Two long years ago, during the 10-year anniversary of America’s 2008 financial crisis, a trio of former policy luminaries — Ben Bernanke, Hank Paulson and Tim Geithner — fretted that the Federal Reserve would be ill-placed to maintain global financial stability if another disaster hit.
After all, the post-2008 reforms seemed to curb the Fed’s legal powers. Worse still, Donald Trump’s “America First” stance appeared at odds with the idea of the Fed helping non-US partners, as it did in 2008.
Now, however, this concern seems almost quaint: as the coronavirus panic has spread, one unexpected policy twist is that the Fed now seems to have more — not less — freedom to break previous conventions, than it did in 2008.
Fed officials are unveiling so many new experiments in domestic and international markets that the institution is becoming a benchmark for the type of proactive, imaginative, speedy and decisive policymaking that is sorely lacking elsewhere. The Fed’s collaboration with non-American counterparts is serving as one of the few areas of cross-border co-ordination which is working well.
Take the latest announcement about the Fed’s new temporary facility for foreign and international monetary authorities, or FIMA — an initiative that lets central banks and public institutions around the world use their existing stock of US Treasuries to get access to dollars.
To a non-banker, this might not look very different to some of the other arcane measures that the Fed has already announced in recent years. After all, private sector banks already swap Treasuries for dollars through short-term repurchase deals with the Fed. And during the 2008 crisis the Fed organised long-term currency swaps deals with five other central banks (in Canada, the UK, the EU, Japan and Switzerland) to let them raise dollars.
The Fed revived this swaps deal earlier this month and expanded it to nine more countries, including emerging market players. That was brave. However, in recent days it has become clear that this was insufficient.
With about 80 per cent of the finance for global supply chains based in dollars — and non-US banks have about $12.6tn in assets, according to the Bank for International Settlements — there is now a global stampede for American currency under way.
Companies in places such as China, say, have borrowed particularly heavily in dollars in recent years, and need funds. Worse still, Japanese banks have been tidying up their balance sheets before the end of the fiscal year. This is hurting the flow of funds, since these institutions have quietly become the largest source of dollar lending since 2008, after US banks, the BIS also notes.
So, to alleviate the stress, the Fed has now unveiled another experiment, using the model it normally uses for private-sector America institutions. Call this, if you like, a new display of American financial multilateralism at work — but without any of the drama that normally emanates from the White House.
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This is laudable. And if it works, it should ease the disruptions in the global financial system, while also reducing the need for some foreign players to dump Treasuries.
But the big question now is which entities will actually use these facilities? Will it just be those from existing allies, such as Japan? Will it also include those from Saudi Arabia and India too? What will happen if the central bank of China needs dollars or Taiwan? (Taiwanese life insurance companies have quietly amassed vast foreign exchange exposures recently.)
Or to put it another way, will the White House give the Fed latitude to experiment if it needs to offer dollars to China — or will that be a step too far in these experiments? Therein lies an intriguing diplomatic question; and a potential cliffhanger for market-watchers given the scale of dollar borrowing by Chinese companies in recent years.
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