NY Fed's Sack Assures Us Swap Lines to Europe are a Preemptive Just In Case, Not a Habit
Funny, the Fed is always first to jump for the just in case lately and with $6.64 billion in currency swaps outstanding as of June 2nd, that doesn't feel like a "just in case" to me. To put that in a bit of perspective - in fairness to our friends at the Fed - that number was $583.1 billion in December of 2008. Fine. It's better.
Brian Sack, the Federal Reserve Bank of New York’s markets group chief, said the central bank’s decision in May to restart swap lines with counterparts in Europe, Canada and Japan was a “preemptive” move to help bolster market confidence.
“From the perspective of the Federal Reserve, the liquidity swap arrangements are safe,” Sack said during a speech to the New York Association for Business Economics today. He described the Fed as taking a “limited and supportive role” in stemming the European debt crisis, saying “the successful resolution of these problems ultimately rests on European policy actions.”
By restarting its emergency currency-swap tool, the Fed agreed to provide as many dollars as needed to the foreign central banks to help keep Europe’s sovereign-debt crisis from spreading to more markets. The Fed’s action last month came as European policy makers unveiled an unprecedented loan package worth almost $1 trillion to stop a crisis that threatened to shatter confidence in the euro.
“The swaps were essentially put in place in a preemptive manner, under the view that their presence would provide a backstop for dollar funding markets and help to bolster market confidence,” said Sack, a former Fed economist and section head who returned to the central bank system last year.
Someone needs to hit these guys over the head with a dictionary that defines words like "backstop" and "emergency measure". Repeatedly.