanke made you look like a bully and himself a victim. Keep trying …

  32. ComparedToWhat?

    Rep. Grayson, Thanks for contributing to one of my favorite blogs!

    My impression is that you're engaging seriously with this financial mess, and that's great.

    I'm with those who found your questions about currency swaps disappointing. I'm no finance pro, but I think rapid and forceful moves like this by the Fed helped to reduce the level of panic and damage last Fall, and are the reason Bernanke gets generally high marks for his handling of the crisis.

    You sounded like you were fishing for a sound-bite. We would have been better served if you had said, "Please discuss the risks and rewards of the currency swaps, both as you saw them when they were instituted and as you see them now."

    Better use of your time would be to ask, "If the government is going to support the real estate market, why shouldn't that activity be moved from the Fed to a more politically accountable institution and be funded by the Treasury?" Ditto for any other Fed balance sheet items, except Treasury obligations, that are likely to persist beyond calendar 2009.

    William Poole made some solidly conservative (not in the movement sense) remarks about the Fed yesterday in an interview with Bloomberg radio. If you're serious about reforming the Fed, I encourage you to get together with him over cigars and fine port, or whatever is the 21st century equivalent (treadmills and bottled oxygen?).

    Thanks again for participating the odd and unsettling "blogosphere" in which people are free to exchange thoughts anonymously or pseudonymously, even if they're not sponsored by a multinational conglomerate sucking at the taxpayers' teat.

  33. Richard Smith


    Yes, all quiet round the money market backstop. Hmmm. Hard to keep track of all these Multi-trillion programs.

    Yes, I totally agree, Grayson can actually make his point about this nonchalant transfer of American assets to foreigners much better via the AIG story. Thus (roughly): US support for collateral calls vs AIG by foreign banks leads averts capital hits at foreign banks: so their foreign shareholders don't take dilution, their foreign CBs don't have to bail out the bust ones and their foreign employees get back on the bonus bandwagon sooner.

    It is one of the "wicked Goldman" stories again except this time the beneficiaries aren't even American (Germany/UK/Switzerland maybe).

    And as far as I can see those dollars never get back to America in any way shape or form; and at the moment it's an open-ended commitment that could drag on for years as the sliced-and-diced underlying mortgages gradually default.

    On the swaps there is a risk that a big foreign CB goes belly up – but if that happens even a chunky currency swap is the least of one's worries. If he'd been swapping with Iceland or Latvia it would have been insane…but he wasn't. Leave that to the Europeans…

    On the swaps yes it would definitely be interesting to know what the rates were and the yield curves. There is a potentially sort of handout story there but it is much harder to get at – I wouldn't like to cram that set of technical questions into a 5-minute slot. It is a risk/reward argument that is harder to stand up than a straight handout story.

    But I am right with Grayson on the fantastic expansion of Fed discretion and how hair-raising it is.

    Bernanke batting away questions is exactly what one doesn't want to see, when the guy has grabbed or been given so much discretionary power and has been exercising it on such a lavish scale.

    So it would be good to make it a bit more difficult for Bernanke to just blank the questioner. If Grayson actually lands a punch sometime that would be great. At least he's trying, unlike the rest of the wasters.

    It can't be that hard to hire someone who can brief him solidly, can it? There might be a few disaffected bankers kicking their heels out there just now who wouldn't shy away from helping a Dem.

  34. Anonymous

    Any president will extend 'executive privilege' and immunity to the Federal Reserve when the garbage they call collatoral is threatened with exposure as being worth less than zero.

    Don't remember the Congressional hearings when SEC counsel claimed 'executive privilege'?

    It's a matter of national security when the banking system is about to be shown insolvent.

  35. tom a taxpayer

    Thank you, Rep. Alan Grayson, for uncovering the clueless Inspector General of the Federal Reserve. You asked the Inspector General gentle questions about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the Feds trillions of off balance sheet transactions and obligations. The lame and ignorant responses of the Inspector General were the worst performance I have ever seen by a federal official. You exposed the incredible incompetence of an Inspector General who could not audit girl scout cookie funds. The amazing video of that exchange was shown on here on the Naked Capitalism blog.

    I want to thank you for the many oversight hearings and probing questions. It is a monumental job to ferret out all the past and present wrongdoing.
    One injustice that really grates many Americans is that the paying of hundreds of billions in bailouts is not accompanied by prosecuting the criminal frauds that led to the bailouts.
    Many of the incompetents and criminals who caused the financial crisis are the same people the taxpayers are bailing out.

    It takes only one prosecutor to investigate just one crime, and follow the money and the connected crimes, and bring down the entire criminal enterprise using a Racketeer Influenced and Corrupt Organizations Act (RICO) prosecution. This is a target rich environment, and the criminal activities (Ponzi schemes; cover-ups; banking fraud; investor fraud; accounting fraud; stock holder fraud; commercial bank and investment bank extortion of federal government; conspiracy with rating agencies, Wall Street, and mortgage companies to defraud investors, pension funds, municipal funds; looting of treasury; etc.) are continuing today. So the investigation and prosecution can begin anywhere, with Countrywide and the mortgage industry or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street investment banks and brokerages or the rating agencies or AIG or with the federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve.

    This gang of overlapping criminal enterprises raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered federal/state/municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, extorted the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy, and now are costing taxpayers hundreds of $billions, even $ trillions.

    To make a difference today, mass prosecutions are needed in style of the Maxiprocesso (Maxi Trial) of the Mafia in Sicily during the mid-1980s that resulted in hundreds of defendants convicted. Justice requires the arrest and prosecution of the hundreds of criminals responsible for committing the greatest financial crimes in U.S. history.
    Congress and prosecutors need to take off the kid gloves, hit these criminals with the iron fist of justice, and become national heros…legends in our time.

  36. Views By a

    I do think the Fed has acted beyond its mandate on a number of occasions, but surely it's not the swap transactions we should be focusing on.

    Bernanke did the swaps with the ECB to keep LIBOR low. The Europeans had lent dollars long and were covering themselves short (say on the 3M) but were hedged with 3M LIBOR swaps. Unhappily, the Fed began loaning money to American banks on sweet terms, and American banks are too important for the LIBOR USD calculations, so the European banks were financing themselves on the 3M rate, but Libor wasn't rising enough to reflect this. They were losing money and they were rightfully ticked and complaining to the British board which calculates Libor. So either: (1) Libor was going to be replaced or modified, to the detriment of American interests; (2) Libor rates were going to have to rise, to the deteriment of American homeowners whose rates were pegged to Libor; or (3) the Fed had to extend the same sweet terms to European banks so that the rate at which they could borrow money equalled, more or less, Libor.

    In return for the USD that the Fed has given to the ECB, it has got euros in return. Maybe I'm wrong, but I'd rather have a euro than a dollar, so I think the Fed is ahead on this one, and it's the ECB which should be worried.


  37. Anonymous

    The Fed needs to be stripped of its regulatory role to protect its ability. In this way Congress could over-see these activities without endangering the Fed's independence. As a regulator the Fed is too conflicted considering its linkage to member banks. So agree with much of what you are trying to accomplish but…

    I find your tactics in front of the camera distasteful. You either do not understand the questions you are asking or are pandering to the camera.

  38. Bruce Krasting

    I can't figure why Mr. B blew this question. It sure has lead to a lot of confusion. There is a big difference in these swap lines from currency intervention. Currency intervention occurs when a CB believes its currency is too high or low vs other currencies. So the enter the open market and create either supply and demand to offset the imbalances.

    Folks their was no currency intervention during this period of time. Not a pennies worth.

    These were liquidity swaps. We were in a melt down due to lack of liquidity. No one was willing to lend. This was an effort to provide funds to the Euro$ market. The CB swaps were an effort to get the money where it was needed as fast as possible.

    I hate this crap too. But like so many other things that were done at that time it was necessary. The global financing system would have gone to its knees if this had not happened.

    The last time the swap lines were made available was after 911. A completely different set of circumstances. Same result, temporary liquidity slows down a panic.

    Keep in mind that these swaps have been largely reversed at this point.We did a lot of dumb things in the last year to stop the bleeding. These swaps were not one of the dumb ones.

  39. joebhed

    Thanks to abby, Reb and Doc for actually putting some rationality into this discussion.
    Unfortunately, all of you still fail to even see the CAUSE of the problem, which is the insolvency of the money system.
    The money system.
    Not the banking system.
    Not the financial system.
    The money system.
    When Paulson told the unfailables to take these new Billions, OR ELSE, it was because he knew at that moment the "money system" would fail without these injections.
    It was his JP Morgan moment from 1907 which ended that panic.
    While we are about ten-months into putting out the fire, NOBODY has even ventured to ask the question that should automatically be on everyone's lips.
    "WHY ?"
    Read this short piece on "How Debt Money Goes Broke".

    What we need is a new money system.
    Not new regulation.
    Hopeflly, Mr. Grayson will catch on a little more clearly.
    But, as Galbraith the elder said:
    "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it."
    Keep on keeping on Re. Grayson.

  40. Unsympathetic

    Rep. Grayson,

    What specific ACTIONS are you going to take? Are you going to shake your finger very energetically in front of Bernanke the next time he speaks in front of his managers – your committee?

    Or are you going to take action and get the sycophantic, incompetent, unprofessional, anti-American, arrogant head of the Fed fired?

    The American people did not elect you to send out text messages and occasionally enjoy the sound of your own voice. Until you take action against the Wall Street clique that is at its fundamental core opposed to the success of middle class America, you are full of sound and fury, signifying nothing.

    For once in your life, don't tell me what you're going to do — let your actions speak for themselves.

    Bernanke, Summers, and Timmy aren't doing the job. Only you can. And while you're at it, you might want to look into starting a new version of the Pecora Commission.

  41. DownSouth

    @Bruce Krastin

    Your assertion that there "was no currency intervention during this period of time. Not a pennies worth," I believe to be factually incorrect.

    The Bank of Mexico (Mexico's central bank) was buying pesos at a furious rate in the fall of 2008 in an effort to prop up the peso. The peso had already fallen from about 10 pesos to the dollar to 13 pesos to the dollar by the 29th of October. Here's a link to the story in the Mexican press:

    As you can see, there was no mention of "liquidy" in this story, only in stabilizing the peso-dollar exchange rate, so the concern here was unambiguously the exchange rate, not liquidity as you assert. Furthermore, the liquidity you speak of and exchange rates are undoubtedly interdependent, one having an effect on the other. So I don't think it's even possible to set the two apart into two separate worlds as you argue.

    As the story relates, the Bank of Mexico had already "injected" $8 billion dollars, or about 10% of the country's foreign reserves, during the month of October trying to stabilize the peso-dollar exchange rate.

    How did the Bank of Mexico "inject" dollars? It did so by conducting daily auctions. At these auctions the Bank of Mexico would offer a pre-determined number of dollars for sale (I suppose the buyers were the nation's private banks), the exchange rate to be determined through the bidding process. All during this crisis the major Mexico City dailies would publish the amount of dollars auctioned off each day by the Bank of Mexico and how much, in pesos, they sold for.

    On the same day of the story linked above (October 29, 2008) the Fed announced it was extending a $30 billion swap line to the Bank of Mexico:

    As you can see, the Fed, like yourself, asserted in its press release that this swap line was "designed to help improve liquidity conditions."

    I think the Fed plays a lot of word games in order to obfuscate and confuse. It plays these semantics games in order to make people like Grayson, and anybody else who dares question its power and/or motives, look naive. Even though the Fed asserts its sole motive of extending the swap lines was to "improve liquidity conditions," the dollars provided were, at least in the case of Mexico, unambiguously and undeniably used to stabilize the peso-dollar exchange rate. Regardless of the claims made by the Fed or by yourself, the net result is that this was a currency intervention.

    For more on the theory of the rhetorical strategies employed by scientist-kings like Bernanke, one might look to Habermas. As Daniel Yankelovich writes in Coming to Public Judgment:

    Habermas is quite insistent, however, that genuine communications in a democracy can take place only when all forms of domination–overt and hidden–have been removed. His emphasis on hidden and indirect forms of domination means that he is not confining his caveat to the obvious forms of power–either of the brutal Nazi variety or the mild armtwisting LBJ variety. He ecnompases the many subtle, indirect forms of distortion. In the American context, examples might include experts who "educate" the public by imposing their points of view on them (especially when they use technical jargon)…

    Yankelvich has a lot more to say on this subject and also cites Arendt, another prominent thinker who deconstructed the semantic (or language) power games that "experts" or "scientist-kings" like Bernanke play.

    The overriding problem confronting Bernake and the entire Greenspan-Rubin-Geithner-Summers cabal, of which he is an integral part, is that which Yanelovich articulated:

    What we want above all from expert opinion is that it be correct. The best criterion for judging expert opinion is whether it proves to be right or wrong.

  42. Bruce Krasting

    Down South:
    I meant that the US Federal Reserve did not intervene in the currency markets to either buy or sell the dollar. Oth3er central banks did intervene during that period. Mexico was on that did.

    The Mexican CB has large reserves held in Treasury securities. These swap lines are effectively repo's of those reserves. Mexico could have gone to the market and dumped its reserves to raise the cash the need to support the Peso. But that would have just added more volatility and confusion.

    The swap lines have been in place for a long time. They are there for times like last November when there is a panic going on. The swaps lines were opened as part of a dozen efforts undertaken to stem the melt down that was happening.

    We need to ask and answer this question:

    What would July of 2009 look like if all of those extraordinary steps had not been taken.

    My guess: S&P=300, Unemployment=20%, Gold=2000, RE values=-50%, GDP=-15%, Shortages of food, electricity and fuel, Schools closed, crime rates skyrocketing, number of big banks left standing=0.

    I think we were heading in this direction last fall.

  43. emca

    Frankly I don't get it. I read the comments here and from of original post, then watch the video just now. Grayson's questions and manner seems reasonable and pertinent (although typical of congressional inquiries, he is fishing). Whether swabs are loans or liquidity transfers between governments is beside the point; under what authority does the Federal Reserve take such an action (risk) involving large sums of currency? On what terms are those transactions undertaken? Should the Federal Reserve unilaterally execute such decisions without the consent of the publicly elected body of this country? Is the "blank check" given the Reserve in 1914 concerning financial manipulations valid (this incidentally would include the decision to bail-out BS)?

    By the way speculation of whether the Federal Reserve save us last fall is just that. What's more we haven't seen the end of this crisis. Whether such a salvation actually occurred or whether just delay (making matters worse) the inevitable is a matter of rational debate, not fact.

  44. emca

    Sorry for the grammatical errors. Firefox (or my proxy?) won't allow me to preview first time out; this blog looks entirely different under IE.

  45. Bruce Krasting

    The following is a link to the FRB that describes this. Yes, article 14 in the 1914 document gave the Fed power to conduct 'open market operations'.

    As for the future, I think you are right. This is not over. I agree also that some of the things that have been done might make things worse in the future.

    I think the odds are better than 50-50 that we will not suffer a depression in the next five years. Last November I would have said it was a sure thing.

    Maybe they bought us time. Maybe they just killed us. We shall see.

  46. Anonymous

    The only thing more terrifying to me than the possibility of a true financial collapse is the ressentiment and raging idiot populism that goes by names like "concerned taxpayer" accusing anyone who happens to have a position of power of playing rhetorical domination games. For the record, Habarmas was always a dolt and couldn't understand the difference between constative and performative speech act if it hit him (joke!) in the face!

    Representative Grayson. You asked a lot of naive questions that make you look like you care about your constituency, but which in fact added up to little more than political theater. There is nothing more dangerous than political theater when crises turn dour. Here is what I suggest: As a representative, your duty is to honestly and intelligently present the situation to your constituents, who are not only clueless but are angry about being clueless without taking the time to get clued in. As a representative of the union, your duty is not only to ask faux-tough questions about nothing–the swap lines–but to be the catalyst for a more perfect union, which means mediating (there's a Habarmasian word) between your people and the talented people who saved the ass of this idiocracy.

  47. Lawrence

    History is documenting those who stood up and asked questions and those who roled over and did nothing.

    It is improper to outright criticise Mr Graysons actions unless done contructively. If his answers seem naive then give him some more ammo.

    Also ask yourselves what you are doing to try and turn this situation around.

    Good on you Sir. Keep it up. You are on the right side. Keep the pressure on these people who are destroying your good country with their misguided policies.

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