I'm currently learning about the money-base multiplier model and the critiques of it.
So far I've understood that one of the implications of the model is that the Central Bank can control the money supply by limiting the money base, which can be done by limiting the quantity of reserves to banks.
The criticism of this appears to be that in practice, the Central Bank can't deny banks reserves as this would create problems such as volatile interest rates or even cause bankruptcies, therefore in order to prevent a collapse in the banking sector, reserves cannot be denied to banks.
These criticisms sound very similar to why a central bank needs to act as a lender of last resort to the central bank. Are they the same thing? I'm not sure as I understand that reserves are made up of notes/coins owned by banks plus deposits held by banks at the central bank. So by denying reserves is the central bank denying banks deposits that they already placed there? If not, then how is providing emergency credit (lender of last resort) effecting the money base? I'm slightly confused, thanks
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Pressure on dollar liquidity created an urgent need for action from the US Federal Reserve (the Fed). Assuming its role as the global lender of last resort - the consequence of its position as the issuer of the international trade and reserve currency - the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008.
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In order to extend the reach of its dollar supply, the Fed has also created a repo facility for the central banks of countries that do not have dollar swap agreements. The high fees charged, however, will limit take-up, depriving the markets of what could be a significant calming influence.
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“The dollar is our currency, but your problem.” This famous line, from Treasury Secretary John Connally following the Nixon administration’s unilateral decision to pull the dollar out of the Bretton Woods system in 1971, has probably never seemed less apposite.
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Under normal circumstances, when a bank registered outside the USA and without access to the Fed’s refinancing lines needs dollars, either on behalf of a client (dollar loan, currency risk hedging) or on its own account (acquisition of a dollar-denominated asset, hedging a currency risk), it will turn to the market. It can issue debt (either secured or not) in dollars, or enter a currency swap (currency versus the dollar) on the foreign exchange (FX) swap markets7 . In periods of pressure on the dollar financing markets, it can turn to the central bank of its country of registration. To supply dollar liquidity, the central bank can either draw from its currency reserves (dollars directly, or another currency which it can then use in an FX swap) or monetise dollar-denominated assets that it holds (by selling them or putting them in repo) – or, where it has a reciprocal agreement with the Fed, it can draw against an agreed dollar swap line
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the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008. So far, the central banks that have been the biggest borrowers of dollars from the Fed have been the Bank of Japan (BoJ) and the European Central Bank (ECB). In practice, the drawing down of central bank dollar swap lines contributes to a very large extent to the financing of US resident banks
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Complementing these liquidity swaps between central banks (which will have the effect of reducing demand for dollars on the FX swap markets), the relaxation of leverage constraints on US
(dated September 2018)
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the paper discusses the ramping up of the Fed’s swap line arrangements from the onset of the GFC through Lehman Brothers’ collapse and the expansion of the swap program during the Fed’s intense crisis-fighting phase. It also discusses the establishment of swap lines with the central banks of four major emerging market countries
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The piece also covers the structure of the swap lines, alternative approaches that were considered, the effectiveness of the program, and closes with some lessons for the future
Interesting read at the bottom and their presence at DEVCON1
http://www.financemagnates.com/cryptocurrency/news/ubs-chairman-bitcoin-currency-will-fail-has-no-lender-of-last-resort/
