Scariest Words I Have Heard All Year: The Federal Reserve's moves to grant special favors to European governments "pose little risk to the U.S. taxpayer, Fed officials said, because the Fed is doing business with foreign central banks viewed as trustworthy." Fannie Mae and Freddie Mac, Bear Sterns, Lehman Brothers, Merrill Lynch, Dexia Bank of Belgium -- they were "viewed as trustworthy," too. U.S. taxpayers once were told they would never, ever have to cover Fannie Mae losses. Now U.S. taxpayers are being told they will never, ever have to cover losses for European bonds.~ Gregg Easterbrook
What happened last week was that the Fed offered deeply discounted "liquidity swap lines" to European banks. This mumbo-jumbo means European banks can borrow U.S. dollars from the United States at 0.5 percent interest. If you need to borrow for a car or credit card debt, can you get a 0.5 percent loan directly from the United States government? Now wealthy Europeans can!
As collateral, the Federal Reserve received promises of euros. Possibly you have read a newspaper at some point in the past year. If so, you know there is a real chance the euro might go out of existence. In that case the collateral becomes worthless. The Fed will have given a large amount of U.S. dollars to Europe to be squandered.
The Federal Reserve did not say how many U.S. dollars have been offered to European governments. The last time transactions of this sort happened, Fed "swaps" to Europe peaked at $580 billion. And as Bloomberg News pointed out last week in an important investigative story by Bob Ivry, Bradley Keoun and Phil Kuntz, the Fed recently has been handing insider companies huge subsidies without even disclosing that it is doing so.
The reason European banks seek dollars in the first place is that, at the moment, companies and investors don't want to borrow euros: corporations and investors know there is a risk the euro will become worthless. Last week that risk was shifted onto American taxpayers. Now European banks can make loans in dollars rather than in euros. If the loans succeed, the rich of Europe keep the profits. If the loans fail, average Americans will be handed the bill. Perhaps that's why the Fed announcement was written so as to be incomprehensible.
At the Fed, when high-level staffers leave, one year later they may seek lucrative jobs at the banks whose profits rise because of Fed actions. Banks and other big businesses often hire former regulators to cushy jobs, in order to send this message to current regulators: sell the public down the river, and there will be a cushy job for you too.
A Fed defender would say that if the economy rebounds and the euro stabilizes, then there will be GDP growth with no losses to taxpayers. Let's hope. Yet in this best-case scenario, the wealthy of Europe get their capital at a half percent courtesy of Uncle Sam, while typical Americans pay 4 to 20 percent interest to borrow. That's the best case!
Washington has not only put the younger generation on the hook for at least $14 trillion in debt -- now young Americans may end up on the hook for money squandered in Europe. TMQ asks again: Why aren't voters under age 30 outraged about this?
CNBC "experts" should read more ESPN columns and watch more Comedy Central shows. They might learn something.