Fed Keeps Trying to Save Europe’s Banks; Ron Paul Frowns

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Last week I noted the spike in ECB drafts on the Fed’s swap lines, which were reopened in May 2010 to help keep dollar liquidity flowing as Europe entered its sovereign debt crisis. This morning the major central banks, including the Fed, ECB, and the Banks of Japan, England, Switzerland and Canada, announced that as of Dec. 5, 2011 they’ll reduce the already nominal interest they charge for the dollars drawn off the swaps by banks in their countries, and extend the swap lines through February 2013.

The markets have reacted with great joy to the news: the S&P is up 3.5% and the Dow’s up 3.6%, as investors take the coordinated action as an indication that the Central Banks are willing to do more to save the Euro. In particular, investors may hope (dream?) that the central banks would be willing to prop up the Euro, a move discussed elsewhere earlier this week.

Not everyone is wild about the idea of reducing the interest rates on dollars worldwide, though. There are some who think that a world economy that runs on untethered credit is a bad thing: Islamic fundamentalists, for example, who believe usury is a crime, or Ron Paul, who opposes the liquidity back stop that the Fed was created to provide. That backstop, of course, saved the world in the fall of 2008 by ultimately providing $7.7 trillion in loans to keep the circulatory system of the world economy (that is, credit) moving, so that the world economy could continue to function. The Fed points out that it has not lost a single penny on those loans.

Paul told CNBC this morning that reduction of interest rates on dollars drawn off the swap lines amount to U.S. taxpayers buying Greek debt . That’s not true, of course: the dollar-Euro swaps have fixed maturities ranging from 7 to 84 days, and the Europeans pay the Fed interest when they swap the Euros and give us dollars back. But why let a few facts get in the way of ideology.

In other news, Paul put the likelihood of him running as a third-party presidential candidate at 1 in 20 million.

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