05/11/2010Fed justifies revival of swap lines - Move a response to EU credit crisis
WASHINGTON — Federal Reserve Chairman Ben Bernanke on Tuesday told U.S. senators that the central bank had to reopen a rescue program used during the financial crisis to prevent Europe's debt woes from spreading.
Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said at the end of the closed-door meeting that Bernanke warned lawmakers the European crisis was threatening U.S. banks.
The Fed on Sunday said it would revive swap lines with five foreign central banks, including the European Central Bank, which were used in 2008 to ship more than $500 billion to help them with dollar funding. Some lawmakers have criticized the move, saying it amounts to bailing out foreigners and is done in a secretive way.
Shelby expressed strong concerns about the Greek crisis spreading to the rest of Europe, indicating his support for the Fed's program. But he warned it was just a temporary solution.
"It's a tough situation. This is not a panacea or a solution. It's a big Band-Aid," he told reporters.
Meanwhile, a Fed official worried Tuesday the swap lines could lead the central bank's already bloated balance sheet to expand further.
Richmond, Va., Federal Reserve President Jeffrey Lacker said the Fed should consider "sterilizing" the swap lines it is providing to avoid further inflating the balance sheet. Lacker said the Fed has a range of options it could consider to offset the impact, though he declined to name the most likely.
Although the Fed's action is aimed at helping Europe's debt crisis from reaching the U.S., it could muddy the central bank's accelerating effort to reduce its $2 trillion-plus balance sheet.
Balance sheet worries are rooted in the fear the central bank's holdings eventually will generate a huge surge in inflation, a concern Lacker underlined Tuesday by saying the Fed must be careful not to raise interest rates too late.
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