Winecoff 2014 APSA

8/11/2019 Winecoff 2014 APSA

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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

W.K. Winecoff | The Feds International Crisis Lending 1/17
http://find/http://goback/


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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.

http://find/


10/17

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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11/17

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

http://goforward/http://find/http://goback/


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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.

http://find/


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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.

http://find/

Documents

Winecoff 2014 APSA