The Politics of Rescuing the World's Financial System: The Federal Reserve as a Global Lender of Last Resort

Abstract

During the financial crisis of 2007-10, the Federal Reserve (Fed) served as a global lender of last resort by establishing currency swap agreements with 14 central banks, including several in East Asia, to provide dollar liquidity to banks in foreign jurisdictions. These agreements were controversial internationally because the Fed selectively established swaps with some central banks and not others, raising concerns about access to the Fed’s dollar-creating facilities. Within the U.S. Congress, the swaps were controversial because they appeared to be a new and unauthorized form of foreign aid. I analyze both the Fed’s decision to establish swap lines with certain central banks and the congressional response to these arrangements. I find that the Fed was more likely to establish swaps with central banks whose jurisdictions were important to U.S. commercial banks, suggesting that the Fed discriminated in ways that served U.S. interests. I also analyze subsequent congressional voting on legislation that would enhance the Fed’s transparency with respect to its transactions with foreign central banks. I find that campaign contributions from commercial banks significantly reduce the likelihood that a representative voted “yes” on the bill. I also find that right-wing representatives were far more likely than their left-wing peers to support this bill, which suggests that new coalitions are forming on the role of the Fed in the (global) economy.