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Politics of the Federal Reserves
International Crisis Lending
Annual Meeting of the American Political Science
Association
William Kindred Winecoff
Indiana University BloomingtonDepartment of Political Science
August 30, 2014
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7:30 a.m. Panels Are a Bad Idea
During the crisis the Fed lent extensively:
$1.5 trillion outstanding at its peak in Dec. 2008.
Swap lines with 14 foreign central banks; hundreds of billions
USD exchanged.
Emergency lending to foreign banks with branches in the U.S.
Today, the Feds balance sheet is about $4.5 trillion.
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The Balance Sheet of the Federal Reserve
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Year
Fed
eralReserveBalanceSheet,TrillionsUSD
2007 2008 2009 2010 2011 2012 2013 2014
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Currency Swaps Held by the Federal Reserve
0
100
200
300
400
500
600
Year
Swap
sHeldbytheFederalReserve,
BillionsUSD
2007 2008 2009 2010 2011 2012 2013 2014
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Commercial Paper Funding Facility Borrowing
PercentageofTotal
0
1
0
20
30
40
UnitedStates
UnitedKingdom
Belgium
Switzerland
Germany
France
Other
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Term Auction Facility Borrowing
PercentageofTotal
0
5
10
15
20
25
30
35
UnitedStates
UnitedKingdom
Germ
any
Oth
er
Japan
France
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Currency Swaps at the Fed
Foreign Central Bank Number of Transactions Peak Amount (bns)
European Central Bank 271 $170.93
Bank of England 114 $76.31
Bank of Japan 35 $50.17
Swiss National Bank 81 $13.11
Danmarks Nationalbank 19 $10.00Sveriges Riksbank 18 $10.00
Reserve Bank of Australia 10 $10.00
Norges Bank 8 $7.05
Bank of Korea 10 $4.00
Banco de Mexico 3 $3.22
Bank of Canada 0 n/a
Reserve Bank of New Zealand 0 n/a
Banco Central do Brasil 0 n/a
Monetary Authority of Singapore 0 n/a
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Prior Explanations
Much of the Feds total lending was international. Why?
Domestic politics:
McDowell (2012): concerns about U.S. macroeconomy.Broz (2013): the Fed was captured by U.S. banks with
foreign counterparties.
International:
Kindlebergerian HST & public goods provision.
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The Puzzle
Each captures important aspects, but issues remain.
Fed could lend directly to U.S. firms, who might benefit if
they faced less global competition, so why act indirectly?Fed (or Bernanke at least) believed that domestic QE would
be capable of managing domestic interest & exchange rates.
Fed did not dispassionately provide public goods globally:
some firms and countries were denied.
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My Argument
Another interest-based mechanism, with emphasis on system structure.
The maintenance of the U.S.s structural power in the global monetary
system.
Power as ability to control outcomes, particularly in the
monetary system.
Significant economic and political benefit from being at the core of
global capital networks:
n-1 condition means freedom from the Trilemma;
Unlimited funding of deficits in fiscal and capital accountswhich fund U.S. consumption, investment, and military
expenditure.
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My Argument, con.
If the structure was allowed to collapse there is no assurance that it
would be rebuilt around the U.S.
1930s as historical analogue (Helleiner, Germain, Dreznermany others).
Control over the global monetary system is the bedrock of hegemony.
This has not diminished in the post-Cold War era; if anything it has
become more pronounced.
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Eurodollars: Total
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Eurodollars: Uncovered Liabilities
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Empirical Strategy
Test these explanations in a common framework:
Direct U.S. bank exposure to foreign counterparties (Broz).
Direct foreign exposure to U.S. banks & need (Kindleberger).
Importance to U.S. macroeconomy and foreign need (Fed &
McDowell).
Eigenvector centrality as measure of structural prominence
(me).
Two model sets: one for peak amount of currencies swapped, one for
peak amount of lending to foreign banks.
Ideally Id use a network model, but it hasnt been invented yet.(Hopefully by this Fall.) So OLS for now.
To move beyond correlative analysis I have begun, but not completed,
textual analysis of Fed transcripts.
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Results
As Im currently using placeholder models I wont dwell on particularsubstantive effects, but:
For both swaps and foreign bank lending, eigenvector
centrality is significant, properly signed, and large.
When EVC is included, direct U.S. exposure is insignificant
in models of foreign bank lending and is oppositely-signed in
models of swaps.
Exposure to U.S. is never significant, but banking crisis is.
Dollar dependence is positive and significant in swaps
models.
Other variables Misery Index, trade, Polity2, GDP, banking
sector size, IMF program have effects not distinguishable
from zero.
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Tentative Conclusions
Reiteratation: these results are merely suggestive, not confirming.
But...
The structural power argument has support; Broz (1997) isstill a good guide.
The (macro) public choice argument is (perhaps) weaker than
Broz (2013) suggests;
Kindleberger was not running the Fed in 2008-9.
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Bigger Picture
Importance of systemic theory.
Need to revisit Stranges structural power arguments using
contemporary methodologies.
Complex network methods may be particularly useful.
There are limits to explanations from domestic politics of international
phenomena.
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