Federal Reserve Floats Billions for European Bailout; Skeptics Abound

Published May 31, 2016

Federal Reserve Chairman Ben Bernanke has announced the Federal Reserve will put billions of dollars into the nearly $1 trillion (euro equivalent) bailout of Greece and Europe. It’s doing this by opening “swap lines” that send dollars to foreign central banks in exchange for their currencies. The swap includes promises by the central banks to repurchase their currencies at the original swap line exchange rate.

In February, Bernanke had declared “we have no plans whatsoever to be involved in any foreign bailouts or anything of that sort.”

Obama administration officials say the swap arrangement ensures the United States will not lose money, but others in Congress and outside the government say the swaps could carry a high price.

Here is a sampling of reaction to and analysis of the European bailout and the Federal Reserve’s involvement in it:

Ross Kaminsky, economic analyst, libertarian blogger, radio talk show host, Heartland Institute Fellow:

“It’s hard to imagine that spending, or threatening to spend, hundreds of billions of dollars to prop up money-losing wealth-redistributing ventures like the Greek government will fix or save Greek finances any more than the first tens of billions thrown at Fannie Mae and Freddie Mac helped them.

“It’s just as hard to imagine that shuffling paper within a Euro region that is consistently and in the aggregate running large budget deficits will somehow magically help the currency. It’s like arguing that moving money from my left pocket to my right pocket made me richer because I only count the money in my right pocket when determining my net worth.

“Given our nation’s financial situation, with the Obama administration on target to double the national debt within a decade or less—following on George W. Bush’s doubling of our national debt—it is unconscionable for any U.S. money to go, directly or indirectly via the IMF, to bail out Greece, Spain, Portugal, Lilliput, or any other place which has the misfortune of suffering through a recession and bad government.

“After all, we’re suffering through a recession and bad government, too.”

Patrick Barron, professor, Graduate School of Banking at the University of Wisconsin-Madison; adjunct professor, economics, University of Iowa; president, PMG Consulting LLC:

“They say we can’t lose money on the swaps. Then why doesn’t Europe make a promise like that to the market? You invest with us, give us dollars, and we’ll buy them back at a certain exchange rate. There’s nothing illegal in that.

“I think we’re just subsidizing Europe so, technically, they don’t go bankrupt. The Fed is doing this with your money and mine, and we have no say in it. The EU has more people than the United States, and their gross domestic product is about 25 percent larger than that of the United States. There’s no way we can prop up the EU and no reason we should.”

John Baker Welch, vice president, Rothschild Investment Corp.:
The United States has so far been largely unaffected by events in Greece, other than the stock market’s volatility. If anything, the U.S Treasury market and the dollar are benefiting from the resulting safe-haven flows. However, just like the financial crisis on U.S. subprime mortgages in 2008, these events have a nasty habit of spreading and taking unexpected turns.

“My main concern is not the fear of cascading sovereign debt defaults in Europe and a world economic slide into the abyss. It is that the United States does not quickly heed the important lessons of Greece’s financial crisis.”

Rep. Mike Pence (R-IN), chairman of the House Republican Conference, in The Wall Street Journal:

“Americans are waking up to the harsh reality that they may be on the hook to keep the euro afloat. With Portugal, Spain, and perhaps others to follow in Greece’s footsteps in the near future, this action shows the Obama administration is headed down a dangerous path of bailing out European countries at a time when we face our own debt crisis.”

Peter Ferrara, economist; director of entitlement and budget policy, Institute for Policy Innovation; Heartland Institute policy advisor, writing in the American Spectator:

“Imagine if each of the American states could run deficits with a federal bailout fund to back them up. Could we count on the voters of California, New York, New Jersey, Michigan, and Illinois to support candidates promising crippling austerity budgets, with draconian benefit cuts and skyrocketing taxes, so they can do the responsible thing? This is the system the EU has just adopted. What that means is get ready for still more IMF bailouts financed by American taxpayers.”

Rep. Ron Paul (R-TX) speaking with Fox Business News host Stuart Varney:

“It’s not only the taxpayer who pays taxes, but it’s everybody, Anybody who buys anything will be taxed because this is inflationary. . . . Everybody in America will suffer.

“I think last week we saw that gold all of a sudden started acting differently. It acted as a currency rather than just reacting to the value of the dollar or other commodities or the stock market. Gold has been money for 6,000 years, it’s going to remain that way, and it will rule the roost, and it’s telling us the dollar is very weak. Although everybody is buying dollars, the dollar is actually very weak when you measure it against gold.”

Steve Stanek ([email protected]) is a research fellow and managing editor of Budget & Tax News.