One of my kitties decided to stay out all night, and consequently I had trouble sleeping and found myself wide awake in the wee hours of the AM. So I turned to Market Watch and Bloomberg News to see the latest. First I turn to John Markman of Market Watch who claims that Timothy (I-forgot-that-I-had-to-pay-taxes) Geitner has cooked up a scheme that will save Europe (Geithner’s plus-sized euro bailout is stealth QE3). :
The plan, cooked up by U.S. Treasury Secretary Tim Geithner, is to persuade European leaders to vastly expand the size of the emergency bailout fund known as the EFSF, or European Financial Stability Facility. His proposal, and I’m not making this up, would use leverage — i.e., borrowing — to increase the size of the already borrowed money in the fund by up to 10x. … snip
This is a little hard to believe, but it’s the truth. The funds from euro-zone countries in the EFSF have already been borrowed. And now the plan espoused by Geithner is to use that money as collateral to borrow as much as ten times more. The guy does not get enough credit for his evil genius.
Where is Geitner going to get this money? Apparently, if I understand correctly, from the Federal Reserve Bank. So Bloomberg says (Euro Crisis Makes Fed Lender of Only Resort),
The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.
So let’s get this straight: The Federal Reserve will lend money to the Europeans. This money will come from where? It will become a new line on Fed balance sheet and will thus increase the adjusted money base. This has become known as quantitative easing. The money won’t be printed, and so nobody will see wheel barrows cash in the market places of Europe as they did in the Weimar Republic. No, it will just be line in a balance book, electronically created from nothing at all (see Niall Ferguson, The Ascent of Money, 30-31, quoted in this post).
Now the best explanation of global monetary policy is in Corner Gas, season 3, episode 1, which is actually an allegory of banking in our times: Oscar has made some bad bets in his stock picking game with Hank, who is beating him hands down. They each started with $10,000 of fictional money, but Oscar’s picks have gone South. But he’s seen the news about Ark Research’s insider trading, and he believes that knowledge will help him defeat Hank. He decides to bet big on Ark Research, but he is in desperate need of liquidity. So Oscar (a.k.a., the European banks) goes to his son Brent (i.e., the Federal Reserve Bank) and asks for $10,000 from his fictional money tree. Brent says, Why can’t you do it yourself? Did a fictional hooligan steal your make-believe ladder? No, Oscar says, that would be against the rules. Without rules nothing makes sense, he claims. With rules, this makes no sense, Brent responds. The monetary policy part of the clip begins at 0:39. (@7:08 Oscar explains that he lost all the money and he can’t pay Brent back, and that is exactly how the loan to Europe is gonna go down).