But in terms of Europe’s overall problems, with governments unable to live within their means, and with investors on strike against government bonds and a very shaky banking system, the Fed action is really like taking a Tylenol gel cap. Might help the headache in the short run, but the fundamental illness is unaffected.
Basically, Bernanke & Co. cut the interest rate it charges for dollar swap lines to the ECB and four other major central banks (Canada, England, Japan, and Switzerland). With interbank funding pressures in Europe rising substantially of late, the Fed’s action was timely. It doesn’t really create new dollars, but it lowers the borrowing cost of dollars taken by the ECB and other central banks.
Technically, the Fed has lowered the dollar swaps spread from 1 percent above the OIS — the overnight index swap, which is comparable to the fed funds rate — to only 50 basis points.
So this is good. And stocks responded by rallying big time.
(Oh, by the way, while the Fed was lowering its dollar-swap interest rate, China eased monetary policy for the first time in several years by reducing bank reserve requirements by 50 basis points. This may be the first of several Chinese easing moves, and it certainly added to the stock surge.)
But a dollar shortage is not Europe’s problem. As of the weekend of November 23, foreign central banks had tapped the Fed for only $2.4 billion of dollar loans. This is very small. In December 2008, during the height of the financial crisis, foreign central banks borrowed $580 billion.
The European problem is a ballooning welfare entitlement state that is bankrupting most of Europe’s governments. And high European tax rates are strangling economic growth. And the debt that private investors won’t buy is held by a banking system that is increasingly vulnerable. And Germany, the strongman of Europe, doesn’t want to pay to bail out the southern countries or anyone else — including, it would seem, France.