At the onset of the recent volatility that has taken place in the global financial markets, much attention has been focused on the behavior of stock exchanges and the evolution of the debt crisis in Europe. But while the markets are reacting strongly to the signs that the process of restructuring the debt of the countries of the European periphery is only a matter of time, most media specialists are missing a key factor of fragility in the European and global financial system: its dependence on short-term, dollar denominated, bank funding.Unfortunately, this piece requires an understanding of finance terms that are obscure to the average person. In my opinion such information has been deliberately obscured to keep ordinary people in the dark as to how their economy actually functions. Also, finance requires some study and therefore time to study the subject. To survive in a capitalist system working people must work long hours and have little energy left over to devote to subjects like this--and that's the way capitalists like it.
I have only a little understanding of the subject and the terms used in this article, but I think it is very important. Thus, I will make a stab at it and welcome others to clarify the issues and concepts.
When the author refers to "asset backed securities" he is mostly writing about the worthless mortgage backed securities that banks were peddling like snake oil all over the world. (See this for more details.)
As these investments were finally revealed as mostly worthless, banks in the UK in 2007 were the first to feel the pain, then in 2008 Lehman Brothers in the US failed while Bear Stearns and Merrill Lynch were sold at fire-sale prices. Goldman Sachs and Morgan Stanley received considerable direct and indirect assistance from the Fed with their ability to create dollars out of debts assumed by US taxpayers--mostly working people because the rich and the corporations pay very little in taxes.
Fannie Mae and Freddie Mac, two U.S. Government sponsored enterprises (read privately owned but with government guaranteed backing), had guaranteed nearly $5 trillion in mortgage obligations at the time they were placed into conservatorship, that is, their debt obligations were assumed by the U.S. government (taxpayers) in September 2008.
Soon more banks in Europe were threatened with bankruptcy. The large European central banks have been trying to keep them afloat by swapping some of their other assets for short term loans in US dollars from the Fed. This has been going on in secrecy, but at least partly revealed recently as reported in these articles: here and here.
But, as the author of this article reveals, there appears to be a roadblock ahead preventing the Fed from injecting more cash in these banks through the use of swaps:
...as a result of the Dodd-Frank Act, the FED would be unable to extend unlimited swap lines with other central banks without getting explicit approval from the Congress of the United States.However, when push comes to shove, I have never seen the political operatives of the ruling class let laws stand in their way from whatever they wanted to do (the Iran Contra affair and CIA operations within the US come readily to mind), and certainly not when they need to save their precious system.
