Fed Chairman ‘Forgets’Banks He Loaned Half Trillion $

By Christopher J. Petherick

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Ben Bernanke, the head of the privately owned and controlled Federal Reserve, cannot remember to which foreign banks the Fed has loaned a half trillion dollars. His lack of memory can be understood, given that the Fed has loaned or guaranteed trillions of U.S. dollars to banks around the world since the U.S. economy took a turn for the worse in the summer of 2008. Still, it was quite an embarrassment for the country’s top banker, who, during a three-hour grilling on July 21 before the House Committee on Financial Services, admitted he did not know the recipients of foreign liquidity swaps—loans to foreign financial entities—that amounted to some
$550 billion.

Shortly after news broke of Bernanke on the hot seat, video of his testimony spread like wildfire on the Internet with hundreds of thousands of viewers around the world watching the chief banker stutter and squirm. Here is the relevant portion of the official transcript relating the exchange between Bernanke and Rep. Alan Grayson (D-Fla.), who is also a sponsor of Rep. Ron Paul’s landmark “Audit the Fed” legislation (H.R. 1207).

Grayson: “What’s that [the $553 billion amount]?”

Bernanke: “Those are swaps that were done with  foreign central banks. Many foreign banks are short dollars. . . .”

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Grayson: “So who got the money?”

Bernanke: “Financial institutions in Europe and other countries.”

Grayson: “Which ones?”

Bernanke: “I don’t know.”

Grayson: “Half a trillion dollars, and you don’t know who got the money?”

Grayson was following up on earlier testimony by Bernanke, who said that loans to foreign banks had increased from $24 billion at the end of 2007 to $553 billion at the end of 2008. That is a 2,300 percent increase in one year for anyone doing the math.

Grayson and Bernanke were debating complicated global financial transactions known as foreign liquidity swaps, whereupon the Federal Reserve gives U.S. dollars to foreign financial entities, usually foreign central banks. In return for dollars, the foreign institutions usually hold an equivalent amount of their own currencies in accounts for the Fed.

Officially, the Federal Reserve states, “When the foreign central bank lends the dollars it obtained by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions.”

Translated from banker-speak, the U.S. dollars, in a nutshell, are going to back unstipulated loans in countries around the world.

As of now, the Fed has dollar liquidity swap lines open with 13 foreign central banks. These include the Reserve Bank of Australia, the Central Bank of Brazil, the Bank of Canada, Denmark’s National Bank, the Bank of England, the European Central Bank, the Bank of Korea, the Bank of Mexico, the Reserve Bank of New Zealand, Norway’s Norges Bank, the Monetary Authority of Singapore, Sweden’s Sveriges Riksbank, and the Swiss National Bank.

Bernanke tried to clarify the need for the swaps, saying that foreign central banks are short of U.S. dollars and come into the U.S. market, driving up interest rates. “We swap our currency dollar for their currency,” said Bernanke. “They take dollars and lend to banks in their jurisdiction.”

Grayson responded that his staff had looked into some of the swaps, including a $9 billion dollar loan to New Zealand. That works out to $3,000 for every citizen in New Zealand, he said.

“Seriously, wouldn’t it have been better to extend that kind of credit to Americans rather than New Zealanders?” asked Grayson.

Putting aside the constitutionality of lending dollars to foreign banks—strictly speaking, neither the Federal Reserve nor the fractional reserve banking system is constitutional—there are considerable dangers associated with these types of transactions. Should the “swapped” foreign currency lose value, and the foreign bank balk at paying back the loan at the agreed-upon rate, the Federal Reserve and the dollar could be dragged down with them. Also, should the U.S.-backed foreign loans go bad, the whole system could go down like dominoes with foreign central banks taking down the Federal Reserve and the U.S. economy.

It’s a dangerous game the U.S. private central bank is playing with the American people’s money, all the more reason why it should be opened up to public scrutiny. With no clue as to the solvency of the Federal Reserve, Rep. Paul’s “Audit the Bill” looks better and better every day.

UPDATE: Since AFP last went to press on July 22, another legislator—Rep. DonYoung (R-Alaska)—has signed on to sponsor Rep. Paul’s audit the Fed bill, bringing the number of supporters in the House to
276.

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