CHAIRMAN GREENSPAN. Just a couple of questions relevant to this issue: The real danger here, as you imply, is that there are numerous people who can envisage a reverse repo as an extension of credit.
I can very readily see that there are certain countries with which the Federal Reserve Bank of New York might engage in a reverse repo and that transaction would not sit well with various Congressional committees or a variety of other groupings within this society.
Do you think we should have at least some indication from the Committee as to the eligible list of countries or some mechanism for making that sort of judgment other than requiring it to be made by the Chairman or the Vice Chairman of this Committee?
VICE CHAIRMAN MCDONOUGH. Mr. Chairman, I think that has great merit.
The question is the form.
Would you want a list or would you want a sense of the Committee concerning what sorts of countries might be on the list?
CHAIRMAN GREENSPAN. We do not want a published list.
VICE CHAIRMAN MCDONOUGH. Yes, and we do not want a leaked list or somebody trying to obtain it through a FOIA request.
A list cannot be leaked or released if it does not exist.
My preference would be for us to have a discussion to arrive at a sense of the Committee concerning standards.
The latter might include the requirements that a country should be highly creditworthy and not be in conflict with the United States of America in some manner.
I think the Committee could give certain guidelines for the Desk and the Chairman to follow.
This is not a firm opinion, but my own working hypothesis is that we would be better off to have guidelines rather than a list.
CHAIRMAN GREENSPAN. Perhaps they might include such a thing as the State Department's acquiescence in American citizens visiting such countries.
VICE CHAIRMAN MCDONOUGH. Yes, right.
TO BE CONTINUED ...
MINUTES OF JULY 3, 1996 FOMC MEETING
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Minehan.
MS. MINEHAN. Mr. Chairman, I would like to take advantage of your offer to discuss the broader principles bearing on this issue and to leave some of the details for a subsequent discussion.
I think the fundamental question that underlies the several discussions of swaps in which I have participated is whether we believe that central banks should have reserves in foreign currencies that they use either to support foreign exchange markets or to address payments system problems or both.
My answer to that is that I am in favor of maintaining balances in foreign currencies.
I say that despite the fact that foreign exchange intervention is tricky and more importantly it is not suited in some ways to what one might regard as a pure market philosophy.
Foreign currency holdings have been useful in the past and not having them seems to me to be more risky than maintaining them despite all the questions that they raise about the size of holdings, earnings, and related matters.
We have accumulated a lot of foreign exchange holdings, though I gather mostly in two currencies, over the years.
Swap lines, as I understand them, were put in place to provide currency balances where none existed.
So, having foreign exchange balances and swap lines at the same time is a lot like having a belt and suspenders, too.
Should we do away with swaps?
Over the years, I have come to be a believer in the desirability of belts and suspenders at the same time.
I think the combination is often a good thing, especially when the suspenders are quite cheap and are legal as in this case.
I also believe that engaging in foreign exchange intervention and using swaps in conjunction with the Treasury, rather than compromising our independence, is highly useful, in providing us with an opportunity to inform and moderate Treasury actions.
Treasury practices in this area can, of course, bounce back and forth depending on the policies of the Administration.
It is possible that existing balances of foreign currencies may not be sufficient in some cases like the Mexican crisis.
Swaps are the time-honored way of getting foreign currencies, and the fact that our swap lines have not been used in recent years except by Mexico seems fortuitous to me but not especially relevant to the issue of whether or not they should exist.
The use of repo facilities is, I think, a separable issue.
Repo facilities inherently involve maintaining foreign exchange balances, as I understand them.
At least based on the material presented in the staff memo, I find it difficult to come to a settled conclusion on the expansion of repo facilities because I think we need a fuller treatment and fuller discussion at some point as to exactly how they are used and in what situations they are used.
But based on what I know about them, I find it hard to imagine that repo facilities could replace swaps.
They do not seem to deal with the issue of a lack of balances in the affected currency.
What happens, for example, when there is a sterling run on Citibank branches in London?
We do not have a lot of sterling balances.
If this repo process is used to replace swaps, which is the implication of the memo, how does that help us deal with that?
Whether repo agreements are standard or customized, they could involve a major negotiation process with every country involved, and this undoubtedly would take a lot of time and effort.
In short, at least in my own mind--and I could be naive or wrong about this--it seems to be a little like mixing apples and oranges to imply that swaps could be replaced by repo arrangements.
It may be that I do not understand this well, but there does seem to be a bit of a mix here.
TO BE CONTINUED ...
MS. MINEHAN. Mr. Chairman, I would like to take advantage of your offer to discuss the broader principles bearing on this issue and to leave some of the details for a subsequent discussion.
I think the fundamental question that underlies the several discussions of swaps in which I have participated is whether we believe that central banks should have reserves in foreign currencies that they use either to support foreign exchange markets or to address payments system problems or both.
My answer to that is that I am in favor of maintaining balances in foreign currencies.
I say that despite the fact that foreign exchange intervention is tricky and more importantly it is not suited in some ways to what one might regard as a pure market philosophy.
Foreign currency holdings have been useful in the past and not having them seems to me to be more risky than maintaining them despite all the questions that they raise about the size of holdings, earnings, and related matters.
We have accumulated a lot of foreign exchange holdings, though I gather mostly in two currencies, over the years.
Swap lines, as I understand them, were put in place to provide currency balances where none existed.
So, having foreign exchange balances and swap lines at the same time is a lot like having a belt and suspenders, too.
Should we do away with swaps?
Over the years, I have come to be a believer in the desirability of belts and suspenders at the same time.
I think the combination is often a good thing, especially when the suspenders are quite cheap and are legal as in this case.
I also believe that engaging in foreign exchange intervention and using swaps in conjunction with the Treasury, rather than compromising our independence, is highly useful, in providing us with an opportunity to inform and moderate Treasury actions.
Treasury practices in this area can, of course, bounce back and forth depending on the policies of the Administration.
It is possible that existing balances of foreign currencies may not be sufficient in some cases like the Mexican crisis.
Swaps are the time-honored way of getting foreign currencies, and the fact that our swap lines have not been used in recent years except by Mexico seems fortuitous to me but not especially relevant to the issue of whether or not they should exist.
The use of repo facilities is, I think, a separable issue.
Repo facilities inherently involve maintaining foreign exchange balances, as I understand them.
At least based on the material presented in the staff memo, I find it difficult to come to a settled conclusion on the expansion of repo facilities because I think we need a fuller treatment and fuller discussion at some point as to exactly how they are used and in what situations they are used.
But based on what I know about them, I find it hard to imagine that repo facilities could replace swaps.
They do not seem to deal with the issue of a lack of balances in the affected currency.
What happens, for example, when there is a sterling run on Citibank branches in London?
We do not have a lot of sterling balances.
If this repo process is used to replace swaps, which is the implication of the memo, how does that help us deal with that?
Whether repo agreements are standard or customized, they could involve a major negotiation process with every country involved, and this undoubtedly would take a lot of time and effort.
In short, at least in my own mind--and I could be naive or wrong about this--it seems to be a little like mixing apples and oranges to imply that swaps could be replaced by repo arrangements.
It may be that I do not understand this well, but there does seem to be a bit of a mix here.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. It is a mix.
It is not a replacement for the actual mechanism.
It is a political replacement, if I may put it that way.
MS. MINEHAN. Yes, it certainly seems that way.
MR. PARRY. It is not belts and suspenders.
One is a belt and the other is a raincoat.
[Laughter]
MS. MINEHAN. I did not use "belt and suspenders" with regard to the repo facilities.
It was with regard to swaps and the accumulation of foreign exchange balances.
CHAIRMAN GREENSPAN. Just remember a raincoat is antiliquidity.
[Laughter]
MS. MINEHAN. Because we have a December deadline on approving the swap network for yet another year, my preference at this point would be to approve the swap network.
I think it would be very useful for us to engage in a more thorough review of alternatives.
I certainly would like to see fewer questions and more strawmen put up as possible ways that we could deal with the issue.
I would like to have some idea of how people see using a broader range of repo facilities.
If we were to engage in negotiations with our counterparties, I think it would be rather arduous to get the change we want.
If and when we want that to occur, the paper asks the question whether that should be linked in some way or another to the European Monetary Union.
I am agnostic enough about that and what it would mean over the near term that I think we should go ahead with this reevaluation.
We should look at various scenarios, but we should do it on our own timetable and not the European timetable.
TO BE CONTINUED ...
It is not a replacement for the actual mechanism.
It is a political replacement, if I may put it that way.
MS. MINEHAN. Yes, it certainly seems that way.
MR. PARRY. It is not belts and suspenders.
One is a belt and the other is a raincoat.
[Laughter]
MS. MINEHAN. I did not use "belt and suspenders" with regard to the repo facilities.
It was with regard to swaps and the accumulation of foreign exchange balances.
CHAIRMAN GREENSPAN. Just remember a raincoat is antiliquidity.
[Laughter]
MS. MINEHAN. Because we have a December deadline on approving the swap network for yet another year, my preference at this point would be to approve the swap network.
I think it would be very useful for us to engage in a more thorough review of alternatives.
I certainly would like to see fewer questions and more strawmen put up as possible ways that we could deal with the issue.
I would like to have some idea of how people see using a broader range of repo facilities.
If we were to engage in negotiations with our counterparties, I think it would be rather arduous to get the change we want.
If and when we want that to occur, the paper asks the question whether that should be linked in some way or another to the European Monetary Union.
I am agnostic enough about that and what it would mean over the near term that I think we should go ahead with this reevaluation.
We should look at various scenarios, but we should do it on our own timetable and not the European timetable.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Hoenig.
MR. HOENIG. Mr. Chairman, I appreciate the breadth of this discussion and for my purposes would like to put it in a different perspective.
In my view, the first issue relating to our swap lines is our attitude toward intervention.
That has been the reason for their existence, why they have been maintained and renewed.
My own preference is for us to intervene on a very limited basis, and I think that also has been a very strong premise for some time for many on this Committee.
I believe that should continue.
We have foreign currency balances that provide us with a mechanism for intervention should we choose to use those balances in circumstances that we deem appropriate.
As they have evolved over the years, our swap lines have been of very limited use, and I think they present a confusing picture about our role and intentions going forward.
We should phase them out.
As far as the timing is concerned, the European Monetary Union provides us with an opportunity.
We may not be in a position to choose the exact timing, but it is an opportunity to phase out the swap network in a rational way without raising a lot of questions or uncertainties.
I think we should take advantage of that opportunity.
That brings me to the issue of liquidity, whether we call it reverse repos or lending to others.
I am very uncertain about that and would not want to indicate my leanings at this time because I think we need more information and a broader discussion.
I know on the basis of some of the documents that I have seen in the past that there has been a very strong reluctance to get involved in the appearance or the reality of lending to another central bank or other international financial institution.
So, I would like to know a little more about the potential liquidity needs, what countries would be involved, and how we would set general criteria for providing funds if we are going to move down that road.
I certainly would hesitate to do it very quickly.
Perhaps it is my own ignorance, but I believe we need more information on the table before we move to a decision.
And I think that is a separate issue from swaps in principle.
CHAIRMAN GREENSPAN. It is.
Let us emphasize that it is an issue that can be discussed on its own merits.
MR. HOENIG. I think we should do that over time in future meetings.
TO BE CONTINUED ...
MR. HOENIG. Mr. Chairman, I appreciate the breadth of this discussion and for my purposes would like to put it in a different perspective.
In my view, the first issue relating to our swap lines is our attitude toward intervention.
That has been the reason for their existence, why they have been maintained and renewed.
My own preference is for us to intervene on a very limited basis, and I think that also has been a very strong premise for some time for many on this Committee.
I believe that should continue.
We have foreign currency balances that provide us with a mechanism for intervention should we choose to use those balances in circumstances that we deem appropriate.
As they have evolved over the years, our swap lines have been of very limited use, and I think they present a confusing picture about our role and intentions going forward.
We should phase them out.
As far as the timing is concerned, the European Monetary Union provides us with an opportunity.
We may not be in a position to choose the exact timing, but it is an opportunity to phase out the swap network in a rational way without raising a lot of questions or uncertainties.
I think we should take advantage of that opportunity.
That brings me to the issue of liquidity, whether we call it reverse repos or lending to others.
I am very uncertain about that and would not want to indicate my leanings at this time because I think we need more information and a broader discussion.
I know on the basis of some of the documents that I have seen in the past that there has been a very strong reluctance to get involved in the appearance or the reality of lending to another central bank or other international financial institution.
So, I would like to know a little more about the potential liquidity needs, what countries would be involved, and how we would set general criteria for providing funds if we are going to move down that road.
I certainly would hesitate to do it very quickly.
Perhaps it is my own ignorance, but I believe we need more information on the table before we move to a decision.
And I think that is a separate issue from swaps in principle.
CHAIRMAN GREENSPAN. It is.
Let us emphasize that it is an issue that can be discussed on its own merits.
MR. HOENIG. I think we should do that over time in future meetings.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Jordan.
MR. JORDAN. Thank you.
I thought there was a general agreement in our earlier discussions that if we did not already have swap arrangements, we would not invent them, so the question looking forward was simply one of tactics for getting rid of them.
Cathy in her remarks raised some question as to whether we should invent them if we did not already have them.
Another issue is who is on the list.
Should we have a swap agreement with Denmark, for example, and under what circumstances would we use it or allow them to use it?
In one of our discussions last year, Mr. Chairman, you made reference to the renewals of these swap lines as being like Christmas cards.
I went home after that meeting and cut all foreign central bankers off my Christmas card list!
[Laughter]
A problem with a swap arrangement, either a current arrangement or any new one, is that it is expected to be used and the question is under what circumstances and with what unintended consequences.
I think none of us was happy with the further temporary increase in our swap line with Mexico and related decisions a year and a half ago.
It was messy; it was uncomfortable with the U.S. Treasury; it was uncomfortable with the IMF.
It was difficult and uncomfortable with the Mexicans.
We would have been better off if we had not had the swap line.
I would hope that by the time the Mexicans hold their next presidential election we will not have this reciprocal lending facility.
That would be one criterion I would set up.
Another relates to the fact that there are only a very few currencies that serve as major standards of value in the world and every other currency is defined in terms of those currencies.
One of those, the deutsche mark, is slated to go away in a couple of years.
I think the kind of arrangement that we have with other major central banks whose currency competes with the dollar as an international standard of value is one thing, and the arrangements that we have with everybody else is something else again.
Central banks are proliferating all over the world--in Tajikistan and places I can't even pronounce.
I hope that my worst fears about the new European central bank and the new euro currency prove not to be warranted, but I believe we need to think very carefully, starting now, about what kind of arrangements we will want to have with that central bank and what kind of transactions we will be willing to engage in with it.
There also are questions pertaining to those European countries that may be subjected to some severe dislocations by not being a part of the euro club and the European central bank.
What kind of arrangements are they going to want to have with us, and are they arrangements that we are going to want to have with them?
I think this is an extremely important issue.
We do not have a lot of time, but we ought to put it in that context so that we finish this millennium with something quite different from what we have today.
TO BE CONTINUED ...
MR. JORDAN. Thank you.
I thought there was a general agreement in our earlier discussions that if we did not already have swap arrangements, we would not invent them, so the question looking forward was simply one of tactics for getting rid of them.
Cathy in her remarks raised some question as to whether we should invent them if we did not already have them.
Another issue is who is on the list.
Should we have a swap agreement with Denmark, for example, and under what circumstances would we use it or allow them to use it?
In one of our discussions last year, Mr. Chairman, you made reference to the renewals of these swap lines as being like Christmas cards.
I went home after that meeting and cut all foreign central bankers off my Christmas card list!
[Laughter]
A problem with a swap arrangement, either a current arrangement or any new one, is that it is expected to be used and the question is under what circumstances and with what unintended consequences.
I think none of us was happy with the further temporary increase in our swap line with Mexico and related decisions a year and a half ago.
It was messy; it was uncomfortable with the U.S. Treasury; it was uncomfortable with the IMF.
It was difficult and uncomfortable with the Mexicans.
We would have been better off if we had not had the swap line.
I would hope that by the time the Mexicans hold their next presidential election we will not have this reciprocal lending facility.
That would be one criterion I would set up.
Another relates to the fact that there are only a very few currencies that serve as major standards of value in the world and every other currency is defined in terms of those currencies.
One of those, the deutsche mark, is slated to go away in a couple of years.
I think the kind of arrangement that we have with other major central banks whose currency competes with the dollar as an international standard of value is one thing, and the arrangements that we have with everybody else is something else again.
Central banks are proliferating all over the world--in Tajikistan and places I can't even pronounce.
I hope that my worst fears about the new European central bank and the new euro currency prove not to be warranted, but I believe we need to think very carefully, starting now, about what kind of arrangements we will want to have with that central bank and what kind of transactions we will be willing to engage in with it.
There also are questions pertaining to those European countries that may be subjected to some severe dislocations by not being a part of the euro club and the European central bank.
What kind of arrangements are they going to want to have with us, and are they arrangements that we are going to want to have with them?
I think this is an extremely important issue.
We do not have a lot of time, but we ought to put it in that context so that we finish this millennium with something quite different from what we have today.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Rivlin.
MS. RIVLIN. On a very basic level, it seems to me that we ought to welcome the respect and the leadership role that the world, as Mr. McDonough pointed out, seems very willing to accord us and we ought to work as closely as possible with the other major central banks to keep things on an even keel and avoid financial crises.
For that purpose, it seems to me that, as the world gets more complicated, we probably are going to need a quite flexible set of instruments and a quite flexible set of groupings of countries that we deal with in different ways.
I am persuaded by the staff paper that the current swaps are probably an obsolete instrument, but I would be very worried about eliminating them before we are much surer about the kind of structure we want going forward.
I think we need to rethink that very carefully, and we need to do it in the light of a couple sets of political sensitivities.
One set is the concerns of our friends and allies around the world who are very worried, as I perceive it, that the United States may be withdrawing from the world.
They believe that we have an inward-looking, to-hell-with-the-rest-of-the-world stance at the moment and that we are drawing back on foreign aid and not paying our bills that are due to international organizations.
If we were to get rid of our swap lines, that might be seen as one more indication that we are withdrawing from the world.
I do not think anybody around this table wants to do that.
The other set of political sensitivities is exactly the one to which those people are responding--the Congressional set of fears that somehow we are going to become more entangled.
So, as we structure a new set of relationships, I think we have to be very careful, first, that they are not seen as foreign aid but as mutual arrangements among central banks to avoid world crisis.
They must not be viewed as give-aways because that would create some problem for anything that is an extension of credit.
Second, these arrangements should not be seen as obscure, as the mysterious getting together of central bankers who might be thought to be up to no good.
Politically, it seems to me that we have a very sensitive set of issues that we have to work our way through very carefully.
I for one would think the first thing is to do no harm and not overturn the existing arrangements even though they may not be very modern ones.
TO BE CONTINUED ...
MS. RIVLIN. On a very basic level, it seems to me that we ought to welcome the respect and the leadership role that the world, as Mr. McDonough pointed out, seems very willing to accord us and we ought to work as closely as possible with the other major central banks to keep things on an even keel and avoid financial crises.
For that purpose, it seems to me that, as the world gets more complicated, we probably are going to need a quite flexible set of instruments and a quite flexible set of groupings of countries that we deal with in different ways.
I am persuaded by the staff paper that the current swaps are probably an obsolete instrument, but I would be very worried about eliminating them before we are much surer about the kind of structure we want going forward.
I think we need to rethink that very carefully, and we need to do it in the light of a couple sets of political sensitivities.
One set is the concerns of our friends and allies around the world who are very worried, as I perceive it, that the United States may be withdrawing from the world.
They believe that we have an inward-looking, to-hell-with-the-rest-of-the-world stance at the moment and that we are drawing back on foreign aid and not paying our bills that are due to international organizations.
If we were to get rid of our swap lines, that might be seen as one more indication that we are withdrawing from the world.
I do not think anybody around this table wants to do that.
The other set of political sensitivities is exactly the one to which those people are responding--the Congressional set of fears that somehow we are going to become more entangled.
So, as we structure a new set of relationships, I think we have to be very careful, first, that they are not seen as foreign aid but as mutual arrangements among central banks to avoid world crisis.
They must not be viewed as give-aways because that would create some problem for anything that is an extension of credit.
Second, these arrangements should not be seen as obscure, as the mysterious getting together of central bankers who might be thought to be up to no good.
Politically, it seems to me that we have a very sensitive set of issues that we have to work our way through very carefully.
I for one would think the first thing is to do no harm and not overturn the existing arrangements even though they may not be very modern ones.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Parry.
MR. PARRY. I think the history of the swap arrangements since the early 1980s indicates that there is no need for them.
Somewhat in answer to Governor Rivlin's concerns, it would seem to me that there may be political reasons for wanting to substitute something, but I think history has indicated that when it comes to the economic and financial considerations, a substitute mechanism really is not required.
In addition, the more recent experience that we have had, I think, is another item on the side of the ledger in support of the view that we do not need this type of arrangement.
So, without getting into what one perhaps should substitute or just add to it, I don't see where the case is at all strong that we need our swap lines.
TO BE CONTINUED ...
MR. PARRY. I think the history of the swap arrangements since the early 1980s indicates that there is no need for them.
Somewhat in answer to Governor Rivlin's concerns, it would seem to me that there may be political reasons for wanting to substitute something, but I think history has indicated that when it comes to the economic and financial considerations, a substitute mechanism really is not required.
In addition, the more recent experience that we have had, I think, is another item on the side of the ledger in support of the view that we do not need this type of arrangement.
So, without getting into what one perhaps should substitute or just add to it, I don't see where the case is at all strong that we need our swap lines.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Broaddus.
MR. BROADDUS. Mr. Chairman, as you know, I have registered my discomfort with swap arrangements for some time, beginning with my votes against the renewal of a number of these arrangements in late 1994.
Essentially, I think swap arrangements are undesirable because their primary purpose is to facilitate foreign exchange intervention, and I do not like foreign exchange intervention.
I believe it compromises or threatens to compromise the conduct of monetary policy for reasons I have outlined here before.
Just in two brief summary sentences: I think intervention undermines the credibility of monetary policy by introducing some confusion as to what our fundamental objectives are as between domestic price stability and exchange rate objectives at particular points in time.
Secondly, I think some foreign exchange operations could over time undermine public support for the Fed's financial independence, which is the ultimate foundation for our credibility.
So, I would favor discontinuing the swap network.
I was encouraged by the memorandum, which I also thought was very well done, because I sensed from it that a number of other central banks may also share these sentiments.
Obviously, if we were to do this, there would be some transition problems and some technical difficulties and perhaps some perception difficulties in actually getting it done.
I do not want to minimize those, but I think that if we confront them we can deal with them.
As far as the timing is concerned, I would agree that if we could in some way tie this in with the EMU, that would be great.
However, Tom Hoenig said it well; we do not know what that timing is going to be and I would not want to wait for that.
With regard to the question that you raised and that the memo raises with respect to replacing the swap lines--if we do dismantle them--with some other kind of credit facility, I do not have answers, just questions.
There are a lot of questions that we would need to ask and try to get answers to.
Let me just highlight the ones that I believe would be most compelling.
If we are going to do something like this, we need to be very clear as to the reason.
There may be a valid reason, but we as a Committee would need to understand it as clearly as possible, and that would involve some discussion.
Then there would be the mechanical issues having to do with whether to have limits on credit extensions either with respect to amount or to whom the loans might be made, how frequently they might be made, what the approval process would be, and so forth.
I think we would have to establish those terms very carefully.
There also would be questions about collateral.
We would need to decide how what would be acceptable collateral and how it would be valued.
Finally, and I guess most importantly, if we were to do something like this, we would need to try to design it in a way where we would not be seen as in any way misusing our off-budget status to make loans to foreign governments that could open us up to the kind of charges we got when we made the Mexican loan.
TO BE CONTINUED ...
MR. BROADDUS. Mr. Chairman, as you know, I have registered my discomfort with swap arrangements for some time, beginning with my votes against the renewal of a number of these arrangements in late 1994.
Essentially, I think swap arrangements are undesirable because their primary purpose is to facilitate foreign exchange intervention, and I do not like foreign exchange intervention.
I believe it compromises or threatens to compromise the conduct of monetary policy for reasons I have outlined here before.
Just in two brief summary sentences: I think intervention undermines the credibility of monetary policy by introducing some confusion as to what our fundamental objectives are as between domestic price stability and exchange rate objectives at particular points in time.
Secondly, I think some foreign exchange operations could over time undermine public support for the Fed's financial independence, which is the ultimate foundation for our credibility.
So, I would favor discontinuing the swap network.
I was encouraged by the memorandum, which I also thought was very well done, because I sensed from it that a number of other central banks may also share these sentiments.
Obviously, if we were to do this, there would be some transition problems and some technical difficulties and perhaps some perception difficulties in actually getting it done.
I do not want to minimize those, but I think that if we confront them we can deal with them.
As far as the timing is concerned, I would agree that if we could in some way tie this in with the EMU, that would be great.
However, Tom Hoenig said it well; we do not know what that timing is going to be and I would not want to wait for that.
With regard to the question that you raised and that the memo raises with respect to replacing the swap lines--if we do dismantle them--with some other kind of credit facility, I do not have answers, just questions.
There are a lot of questions that we would need to ask and try to get answers to.
Let me just highlight the ones that I believe would be most compelling.
If we are going to do something like this, we need to be very clear as to the reason.
There may be a valid reason, but we as a Committee would need to understand it as clearly as possible, and that would involve some discussion.
Then there would be the mechanical issues having to do with whether to have limits on credit extensions either with respect to amount or to whom the loans might be made, how frequently they might be made, what the approval process would be, and so forth.
I think we would have to establish those terms very carefully.
There also would be questions about collateral.
We would need to decide how what would be acceptable collateral and how it would be valued.
Finally, and I guess most importantly, if we were to do something like this, we would need to try to design it in a way where we would not be seen as in any way misusing our off-budget status to make loans to foreign governments that could open us up to the kind of charges we got when we made the Mexican loan.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Phillips.
MS. PHILLIPS. Thank you, Mr. Chairman.
I have to admit my general skepticism regarding the effectiveness of intervention as a means of permanently affecting the value of the dollar.
I do think that there are times when other smaller countries may be able to use intervention policies appropriately to affect their currencies.
So, it seems to me that the usefulness of swap lines for the United States may be questionable.
But I recognize that we live in a global environment, and we may need to be able to respond to the needs of other countries.
We also are not the only government institution making this policy.
To the extent that the Treasury, for example, decides that it is appropriate to intervene, we need to be there and we need to have the appropriate capabilities.
I am not sure that swap lines are the most efficient means of effecting these kinds of transactions.
I am not even sure that repos or reverse repos are the only other kinds of financial instruments that we could use.
I suspect that in today's marketplace, there may be a wider range of instruments that could be used, and before we come to a final conclusion, we need to be thinking about where we want to go as opposed to eliminating one procedure and having nothing to replace it.
Whatever adjustments are made, I hope that we would not be seen as withdrawing from the international arena.
I think the Fed should be an active participant in the formulation of U.S. policy.
We should have a place at the table.
I do think that the Fed provides continuity in the international financial arena on behalf of the United States.
TO BE CONTINUED ...
MS. PHILLIPS. Thank you, Mr. Chairman.
I have to admit my general skepticism regarding the effectiveness of intervention as a means of permanently affecting the value of the dollar.
I do think that there are times when other smaller countries may be able to use intervention policies appropriately to affect their currencies.
So, it seems to me that the usefulness of swap lines for the United States may be questionable.
But I recognize that we live in a global environment, and we may need to be able to respond to the needs of other countries.
We also are not the only government institution making this policy.
To the extent that the Treasury, for example, decides that it is appropriate to intervene, we need to be there and we need to have the appropriate capabilities.
I am not sure that swap lines are the most efficient means of effecting these kinds of transactions.
I am not even sure that repos or reverse repos are the only other kinds of financial instruments that we could use.
I suspect that in today's marketplace, there may be a wider range of instruments that could be used, and before we come to a final conclusion, we need to be thinking about where we want to go as opposed to eliminating one procedure and having nothing to replace it.
Whatever adjustments are made, I hope that we would not be seen as withdrawing from the international arena.
I think the Fed should be an active participant in the formulation of U.S. policy.
We should have a place at the table.
I do think that the Fed provides continuity in the international financial arena on behalf of the United States.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Kelley.
MR. KELLEY. Mr. Chairman, I have never been completely clear as to exactly what kind of an obligation these swap lines were.
What are we obliged to do?
It seems to me that whenever there is a likelihood that a central bank will want to draw on its swap line, that involves a full-blown discussion and negotiation anyway.
A swap agreement is not a right to automatic credit as I understand it.
As a consequence, it strikes me that its very existence may tend over time to be more awkward than helpful if other central banks presume that there is a right to credit which may turn out not to be desirable from our perspective at the time the drawing is requested.
So, for that reason and others that have been mentioned here, it seems to me that it would be a good idea for us to start moving slowly away from our swap agreements.
An additional dimension that I don't think I heard mentioned here and that seems relevant to me would be the new level of participation and capability of the private sector to perform a lot of these functions.
We recently went through an interesting pattern with the Brady negotiations and the structure that came out of that.
Very recently, there have been interesting negotiations with Mexico that involved a third-party, private-sector group.
I think that that is an appropriate consideration as well.
I would like to reiterate two things that Governor Rivlin and others have said.
First, we probably should have some idea of where we want to go before we leave where we are.
The second point is that I believe this is at least as much a political as it is a financial consideration.
As a consequence, as soon as we have our thinking together, I think we should begin to move very slowly and carefully out of these arrangements and to do so in the context of a broad range of considerations and discussions.
TO BE CONTINUED ...
MR. KELLEY. Mr. Chairman, I have never been completely clear as to exactly what kind of an obligation these swap lines were.
What are we obliged to do?
It seems to me that whenever there is a likelihood that a central bank will want to draw on its swap line, that involves a full-blown discussion and negotiation anyway.
A swap agreement is not a right to automatic credit as I understand it.
As a consequence, it strikes me that its very existence may tend over time to be more awkward than helpful if other central banks presume that there is a right to credit which may turn out not to be desirable from our perspective at the time the drawing is requested.
So, for that reason and others that have been mentioned here, it seems to me that it would be a good idea for us to start moving slowly away from our swap agreements.
An additional dimension that I don't think I heard mentioned here and that seems relevant to me would be the new level of participation and capability of the private sector to perform a lot of these functions.
We recently went through an interesting pattern with the Brady negotiations and the structure that came out of that.
Very recently, there have been interesting negotiations with Mexico that involved a third-party, private-sector group.
I think that that is an appropriate consideration as well.
I would like to reiterate two things that Governor Rivlin and others have said.
First, we probably should have some idea of where we want to go before we leave where we are.
The second point is that I believe this is at least as much a political as it is a financial consideration.
As a consequence, as soon as we have our thinking together, I think we should begin to move very slowly and carefully out of these arrangements and to do so in the context of a broad range of considerations and discussions.
TO BE CONTINUED ...