Ron Paul: Stop the Fed’s Covert Bailout of Europe

by Ron Paul

This week, my congressional committee will hold a hearing to examine how the Federal Reserve bails out European banks, propping up spendthrift European governments in the process. Unfortunately this bailout comes at the expense of American citizens, in the form of higher prices and diminished savings down the road.

A good analysis of the Fed’s “swap” scheme first appeared in the Wall Street Journal back in December, in an article by Gerald O’Driscoll entitled, “The Federal Reserve’s Covert Bailout of Europe.” Essentially, beginning late last year the Fed provided U.S. dollars to the European Central Bank in exchange for Euros– sometimes as much as $100 billion at a time. The ECB then funneled those dollars to European banks to provide liquidity and prevent crises from bank insolvencies. Since the currency swap was not technically a loan, the Fed did not have to embarrass itself by openly showing foreign bank debt on its balance sheet. The ECB meanwhile did not have to print new Euros and expose the true fragility of big European banks.

The entire purpose of this unholy arrangement was to obscure the truth: namely that the Fed was bailing out Europe with U.S. dollars.

But why is it the business of the Federal Reserve to bail out European banks that find themselves short of dollars to pay their dollar-denominated contracts? After all, those

contracts often were hedges taken to protect banks against weakness of the Euro. Hedges are supposed to reduce risk, but banks that miscalculate should suffer their own losses accordingly. It’s not our business if the ECB chooses to create moral hazards by providing liquidity to European banks, but why should the Fed prop up Europe’s bad decisions!

The Fed has promised to provide unlimited amounts of dollars to the ECB, should circumstances require it. It boggles the mind. Of course when Fed officials first entered into these swap agreements with the ECB last September, they did so quietly. The American public only found out via websites of the ECB, the Bank of England, or the Swiss Central Bank.

The Fed already has pumped trillions of dollars into the economy since 2008, and US banks currently hold $1.5 trillion of excess reserves. So why don’t American banks lend those excess trillions to European banks if they really need dollars? If US banks could earn 1 or 2 percent on those loans, they might just be interested. But they can’t compete with the ½ percent interest rate charged by the Fed to the ECB. That’s one glaring example of the harm caused by the Fed’s ability to create money and loan it at below-market interest rates.

The Fed argues that these loans will be temporary, merely providing a little boost to get Europe over the hump. But that’s what they thought a few years ago when such lines of credit to the ECB were set to expire, only to see the Fed reauthorize them. What happens if the European financial system collapses? Will the Fed be left holding a bunch of worthless Euros? Will the ECB simply shrug and turn over the collateral it received from European banks, maybe in the form of bonds from Ireland, Italy, or Greece? Have the 17 individual central banks backing the ECB pledged their gold holdings as collateral?

The Fed has placed a hundred-billion dollar bet on the future of the Euro, with the strength of the dollar on the line. This is absolutely irresponsible, and directly contrary to market discipline. Let private banks, European or otherwise, take their own risks. Let foreign central banks inflate their own currencies and suffer the consequences. In other words, it’s time to apply market principles to banks and money.

  • http://www.youtube.com/profile?user=FreedomsReigning FreedomsReigning

    End the IMF and World Bank.

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  • http://www.youtube.com/profile?user=studlytwin studlytwin

    How is he winning?!

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  • http://www.youtube.com/profile?user=claradusk claradusk

    Please do not feed the trolls, thank you.

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  • http://www.youtube.com/profile?user=claradusk claradusk

    Eh, cut me some slack on my grammar, it’s past my bedtime. lol ^_^

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  • http://www.youtube.com/profile?user=2JOHNNYT 2JOHNNYT

    How about just being a HUMAN, proud of all we share between us?

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  • http://www.youtube.com/profile?user=2JOHNNYT 2JOHNNYT

    How about just being a a HUMAN?

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  • http://www.youtube.com/profile?user=Ipostle Ipostle

    You’re Engrish lulz

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  • Loren Washburn

    THE. ONLY. WAY TO GET DR. PAUL INTO THE WHITE HOUSE IS TO TALK TO LEE EGGERT BRANDON FLA. DR. PAUL BACKER. HE HAS A WAY TO HAVE DR. PAUL SPONSOR A SPRINT CUP CAR& DRIVER THAT IS READY. THIS GRASS ROOTS MOVEMENT WILL CAUSE THE TAMPA CONVENTION TO PLACE DR.PAUL AS. VICE PRESIDENT AND WATCH DOG THE WHITE HOUSE, STATE DEPT PLUS CONGRESS!!!! Lee Eggert has put forth his ideas but his calls and emails have been misplaced???? check with FLA president PAUL office About Eggert’s efforts for last 3 weeks get the national campaign Pres to do or reply with questions. the cost of this could be zero & $ 2-5 million to and bring a worldwide Internet demand and some press outlets that wish to broadcast the truth.

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  • http://www.youtube.com/profile?user=ilovety65 ilovety65

    I’m voting foryou Dr.Paul.keep up the good work.

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  • http://www.youtube.com/profile?user=claradusk claradusk

    Just checked your profile, you’re a hopeless troll.

    Zionism = Satanism

    Israel = The Great Satan

    USA Government = False Democracy

    You’re poor Engrish and repetitive nonsense makes me lulz.

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  • http://www.youtube.com/profile?user=BabylonsKing BabylonsKing

    If We the People of the United States don’t DEMOISH THE FEDERAL RESERVE PERMANENTLY You will all be LIVING IN SQUALLER due to that FAT SORRY ZIONIST JEW PIG BEN BERNANKE and his regime. Are all the Soldiers and Coppers on US SOIL been Sold Out to this Cabal? It Sure Looks like it from where I’m sitting. Common Men In Uniform this about YOUR FUTURE AS WELL AS OURS…Where’s Your HONOR and LOYALTY to the United States Constitution?

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  • http://www.youtube.com/profile?user=brooksioux brooksioux

    You are the best! True watch dog and fearless taking on a corrupt monster. Ron Paul 2012!

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  • http://www.youtube.com/profile?user=johnbarkand johnbarkand

    mr. 1979 it was YehudLand. he used his school loan money, (banksters FED money) in order to buy drugs that dumbed him down Dr. Paul 2012, the smart vote!

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  • http://www.youtube.com/profile?user=YehudLand YehudLand

    I am aproud Jew!!!
    Am Yisrael Chai!!

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  • http://www.youtube.com/profile?user=joepelham joepelham

    u r a douche bag

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  • http://www.youtube.com/profile?user=YehudLand YehudLand

    Shut up Antisemitist!! “humanity” is antisemetic!!! Long live Zionism!!!
    Am Yisrael Chai!!

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  • http://www.youtube.com/profile?user=Babblan007 Babblan007

    I support RON PAUL to 100% even if I sit on the EU side and receives FED support! It’s very simple! U.S. is hijacked by private interests through the privately owned Federal Reserve. Find out who owns the FED, goldman S, BIS, IMF, World Bank and S&P, and you get the answer to who really holds power in the US!
    If someone today told you that hundred years ago an elite run the world,you would not wink! But say that the same is true today,you think he is a paranoid loony!
    What if S&P rated US bbb?

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  • http://www.youtube.com/profile?user=UNENSLAVER UNENSLAVER

    Can we improve the audio from a cell phone call?

    PITIFUL audio!

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  • http://www.youtube.com/profile?user=westchesterny westchesterny

    Many feel threatened by the Liberty Movement— since they are afraid they could not live —in the sense of survive physically— in a free economy, and because they fear they will be exposed for having no real thoughts if they had freedom of conscience, or no real friends if they had REAL freedom of association. Pity and prayers for people that destroyed are more in order, maybe. They should realize they could “get their real self back,” and not be beholden to others and the system

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  • http://www.youtube.com/profile?user=Jacoblk1979 Jacoblk1979

    one person actually disliked this, must be pretty ignorant on current events

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