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Politics of the Federal Reserves
International Crisis Lending
Annual Meeting of the American Political Science
Association
William Kindred Wineco
Indiana University Bloomington
Department of Political Science
August 30, 2014
W.K. Wineco | The Feds International Crisis Lending 1/17
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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.
W.K. Wineco | The Feds International Crisis Lending 2/17
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The Balance Sheet of the Federal Reserve
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W.K. Wineco | The Feds International Crisis Lending 3/17
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Currency Swaps Held by the Federal Reserve
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W.K. Wineco | The Feds International Crisis Lending 4/17
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W.K. Wineco | The Feds International Crisis Lending 5/17
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W.K. Wineco | The Feds International Crisis Lending 6/17
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Currency Swaps at the Fed
Foreign Central Bank Number of Transactions Peak Amount (bns) Peak Date
European Central Bank 271 $170.93 Oct. 15, 2008
Bank of England 114 $76.31 Oct. 15, 2008
Bank of Japan 35 $50.17 Oct. 21, 2008
Swiss National Bank 81 $13.11 Jan. 13, 2009
Danmarks Nationalbank 19 $10.00 Oct. 24, 2008
Sveriges Riksbank 18 $10.00 Oct. 15, 2008
Reserve Bank of Australia 10 $10.00 Oct. 15, 2008
Norges Bank 8 $7.05 Jan. 27, 2009
Bank of Korea 10 $4.00 Dec. 2, 2008
Banco de Mexico 3 $3.22 Apr. 21, 2009
Bank of Canada 0 n/a n/a
Reserve Bank of New Zealand 0 n/a n/a
Banco Central do Brasil 0 n/a n/a
Monetary Authority of Singapore 0 n/a n/a
W.K. Wineco | The Feds International Crisis Lending 7/17
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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.
W.K. Wineco | The Feds International Crisis Lending 8/17
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The Puzzle
Each captures important aspects, but issues remain.
Fed could lend directly to U.S. rms, who might benet 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 rms and countries were denied.
W.K. Wineco | The Feds International Crisis Lending 9/17
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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.
Signicant economic and political benet from being at the core of
global capital networks:
n-1 condition means freedom from the Trilemma;
Unlimited funding of decits in scal and capital accounts
which fund U.S. consumption, investment, and military
expenditure.
W.K. Wineco | The Feds International Crisis Lending 10/17
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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, Drezner
many 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.
W.K. Wineco | The Feds International Crisis Lending 11/17
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Eurodollars: Total
W.K. Wineco | The Feds International Crisis Lending 12/17
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Eurodollars: Uncovered Liabilities
W.K. Wineco | The Feds International Crisis Lending 13/17
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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.
W.K. Wineco | The Feds International Crisis Lending 14/17
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Results
As Im currently using placeholder models I wont dwell on particular
substantive eects, but:
For both swaps and foreign bank lending, eigenvector
centrality is signicant, properly signed, and large.
When EVC is included, direct U.S. exposure is insignicant
in models of foreign bank lending and is oppositely-signed in
models of swaps.
Exposure to U.S. is never signicant, but banking crisis is.
Dollar dependence is positive and signicant in swaps
models.
Other variables Misery Index, trade, Polity2, GDP, banking
sector size, IMF program have eects not distinguishable
from zero.
W.K. Wineco | The Feds International Crisis Lending 15/17
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Tentative Conclusions
Reiteratation: these results are merely suggestive, not conrming.
But...
The structural power argument has support; Broz (1997) is
still a good guide.
The (macro) public choice argument is (perhaps) weaker than
Broz (2013) suggests;
Kindleberger was not running the Fed in 2008-9.
W.K. Wineco | The Feds International Crisis Lending 16/17
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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.
W.K. Wineco | The Feds International Crisis Lending 17/17