The Fed’s decision two weeks ago to lower the cost of dollar funding to liquidity-starved European banks has aroused criticism on the both the left and right, but also strong words from a noted bank analyst. Republican presidential candidate and fierce Fed critic Ron Paul was swift in his denunciation of the Fed’s Nov. 30 move, lamenting that “under current law Congress cannot examine these types of agreements. “
In less than two weeks, European banks anonymously clamed nearly $600 billion from the ECB’s discount window, prompting former Clinton administration advisor and Nobel Prize winner Joseph Stiglitz to say in a Bloomberg report, that the Fed hypocritically sought “capital market discipline without information” that markets need to perform properly.
But those criticisms from the political right and left were mild in comparison to Chris Whalen, bank analyst and chairman of Lord, Whalen. Writing in this week’s edition of the firm’s blog, The Institutional Risk Analyst, Whalen says that “by providing financing to the bankrupt nations of Europe, the Fed is interfering in the internal political affairs of foreign nations,” and in so doing helping to protect entrenched business and political interests. Europe’s voters, he argues, might “throw the rascals out” if the U.S. Federal Reserve didn’t act to keep European institutions solvent.
In his blog, Whalen interviews Walker Todd, a former Fed official and current scholar at the American Institute for Economic Research, who calls the Fed’s move unconstitutional. “The Constitution clearly and squarely prohibits a congressional delegation of the power to create monetary claims against the United States. What else is a swap agreement, after all? The Congress cannot allow claims to be created permanently to an entity not subject to congressional (a) appropriations or (b) review,” Todd said.
The financial scholar warned the Fed is allowing the ECB to create “unlimited amount claims” against the Fed. The Fed has described its recent move to reduce the overnight dollar index swap rate by 50 basis points as a technical action whose risk is borne by its central bank counterparties. According to Whalen, that is “true if the central banks on the other side of the swap still exist a year from now.”