“Which Foreigners Got the Fed’s $500,000,000,000?” Bernanke: “I Don’t Know.”

No, I don’t consider myself to be an economist. Being an avid reader, I stumbled across something that was very interesting, to say the least. I was reading a book entitled End The Fed, authored by Ron Paul, and then I ran into an intriguing concept. The subject was Exchange Stabilization Fund, an idea that I’m trying to grasp.

The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply.

The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve Act of January 31, 1934.

As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in special drawing rights (SDR) from the International Monetary Fund. Okay, enough of that.

Then I ran across an amusing video. Alan Grayson, A former U.S. Representative for Florida’s 8th congressional district, popped a serious question to Ben Bernanke, the Fed Chair. “Which Foreigners Got the Fed’s $500,000,000,000?” Bernanke: “I Don’t Know.”

Grayson Questions Bernanke About Federal Reserve Loans

Grayson: There’s a table on page 26 which consists of your balance sheet, and one of the entries on the balance sheet is under Assets Central Bank Liquidity Swaps, which shows an increase from the end of 2007; from $24 billion to $533 billion in change, at the end of 2008. What’s that?

Bernanke: Those are swaps that were done with foreign central banks. Many foreign banks are short dollars and slip into our markets looking for dollars and drive up interest rates and create volatility in our markets. What we have done is with a number of major central banks, like European Central Bank for example, we swap our currency dollars for their currency Euros. They take the dollars and lend it out to the banks in their jurisdiction. That helps bring down interest rates in the global market for dollars, and meanwhile we’re not lending to those banks; we’re lending to the central bank. The central bank is responsible for repaying us.

Grayson: So, who got the money?

Bernanke: [It went] To financial institutions in Europe and other countries.

Grayson: Which ones?

Bernanke: I don’t know.

Grayson: Half a trillion dollars and you don’t know who got the money?

Bernanke: The loans go to the central banks and they put them out to their institutions to try to bring down short-term interest rates.

Grayson: Well, let’s start out with which central banks got the money.

Bernanke: There are fourteen of them, I’m sure they’re listed in here somewhere.

Grayson: So, who actually made that decision to hand out a half a trillion dollars that way? Who made that decision?

Bernanke: The Federal Open Market Committee.

Grayson: Was it done at one time or in a series of meetings?

Bernanke: A series of meetings.

Grayson: And under what legal authority?

Bernanke: We have a longstanding authority to do swaps with other central banks. It’s not an emergency authority of any kind.

Grayson: Anything specific about it?

Bernanke: My counsel says Section 14 of the Federal Reserve Act.

Grayson: We actually looked at one of the arrangements, and one of the arrangements is $9 billion for New Zealand. That works out to $3,000 for every single person for who lives in New Zealand. Seriously, wouldn’t it be better to extend that kind of credit to Americans, rather than New Zealanders?

Bernanke: It’s not costing Americans anything. We’re getting interest back and it’s not at the cost of any American credit. We are extending credit to Americans.

Grayson: Wouldn’t it necessarily affect the credit markets if you extend a half a trillion dollars credit to anybody?

Bernanke: We are lending to all U.S. financial institutions in exactly the same.

Grayson: Look at the next page. The very next page has the US dollar nominal exchange rate, which shows a 20% increase in the US dollar nominal exchange rate at exactly the same time that you’re handing out a half a trillion dollars to foreigners. Do you think that’s a coincidence?

Bernanke: Yes.

Grayson: The Constitution (art. I. § 9) says “no money shall be drawn from the treasury but in consequence appropriations made by law”. Do you think it’s consistent with the spirit of that provision of constitution for a group like the FMOC (Federal Open Market Committee) to hand out a half a trillion dollars to foreigners, without any action by this congress?

Bernanke: Congress approved it in the Federal Reserve Act.

Grayson: When was that?

Bernanke: Quite a long time ago. I don’t know the exact date. The Federal Reserve Act was in 1913.

Grayson: At that time the entire gross national product of this country was well under a half a trillion dollars, wasn’t it?

Bernanke: I don’t know.

Grayson: It is safe to say that nobody in 1913 contemplated that your small little group of people would decide to hand out a half a trillion dollars to foreigners?

Bernanke: This particular authority has been used numerous times over the years.

Grayson: Actually, according to the chart on page 28, virtually the entire amount that’s reflect on your entire balance sheet went out starting in the last quarter of 2007. And before that, going back to the beginning of this chart, the amount of lending was zero, to foreigners.

Bernanke: It was zero before the crisis. This was part of the process working with other central banks to try to get dollar money markets working normally in a global economy.