Is the Fed planning another bailout?

And if they do, will they tell us …

My old colleague, Paul-Martin Foss, former Monetary Policy aide for Ron Paul and founder and President of the Carl Menger Center for the Study of Money and Banking, has a fascinating article on the showdown between the European Central Bank and the new Greek government.

Paul-Martin suggests that Greece may finally withdraw from the Euro, thus causing investors to be reluctant to purchase European-dominated debt for fear other European countries will follow Greece’s lead. The resulting difficulties for financial institutions holding dollar-dominated assets could result in another Federal Reserve bailout of European banks and big corporations.

Paul-Martin explains:

European banks and corporations still hold significant amounts of dollar-denominated debt, and servicing that debt would now require them to sell a lot more euros to get those dollars. Having paid negative interest rates for months, their euro balances are shrinking and they might not have enough euros to get dollars and would risk defaulting on that dollar-denominated debt. The Federal Reserve would step in and re-open its swap lines with the ECB. Remember that during the height of the financial crisis, the swap lines were on the order of nearly $600 billion, almost as much as the Treasury’s bank bailout that so incensed American voters in 2008.

The ECB would create euros and send them to the Fed, the Fed would create dollars and send them to the ECB, and the ECB would loan those dollars to firms that need them. The hope is that you save the firms, they repay the loans, and the whole trade unwinds over time. If they go under, you’ve got problems. But once again the Fed might end up getting involved in bailing out Europe, and most likely to the tune of hundreds of millions of dollars. Something on the order of the Grexit would also almost certainly mean that there would be no Fed rate hike, and might even spur the Fed to engage in additional easing, such as purchasing Eurozone government securities to try to drive down Eurozone bond yields. Then the Fed would be actively involved in trying to prop up not just the US economy but the European economy as well. To quote Bart Simpson: Ay caramba!

Read Paul-Martin’s entire piece here.

If the Federal Reserve does bail out the big European banks, the American people will be the last to know. And the American people will never know the full truth about the Fed’s dealings with foreign central banks until Congress passes the Audit the Fed legislation.

If you have not yet, please sign the Audit the Fed petition.