A new paper from Lawrence Broz uses formerly disclosed information to show that the Fed’s global lending patterns fit the interests of global U.S. banks just fine. He then analyzes a vote in Congress on a bill that would reduce the Fed’s confidentiality permanently. All but one Republican favored the bill (Robert Turner was the odd one out). Among Democrats those that received campaign contributions by U.S. banks and those towards the conservative end of the ideological spectrum were more likely to vote in favor (one argument against is that it decreases the political independence of the Fed). Taken together, these findings suggest that the Federal Reserve served as lender of last resort at least in part because it served the interests of large U.S. global banks and that these banks influenced Congress through campaign financing. I fully expect Ron Paul to cite this paper at his “last hurrah.”
Here is the abstract:
Passage of the Dodd-Frank financial reform bill, in conjunction with a Supreme Court ruling supporting a Freedom of Information Act request, forced the Federal Reserve (Fed) to disclose private information about its emergency lending during the financial crisis. The disclosures revealed the extent to which the Fed served as a global lender of last resort, providing dollar liquidity to foreign banks that were having difficulty funding their dollar-denominated assets. I exploit the exogenous nature of these disclosures on two levels. First, I use the disclosed information to evaluate the Fed’s global lending during the crisis. My findings indicate that the Fed supported foreign banks in countries in which U.S. money-center banks had high loan exposures, which suggests that the Fed served the interests of global U.S. banks. Second, I explore the congressional response to revelations of the Fed’s massive global lending. I analyze a House vote on “Audit the Fed” legislation that would end the Fed’s confidentiality about the banks and countries it supports and potentially reduce its monetary policy independence. I find the influence of global banks extends to Congress by way of campaign contributions: contributions from global banks significantly reduce the likelihood that a representative will vote in favor of the bill. In addition, I find that right-wing representatives are substantially more likely than their left-wing peers to support the bill, which suggests that new coalitions are forming in Congress on role of the Fed in the (global) economy.
[Cross-posted at The Monkey Cage]