Last week, we wondered why the Fed was tacitly supporting the ECB shellacking of Greece. As we wrote:
Obama is one of the few national leaders to come out forcefully against the Troika’s efforts to squeeze more out of an already bankrupt Greece. From the Wall Street Journal report on his remarks:
“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday.
He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.”…
So why is the Fed, whose mandate includes promoting growth, pointedly ignoring Obama’s views and tacitly supporting the ECB? The US central bank actually has significant leverage over the ECB via its dollar swap lines. Those were extended in violation of Congressional approval processes, but Congress has been too supine or inattentive to challenge them. While the swap lines are not presently in use, they are important to the ECB. Withdrawing them over the treatment of Greece and the potential serious downside risk would constitute a serious rebuke and get the ECB’s attention.
Similarly, Congress could challenge the Fed’s authority to have granted the currency swap lines at all, a move it should have taken long ago. There is a good argument to be made that it is unconstitutional to have done so without prior explicit approval from Congress, and no justification for making them “permanent”.
Even worse, the ECB has an almost certain booster in the Board of Governors in the form of Stanley Fischer, who was ECB chief Mario Draghi’s thesis advisor. If Yellen were to be concerned about the dangers of the Troika’s policies towards periphery countries as a danger to global growth, and hence the US, the odds are high that any effort to press the ECB to moderate its course would be influenced, as in checked, by Fischer, or that he would volunteer himself as intermediary, which would serve the same end.
It appears the same thing occurred to Senator Bernie Sanders. He issued a letter over the weekend asking Janet Yellen to “make it clear to the leadership of the European Central Bank that the United States and the Federal Reserve object to actions that affect our national interest and risk U.S. and global financial stability through the unnecessary and counterproductive implementation of deflationary policies.” The full letter is embedded below. Also note that Senator Sanders wrote Christine Lagarde at the IMF on January 28, two days after Syriza’s victory, expressing his concern about the humanitarian costs and political risks of continuing to pursue failed austerity policies.
If you are a Vermont voter, please e-mail him and thank him for taking this stand. And the rest of you who are moved to help, please write Hillary Clinton’s office and ask why, as the Democratic party Presidential nominee-in-waiting, why she is silent on this important topic.