Currency Swaps and the Federal Reserve’s Role

The currency swaps, the foreign exchange swaps, discussed here are a lifeline our Federal Reserve Bank system extended to other nations during the Panic of 2008.  The arrangements let foreign central banks exchange their domestic currencies for US dollars in order to increase their domestic liquidity in addition to merely printing more domestic currency units.

The Wall Street Journal thinks the Fed should extend such swaps to more national entities than the few with which we still have such arrangements, under the guise of “that’s what the Fed’s role is.”

I have a couple thoughts on this.

…some folks to forget that financial panics happen, and that’s one reason the Federal Reserve exists.

No, it isn’t. The Fed exists to maintain price stability and full employment. Full stop.

Pricing instabilities might lead into financial panics, and vice versa, but if the Fed sticks to its role—working to maintain/restore price stability rather than reacting to panic itself—the panic will subside in result.

It [the Fed] could extend these swap lines to other countries with markets in tumult like Australia, South Korea, China, Taiwan, and Hong Kong.

It might—even likely would—be beneficial to extend swap lines to the Republic of China, along with most of the others named. It will do us little good at all to help out an enemy, the People’s Republic of China, for all that we’re presently (too much) entangled with the PRC’s economy. On the contrary, the drag the PRC’s economy represents on our own and those of other nations around the world illustrates clearly the utility of reducing that entanglement and increasing the flexibility of business’ supply chains.

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