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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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