The Federal Reserve announced a $290 billion expansion of swap lines with foreign central banks today, adding facilities to acquire foreign currency in transactions with the British, European, Swiss and Japanese central banks. The move adds to the swap line of $300 billion created last fall to provide dollars to the same foreign central banks, and brings the total of such swaps run through the Federal Reserve to about $690 billion. I think there are some serious political questions related to these issues, but first I'd like to briefly discuss the recent developments and their context.
The move is another in the series since the spring and summer of 2007 when Bernanke began to use the Federal Reserve's capital accounts as a supplement to interest rate reduction in loosening credit. In the process Bernanke seems to be transforming the Federal Reserve system away from being a supplier of credit to the system and toward becoming the preferential supplier to a part of the system. This has been addressed byJames Hamilton, among others: