Federal Reserve boosts effort to save euro, global financial markets


The Federal Reserve slashed in half the interest rate premium it charges European banks to borrow in dollars, part of a coordinated effort with other central banks to contain the European debt crisis. 

The move represented the clearest indication yet that officials fear the crisis could derail a fledgling economic recovery in the U.S., which received further boosts Wednesday from positive reports on manufacturing and hiring by private companies. 

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The actions and positive economic news spiked markets, with the Dow Jones rising 490 points and enjoying its best day in nearly three years. 

It also provoked a fiery response from Republicans, who have long said Fed efforts to boost the economy do more harm than good. 

Rep. Cathy McMorris Rodgers (R-Wash.) warned that the Fed move would make U.S. taxpayers “the fall guy for decades of overspending and overborrowing by European governments.”

“Every dollar the Fed prints and swaps to Europe has the danger of reducing the value of the dollars held by the American people,” she said.

The Obama administration, which earlier this week said it stood ready to help with the crisis, made the somewhat rare move of publicly backing the Fed’s decision. 

“We welcome and support the actions taken by central banks around the world today to help ease pressure on the European financial system and help foster the global economic recovery,” said Treasury Secretary Timothy Geithner.

President Obama met with European Union officials Monday, where he said the U.S. was “ready to do its part” to resolve the crisis. The crisis in Europe threatens to hold back the U.S. economy and cripple Obama’s hopes for a second term. 

Rep. Ron Paul (R-Texas), Congress’s most visible Fed critic, suggested Federal Reserve Chairman Ben Bernanke was doing President Obama’s bidding by stepping in to help Europe.

Fed defenders “should re-evaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promises U.S. assistance,” said Paul, who has consistently polled just short of front-runner status for the GOP presidential nomination.

Paul’s criticism echoed complaints about past Fed chairmen that have come from members of both parties.

Senate Majority Leader Harry Reid (D-Nev.) called Alan Greenspan a “political hack” in 2005, blaming the Fed chairman for giving President George W. Bush a pass that allowed him to blow up federal deficits. 

More than a decade earlier, some Republicans blamed a lack of action by Greenspan for a slow economy that helped limit the first President Bush to a single term. 

Another key Republican offered nuanced support for the move. 

Rep. Spencer Bachus (R-Ala.), the chairman of the House Financial Services Committee, said it was in the U.S. national interest to help Europe recover. 

At the same time, he emphasized that any U.S. support should be contingent on continued European efforts to solve the underlying issues of excessive debt.

“Today’s central bank action should not and cannot absolve European policymakers from the need to resolve their own problems,” he said. “If the U.S. is to continue to support Europe, then Europeans must be willing to make the same kind of painful choices to reflect today’s economic reality.”

The Fed’s decision is a step up in involvement for the U.S. government, which previously has urged European leaders to take decisive action. 

With its Wednesday actions, the Fed will reduce its gains on currency swap agreements and allow foreign banks easier access to liquidity.

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“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed said in a statement.

The central bank emphasized that U.S. financial institutions are not currently lacking access to cash, but that it has a “range of tools” it could employ if the situation worsened.

The move is expected to buy time for European institutions to get a handle on the debt crisis.

European financial institutions are under immense scrutiny from investors and are struggling to line up affordable financing. The Fed’s move allows it to engage in cheaper swaps with the European Central Bank (ECB), which in turn can loan those dollars out to the banks.

But experts warned that it was nowhere near enough and fundamental issues still need to be dealt with there to protect the global economy.

“This action does not come close to resolving the current financial crisis in Europe, nor its contagion to the United States,” said Dean Baker and Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research.

Advocates of greater Fed action have gone so far as to suggest the central bank should begin buying up debt from troubled European nations that sit at the heart of the crisis, a move the ECB has refused to take and something that would ignite a political firestorm in Congress.


— This story was posted at 9:38 a.m. and last updated at 8:24 a.m.