U.S. Banks and the Fed as Global Lender of Last Resort

A new paper from Lawrence Broz uses formerly disclosed information to show that the Fed’s global lending patterns fit the interests of global U.S. banks just fine. He then analyzes a vote in Congress on a bill that would reduce the Fed’s confidentiality permanently. All but one Republican favored the bill (Robert Turner was the odd one out). Among Democrats those that received  campaign contributions by U.S. banks and those towards the conservative end of the ideological spectrum were more likely to vote in favor (one argument against is that it decreases the political independence of the Fed).  Taken together, these findings suggest that  the Federal Reserve served as lender of last resort at least in part because it served the interests of large U.S. global banks and that these banks influenced Congress through campaign financing. I fully expect Ron Paul to cite this paper at his “last hurrah.”

Here is the abstract:

Passage of the Dodd-Frank financial reform bill, in conjunction with a Supreme Court ruling supporting a Freedom of Information Act request, forced the Federal Reserve (Fed) to disclose private information about its emergency lending during the financial crisis. The disclosures revealed the extent to which the Fed served as a global lender of last resort, providing dollar liquidity to foreign banks that were having difficulty funding their dollar-denominated assets. I exploit the exogenous nature of these disclosures on two levels. First, I use the disclosed information to evaluate the Fed’s global lending during the crisis. My findings indicate that the Fed supported foreign banks in countries in which U.S. money-center banks had high loan exposures, which suggests that the Fed served the interests of global U.S. banks. Second, I explore the congressional response to revelations of the Fed’s massive global lending. I analyze a House vote on “Audit the Fed” legislation that would end the Fed’s confidentiality about the banks and countries it supports and potentially reduce its monetary policy independence. I find the influence of global banks extends to Congress by way of campaign contributions: contributions from global banks significantly reduce the likelihood that a representative will vote in favor of the bill. In addition, I find that right-wing representatives are substantially more likely than their left-wing peers to support the bill, which suggests that new coalitions are forming in Congress on role of the Fed in the (global) economy.


8 Responses to U.S. Banks and the Fed as Global Lender of Last Resort

  1. Woener August 22, 2012 at 11:13 am #

    …so your only significant comment on this Broz paper is that Ron Paul might find it interesting ?

    How ’bout the massive negative effects of this banking/Congress collusion upon the U.S. economy ?

    The Federal Reserve is a cartel of large banks … created in 1910 at Jekyll Island, Georgia by big- banksters (Morgans, Rockefellers, etc). Congress enforced the cartel with the Federal Reserve Act of 1913. In turn, the Fed supplies Congress with all the phony-money it wants. Result to Joe-Sixpack is that the U.S. Dollar has lost 99% of its value since 1913.

    Very old news.

  2. matt w August 22, 2012 at 12:25 pm #

    You say “among Democrats those that received campaign contributions by U.S. banks… were more likely to vote in favor,” but the abstract says “contributions from global banks significantly reduce the likelihood that a representative will vote in favor of the bill.” These seem to me to contradict each other. Is there a typo, or am I misunderstanding something.

    (As a left-wingish Democrat who doesn’t get any contributions from banks, I’m starting to think that the central bank shouldn’t be independent. The president is the person most likely to lose his job for poor economic performance, so wouldn’t it align the incentives properly to give him control over the central bank’s interest rate policies? Under the selection pressure of the election, we would start getting good monetary policy. This seems like it would be a much healthier form of democracy than giving the central bank the power to blackmail democratically elected governments into doing what the central bankers think they ought to do. I suppose that link contains an answer to my suggestion, which is that a non-independent central bank will time things to the election cycle, though in the U.S. I’m not sure that the incumbent president will be so happy to sacrifice Congress in mid-term elections.)

  3. Sarah August 22, 2012 at 4:18 pm #


    I read the paper quickly. All (but one) of the House GOP legislators voted for the Audit bill, so Broz only models the vote choice of House Democrats.

    As for the argument in favor of independent central banks, the typical argument in favor of independence is that countries with more independent central banks have lower levels of inflation. I haven’t read deeply enough into the literature to know whether certain types of countries are both more likely to create independent central banks and more likely to exhibit lower levels of inflation.

    • matt w August 23, 2012 at 6:14 am #

      Does the literature say anything about independent central banks and unemployment? From my perspective, the problem (at least right now) with the central banks is that they valorize low inflation above all else, including recovery from the terrible depression that we’re currently in. (e.g..) But his may be a one-time circumstance, albeit a very significant time and one that looms very large, in which a low inflation target has made it easy to fall into a liquidity trap.

      As for the article, I think I see what I was missing — contributions from U.S. banks made Democrats more likely to vote in favor, contributions from global banks made them more likely to vote against; is that right? Or are the global banks and the U.S. banks the same banks, since the abstract refers to “global U.S. banks”? Because if so, then Erik’s writeup seems to say that bank contributions made Democrats more likely to vote yes, and the abstract seems to say that bank contributions made Democrats less likely to vote yes.

      • Erik Voeten August 23, 2012 at 9:23 am #

        The abstract is of course right but my writeup wasn’t. Sorry too quick, I should have just posted the abstract.

        • matt w August 23, 2012 at 9:52 am #

          No problem — easy to make typos. Just wanted to check I wasn’t completely confused.

      • Sarah August 23, 2012 at 10:41 am #

        Matt– All good questions. I’m no expert here (and maybe Lawrence Broz or others will jump in and take over the conversation…), but the classic piece on central bank independence and price stability is Alesina and Summers (Journal of Money, Credit, and Banking, 1993). Alesina and Summers do test as well for the impact of independence on real economic performance (including unemployment) but find no measurable effects. (Note that they also raise the possibility that independence and economic outcomes may be jointly endogenous.)

        Having said that, keep in mind that not all central banks have dual mandates like the Fed. (And as you suggest, one might question whether the Fed treats its twin goals equally.) So prioritizing price stability over low unemployment may be perfectly consistent with other central banks’ institutional mandates. (Plus, reams have been written about the relationship between inflation and unemployment, suggesting that there are a lot of moving parts in these analyses.)

        • matt w August 24, 2012 at 10:27 am #

          Thanks Sarah!