Critics Question Fed Loans To Foreign Banks
ROBERT SIEGEL, host:
The Federal Reserve released some surprising information yesterday. The central bank of the United States lent tens of billions of dollars to several European banks. Today, politicians from the socialist senator, Bernie Sanders of Vermont, to Republican Congressman Mike Pence, condemned the Fed for that move.
We asked NPR's Adam Davidson of Planet Money to help us understand what exactly happened and what it means. Hi, Adam.
ADAM DAVIDSON: Hey, Robert.
SIEGEL: And let's first deal with the facts in brief. What exactly did the Fed do?
DAVIDSON: Well, I do want to say that what the Fed did, at least from a certain perspective, is exactly what the Fed is there for. Central banks all over the world are known as the lender of last resort. When banks can't find private investors or other banks to lend them money so that they can keep their operations going, the Fed, or whatever central bank exists in that country, is there to lend the money.
Now, normally and what everyone assumed was the case, you - that happens within a country. So if a British bank is in trouble, they go to...
SIEGEL: To the Bank of England, yes.
DAVIDSON: The Bank of England, yes, and the Swiss Bank would go to the Swiss National Bank. But what we see here is the British Barclay's, for example, going to the U.S. Fed and borrowing something close to $50 billion. UBS from Switzerland borrowed close to $75 billion from the U.S. Fed.
SIEGEL: Why? Why did the Federal Reserve Bank of the United States lend to these foreign banks?
DAVIDSON: And I should say, by the way, that also some foreign central banks did lend to the - to operations of U.S. banks overseas, as well. Basically, this was two years ago, and over the course of the last two years, when the financial world was falling apart, the Fed had a whole lot of fears.
One of the biggest fears was that a bank like, say, UBS, the huge Swiss multinational, they owned billions and billions of dollars in those U.S. subprime mortgage-backed securities, those toxic assets we heard so much about. And the Fed was terrified that if UBS couldn't borrow from the Fed, they would just sell tons of those at bargain-basement prices.
Our mortgage crisis was already bad enough. If we added tens or hundreds of billions of dollars in new mortgage-backed securities just flooding the system, it would have been truly, truly disastrous.
SIEGEL: Well, Senator Sanders of Vermont, the Senate's lone socialist, asked if the Fed has, in fact, become the central bank of the world. And that's just one of many remarks from politicians who were questioning the decision to send money overseas.
The dollar is, it's our currency, but it's also the world's reserve currency. Is this a bad thing for the Fed to be doing this?
DAVIDSON: I think that if this crisis taught us anything, it's that national borders are pretty much meaningless when it comes to the global movement of capital. It's literally trillions of dollars, of U.S. dollars, are flowing from the U.S. to Europe and back again and all, you know, to Asia and Latin America, all over the place.
It is a very global economic system, and frankly the global leaders have been pretty lousy at coming to agreements on how to run this global system. And so I think just de facto, with the U.S. dollar being the global currency and the U.S. being the largest economy in the world, the U.S. Federal Reserve Bank, I guess in a sense, the answer to Bernie Sanders' question is, well, kind of yeah, the Fed is the central bank of the world.
SIEGEL: But Adam, does that mean that the Fed, that Americans in that case, could be on the hook for, who knows, Spain, Portugal, Italy, some European country in deep trouble?
DAVIDSON: I don't think the Fed would step in if it was truly a domestic issue. If Spain had a problem that would impact Spain, I don't think the Fed would have any interest. But obviously, we know that if Spanish banks truly get into trouble, that will have a cascade effect. That could really damage German banks, which could then damage U.S. banks. But I don't imagine this will be a normal course of events. I think this was a fire, and the Fed was trying to put out a fire, and it wasn't asking: Does a French guy own that house? It was just putting out the fire.
SIEGEL: Does this information tell us that the fire was perhaps even worse than we thought it was?
DAVIDSON: I think some of these numbers show us that some banks were less healthy than we thought they were, and we already thought they were pretty unhealthy.
SIEGEL: Thank you, Adam.
DAVIDSON: Thank you, Robert.
SIEGEL: That's Adam Davidson of NPR's Planet Money.
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