CHAIRMAN GREENSPAN. One possibility is that we could move this forward if, for example, the Vice Chairman and I at meetings in Basle unofficially sounded out our counterparts concerning their views of these swaps agreements.
It is very important for us to know if they think these are useless and obsolete appendages to the international financial system as distinct from a measure of embrace by the United States reflecting the United States' view of the moral superiority of our counterparties.
VICE CHAIRMAN MCDONOUGH. If we were to assume a world in which the swap network no longer existed, would any formal mechanism have to be created to replace it?
My own working hypothesis on that would be "no."
In my view, what would replace it is what in a way already replaces it.
A good many of us spend a fair amount of our time--I spend essentially 10 percent of my time--attending BIS meetings.
I don't do that because I like the Basle Hilton, I can assure you, but rather because of the close personal relationships that come from that activity.
What that means is that if we have a problem with any of the people that the Chairman sees, say, at four meetings a year and I see at ten meetings a year, we are talking with someone we know very well.
So what replaces the swap network is that personal relationship.
It does not mean that we do them a favor or they do us a favor.
What it does is to make it possible for two individuals representing their central banks to agree on what is in the mutual interest of their central banks and more importantly their countries.
If we ever got into a situation in which it was necessary to do something, including a reverse repo with, say, Germany, I think none of us would worry about whether there was a political consideration or a creditworthiness consideration.
Germany is, of course, a very easy example.
We would do the financial transaction only if it were very clear that it was in the interest of Germany and in the interest of the United States.
As long as we keep a very close control on it, as has been suggested, then the risk factor is very, very low.
Now, what that kind of approach to the world requires is a great deal of effort in figuring out which of the central banks of the world are important enough for us to spend the amount of time needed to get to know the people who run them as well as we know some of our best friends in Europe.
That is a lot of work.
I think one of the reasons that you, Mr. Chairman, wanted to concentrate on the overall aspects of this issue is that the people who work on this a lot like Ted, Peter, and Terry Checki from the New York Bank could perhaps be thinking of taking a look at whether, because of our rather disparate organization, we have missed some obvious candidates.
I think we were a bit slow in taking the Southeast Asia central banks seriously.
San Francisco was doing a good job on it; we were a little slow in New York, no question.
I think Board staff was taking an interest in them.
But we certainly have stepped up the degree of time and attention that we are spending on those people, I think very appropriately.
TO BE CONTINUED ...
MINUTES OF JULY 3, 1996 FOMC MEETING
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Boehne.
MR. BOEHNE. I start out with some fairly basic views.
I think that we have to be involved in the world and that we have to provide leadership at times.
That means doing all the things necessary to build personal and institutional relationships to support our involvement.
Whether one views intervention in the foreign exchange markets as desirable or not, I will guarantee, absolutely guarantee, that there will come a time when intervention is going to be something that we need to do.
There may be very transitory reasons for the intervention and its effects may fade away over time, but there will be circumstances at some point where we will simply have to engage in intervention operations.
As a practical matter, we will then need to have the ammunition to participate.
While we may have foreign currency reserves now that permit us to do that, we will also need ways to back up those reserves to get the necessary liquidity.
Whether it is swaps or something else, we will have to be in a position to do those things that are necessary for us to sit at the table and be effective players.
The view that we can somehow pull ourselves out of the foreign exchange markets for all time, that we can somehow let the world go, is just completely at odds with the kind of financial structure that we have on a global basis and our role in it.
If we are going to play, we need to have the tools.
MR. PARRY. Do we need the swaps to do that?
MR. BOEHNE. I am not arguing about whether we need the swaps per se.
I am just saying that we need the means.
If we can improve on the swaps mechanism or find other ways, that is fine with me.
I do not think we ought to give them up until we are sure we have something else.
TO BE CONTINUED ...
MR. BOEHNE. I start out with some fairly basic views.
I think that we have to be involved in the world and that we have to provide leadership at times.
That means doing all the things necessary to build personal and institutional relationships to support our involvement.
Whether one views intervention in the foreign exchange markets as desirable or not, I will guarantee, absolutely guarantee, that there will come a time when intervention is going to be something that we need to do.
There may be very transitory reasons for the intervention and its effects may fade away over time, but there will be circumstances at some point where we will simply have to engage in intervention operations.
As a practical matter, we will then need to have the ammunition to participate.
While we may have foreign currency reserves now that permit us to do that, we will also need ways to back up those reserves to get the necessary liquidity.
Whether it is swaps or something else, we will have to be in a position to do those things that are necessary for us to sit at the table and be effective players.
The view that we can somehow pull ourselves out of the foreign exchange markets for all time, that we can somehow let the world go, is just completely at odds with the kind of financial structure that we have on a global basis and our role in it.
If we are going to play, we need to have the tools.
MR. PARRY. Do we need the swaps to do that?
MR. BOEHNE. I am not arguing about whether we need the swaps per se.
I am just saying that we need the means.
If we can improve on the swaps mechanism or find other ways, that is fine with me.
I do not think we ought to give them up until we are sure we have something else.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Meyer.
MR. MEYER. Mr. Chairman, I found a lot on my plate as I prepared for this meeting, and you were the chef!
[Laughter]
Absorbing the memo on swaps got me very close to a form of intellectual indigestion.
So I am not prepared to take a very firm position at this time, but I do want to share a few initial impressions.
First, the current swap network certainly appears to be for the most part an historical relic.
In her comments, Cathy said that this may be fortuitous, and that reminded me of a mutual fund prospectus stating that past performance is no guarantee of future returns.
That may be the case here.
However, the staff memo certainly left me with the impression that not only have these swaps, except in the case of Mexico, not been used since 1982, but in the staff's judgment there was no particular prospect that they would be used for the foreseeable future.
So, eliminating the swaps would be like paperwork reduction, the 303 streamlining that we are engaged in.
Why do we have to meet every year and renew these arrangements when we know they are not going to be used?
The main case for retaining them seems to be that it is not very costly, and there might be some political cost in dismantling them because we could be perceived as disengaging or not being a cooperative member of the team.
Now, while the topic here is presumably swaps, that is not really what we are talking about for the most part.
We really are talking about whether or not we believe in intervention in the exchange markets and how we feel about emergency actions when there are payments system crises as in the case of Mexico.
That is the real issue despite the fact that the swap agreements have nothing to do with intervention in foreign exchange markets, except perhaps as a backup source of foreign currencies at some point down the road.
Even that remains to be seen.
I am not going to reach any judgment at this point about intervention in the foreign exchange markets.
I will say that I start out with a degree of skepticism, but I am not so skeptical that I would remove this policy option from the table at this point.
With respect to the situation of Mexico, it is interesting that their drawing is the only example of the use of our swap line recently, and it is precisely that use that is the main reason why some people want to scrap the swap line network.
This might have been an ugly way of dealing with the problem, but it may be that there were no less ugly options available.
Again, I want to withhold judgment on that.
In terms of RPs and the merits of reverse RPs, I absolutely withhold any judgment on those issues until I have learned much more about those instruments.
TO BE CONTINUED ...
MR. MEYER. Mr. Chairman, I found a lot on my plate as I prepared for this meeting, and you were the chef!
[Laughter]
Absorbing the memo on swaps got me very close to a form of intellectual indigestion.
So I am not prepared to take a very firm position at this time, but I do want to share a few initial impressions.
First, the current swap network certainly appears to be for the most part an historical relic.
In her comments, Cathy said that this may be fortuitous, and that reminded me of a mutual fund prospectus stating that past performance is no guarantee of future returns.
That may be the case here.
However, the staff memo certainly left me with the impression that not only have these swaps, except in the case of Mexico, not been used since 1982, but in the staff's judgment there was no particular prospect that they would be used for the foreseeable future.
So, eliminating the swaps would be like paperwork reduction, the 303 streamlining that we are engaged in.
Why do we have to meet every year and renew these arrangements when we know they are not going to be used?
The main case for retaining them seems to be that it is not very costly, and there might be some political cost in dismantling them because we could be perceived as disengaging or not being a cooperative member of the team.
Now, while the topic here is presumably swaps, that is not really what we are talking about for the most part.
We really are talking about whether or not we believe in intervention in the exchange markets and how we feel about emergency actions when there are payments system crises as in the case of Mexico.
That is the real issue despite the fact that the swap agreements have nothing to do with intervention in foreign exchange markets, except perhaps as a backup source of foreign currencies at some point down the road.
Even that remains to be seen.
I am not going to reach any judgment at this point about intervention in the foreign exchange markets.
I will say that I start out with a degree of skepticism, but I am not so skeptical that I would remove this policy option from the table at this point.
With respect to the situation of Mexico, it is interesting that their drawing is the only example of the use of our swap line recently, and it is precisely that use that is the main reason why some people want to scrap the swap line network.
This might have been an ugly way of dealing with the problem, but it may be that there were no less ugly options available.
Again, I want to withhold judgment on that.
In terms of RPs and the merits of reverse RPs, I absolutely withhold any judgment on those issues until I have learned much more about those instruments.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Yellen.
MS. YELLEN. Mr. Chairman, I agree that the swap arrangements are by and large a legacy of times past and may have become something of an anachronism.
But even if these arrangements have become largely symbolic, they do seem to me to be an important symbol of our commitment to international cooperation.
Here I agree particularly with Governor Rivlin and President Boehne.
I think it would be dangerous simply to dismantle these arrangements in a way that creates international tension.
I do not really see these arrangements as dangerous.
I understand the principle that President Broaddus has enunciated as to why they could be dangerous to our ability to conduct an independent monetary policy, but I think that fear is overblown.
I agree with President Boehne that they could even be helpful on occasion in the future.
I would support the suggestion that you made, Mr. Chairman, that it might be wise to look for an opportunity in Basle or elsewhere to discuss the future of these arrangements quietly with our central bank partners and to see what their reactions would be.
I would not want to see needless tension created here.
I also agree that before we have those conversations, it would be wise to figure out where we might want to go in the future to be able to react to suggestions that we replace these arrangements with something else.
With respect to a system of repo and reverse repo-type arrangements, I think that is a possibility that is well worth exploring.
But I would agree also with President Broaddus's list of the questions that would need to be addressed and answered.
What do we see as the fundamental purpose?
Is it to guard against systemic risk?
Is it a service to our allies?
Is it for our own reserve management needs?
Will we do transactions on demand?
Is this a privilege?
Is this a right?
Are there limits?
With whom do we intend to deal?
What criteria will we use to decide which countries?
I think Governor Kelley's question about private markets and the impact that we might have on private institutions as we become increasingly large players in this area is a question that we should explore along with the broad issue of the governance structure if we proceed.
We need to work out who will make the decisions and what authorization will be required.
I think this is a good opportunity for the staff to go home and do some work.
TO BE CONTINUED ...
MS. YELLEN. Mr. Chairman, I agree that the swap arrangements are by and large a legacy of times past and may have become something of an anachronism.
But even if these arrangements have become largely symbolic, they do seem to me to be an important symbol of our commitment to international cooperation.
Here I agree particularly with Governor Rivlin and President Boehne.
I think it would be dangerous simply to dismantle these arrangements in a way that creates international tension.
I do not really see these arrangements as dangerous.
I understand the principle that President Broaddus has enunciated as to why they could be dangerous to our ability to conduct an independent monetary policy, but I think that fear is overblown.
I agree with President Boehne that they could even be helpful on occasion in the future.
I would support the suggestion that you made, Mr. Chairman, that it might be wise to look for an opportunity in Basle or elsewhere to discuss the future of these arrangements quietly with our central bank partners and to see what their reactions would be.
I would not want to see needless tension created here.
I also agree that before we have those conversations, it would be wise to figure out where we might want to go in the future to be able to react to suggestions that we replace these arrangements with something else.
With respect to a system of repo and reverse repo-type arrangements, I think that is a possibility that is well worth exploring.
But I would agree also with President Broaddus's list of the questions that would need to be addressed and answered.
What do we see as the fundamental purpose?
Is it to guard against systemic risk?
Is it a service to our allies?
Is it for our own reserve management needs?
Will we do transactions on demand?
Is this a privilege?
Is this a right?
Are there limits?
With whom do we intend to deal?
What criteria will we use to decide which countries?
I think Governor Kelley's question about private markets and the impact that we might have on private institutions as we become increasingly large players in this area is a question that we should explore along with the broad issue of the governance structure if we proceed.
We need to work out who will make the decisions and what authorization will be required.
I think this is a good opportunity for the staff to go home and do some work.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Moskow.
MR. MOSKOW. It seems obvious that the original purpose for establishing the swap arrangements is no longer as relevant as it once was.
I do not think this necessarily means that we should unilaterally dismantle the swap lines.
They are reciprocal arrangements.
If our counterparts sense that we no longer have any need for the swap lines, then it might be appropriate to begin the discussions on how best to proceed with disassembling them without unnecessary adverse reactions.
Mr. Chairman, I think your suggestion of the informal discussions that you and the Vice Chairman would have with other central bankers at Basle and elsewhere is a very good initial step.
In the process as we are thinking this through, we certainly should explore alternative arrangements to see if they are needed to better reflect the current state of the international exchange markets, the role we should play, and whether the swaps are needed at all.
There are many issues involved, and I agree with Governor Yellen that we should send the staff back to do some more work on this, including the private market aspect that Governor Kelley mentioned.
I think this should be included in the broader study of intervention and the types of tools that we would use if intervention is called for in the future.
I agree with President Boehne that the odds are pretty high that we will be called on to do something sometime in the coming years.
On the EMU point, I do not think we should wait to see if EMU becomes a reality before we begin this effort, although we clearly would have an opportunity at that time for implementing any change and adjustments that we need.
I also think this is an area where close cooperation is going to be needed between the Federal Reserve, the Treasury, and other affected central banks and governments.
It may be, as someone said, that this is more of a political decision than an economic decision in some respects.
Our independence may be better enhanced if we take a leadership role on this issue rather than just unilaterally terminating these swap arrangements.
We certainly do not want to add to the concern that the United States is no longer exercising leadership in the international community.
TO BE CONTINUED ...
MR. MOSKOW. It seems obvious that the original purpose for establishing the swap arrangements is no longer as relevant as it once was.
I do not think this necessarily means that we should unilaterally dismantle the swap lines.
They are reciprocal arrangements.
If our counterparts sense that we no longer have any need for the swap lines, then it might be appropriate to begin the discussions on how best to proceed with disassembling them without unnecessary adverse reactions.
Mr. Chairman, I think your suggestion of the informal discussions that you and the Vice Chairman would have with other central bankers at Basle and elsewhere is a very good initial step.
In the process as we are thinking this through, we certainly should explore alternative arrangements to see if they are needed to better reflect the current state of the international exchange markets, the role we should play, and whether the swaps are needed at all.
There are many issues involved, and I agree with Governor Yellen that we should send the staff back to do some more work on this, including the private market aspect that Governor Kelley mentioned.
I think this should be included in the broader study of intervention and the types of tools that we would use if intervention is called for in the future.
I agree with President Boehne that the odds are pretty high that we will be called on to do something sometime in the coming years.
On the EMU point, I do not think we should wait to see if EMU becomes a reality before we begin this effort, although we clearly would have an opportunity at that time for implementing any change and adjustments that we need.
I also think this is an area where close cooperation is going to be needed between the Federal Reserve, the Treasury, and other affected central banks and governments.
It may be, as someone said, that this is more of a political decision than an economic decision in some respects.
Our independence may be better enhanced if we take a leadership role on this issue rather than just unilaterally terminating these swap arrangements.
We certainly do not want to add to the concern that the United States is no longer exercising leadership in the international community.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Lindsey.
MR. LINDSEY. I am certainly no advocate of withdrawing from the world.
Two issues have been raised.
The first has to do with what I would call the dual purposes here, which is concern about withdrawal from the world versus a domestic political consideration.
As some members have emphasized in this discussion, there certainly will come a time in the future when we will wish to be in a position to intervene in foreign exchange markets.
I am sure that will happen.
We have managed to intervene in foreign exchange markets quite a bit.
I can't think of any instance since I have been here when we really had to intervene.
It certainly was not because of an emergency or a financial crisis.
As I recall, every time we intervened the reason really came down to what was in effect a domestic political consideration.
Some major trading partner had too high a currency or too low a currency or something of that nature and that was the real motivation.
It was not a systemic risk situation.
There was no question about systemic risk.
In every instance that we can think of, except perhaps for some hypothetical developments in the future, we know why intervention is being used.
It has nothing to do with systemic risk; it is an arm of the domestic political apparatus, and I do not like that.
I do not think that is what we are here for, and I think there are risks to this institution if we play that game.
We really have to think about two issues.
The first, as has been mentioned, is the list of countries with which we want to conduct these transactions, and related to that is the question of whether or not the other currency is a major store of value.
Mr. Chairman, you indicated that we should exclude countries where the State Department does not want U.S. citizens to travel.
I do not think we need a repurchase agreement with North Korea or Cuba, and I do not know where else we cannot travel, so I think that is too small a list of excluded countries.
MS. MINEHAN. Iran.
MR. LINDSEY. Iran, okay.
We do not need a repurchase agreement with Iran right now.
SPEAKER(?). They have their own printing press!
[Laughter]
MR. LINDSEY. Let us think about the Indian rupee or the Chinese renminbi.
CHAIRMAN GREENSPAN. These are repurchases involving U.S. Treasury securities.
MR. LINDSEY. All right, let us pick the case of a repurchase agreement with China.
CHAIRMAN GREENSPAN. In dollars.
MR. LINDSEY. In dollars.
Let us think about the odds that the transaction would be used to prevent systemic contagion to the U.S. banking system versus the odds that it would be used for domestic political considerations because the Chinese are selling us too many shirts or whatever it is.
Do you want to give me the odds on that?
I know which way it is going to come out.
The only place where I think the issue gets really difficult is with the yen, which does serve as a true world store of value currency.
Even in that case, it can still be used for domestic political considerations.
So, I think we have to draw the net very tightly on countries with which we will undertake to do these transactions.
I believe the way to think of this is in terms of the probability that we may need to intervene for good reasons versus purely domestic political considerations.
The second issue is one of duration.
I do not remember any discussion of this although, Bill, you did allude to it.
We could have a two-day reverse repo or a three-day reverse repo, but if we renew it 100 times, it suddenly becomes what I would call a real extension of credit.
I would suggest that we think hard about that issue; that would be one of the clearer lines in the sand that we would have to draw.
I remember in our discussion of the Mexican bailout that we all knew we were going a bit out on a limb for a year.
We viewed that as a long time, and we certainly did not want to go beyond a year.
If we are going to focus on this and we want to avoid the appearance of an extension of credit, I would think that the duration has to be a lot less than a year.
Maybe it should be a matter of weeks.
TO BE CONTINUED ...
MR. LINDSEY. I am certainly no advocate of withdrawing from the world.
Two issues have been raised.
The first has to do with what I would call the dual purposes here, which is concern about withdrawal from the world versus a domestic political consideration.
As some members have emphasized in this discussion, there certainly will come a time in the future when we will wish to be in a position to intervene in foreign exchange markets.
I am sure that will happen.
We have managed to intervene in foreign exchange markets quite a bit.
I can't think of any instance since I have been here when we really had to intervene.
It certainly was not because of an emergency or a financial crisis.
As I recall, every time we intervened the reason really came down to what was in effect a domestic political consideration.
Some major trading partner had too high a currency or too low a currency or something of that nature and that was the real motivation.
It was not a systemic risk situation.
There was no question about systemic risk.
In every instance that we can think of, except perhaps for some hypothetical developments in the future, we know why intervention is being used.
It has nothing to do with systemic risk; it is an arm of the domestic political apparatus, and I do not like that.
I do not think that is what we are here for, and I think there are risks to this institution if we play that game.
We really have to think about two issues.
The first, as has been mentioned, is the list of countries with which we want to conduct these transactions, and related to that is the question of whether or not the other currency is a major store of value.
Mr. Chairman, you indicated that we should exclude countries where the State Department does not want U.S. citizens to travel.
I do not think we need a repurchase agreement with North Korea or Cuba, and I do not know where else we cannot travel, so I think that is too small a list of excluded countries.
MS. MINEHAN. Iran.
MR. LINDSEY. Iran, okay.
We do not need a repurchase agreement with Iran right now.
SPEAKER(?). They have their own printing press!
[Laughter]
MR. LINDSEY. Let us think about the Indian rupee or the Chinese renminbi.
CHAIRMAN GREENSPAN. These are repurchases involving U.S. Treasury securities.
MR. LINDSEY. All right, let us pick the case of a repurchase agreement with China.
CHAIRMAN GREENSPAN. In dollars.
MR. LINDSEY. In dollars.
Let us think about the odds that the transaction would be used to prevent systemic contagion to the U.S. banking system versus the odds that it would be used for domestic political considerations because the Chinese are selling us too many shirts or whatever it is.
Do you want to give me the odds on that?
I know which way it is going to come out.
The only place where I think the issue gets really difficult is with the yen, which does serve as a true world store of value currency.
Even in that case, it can still be used for domestic political considerations.
So, I think we have to draw the net very tightly on countries with which we will undertake to do these transactions.
I believe the way to think of this is in terms of the probability that we may need to intervene for good reasons versus purely domestic political considerations.
The second issue is one of duration.
I do not remember any discussion of this although, Bill, you did allude to it.
We could have a two-day reverse repo or a three-day reverse repo, but if we renew it 100 times, it suddenly becomes what I would call a real extension of credit.
I would suggest that we think hard about that issue; that would be one of the clearer lines in the sand that we would have to draw.
I remember in our discussion of the Mexican bailout that we all knew we were going a bit out on a limb for a year.
We viewed that as a long time, and we certainly did not want to go beyond a year.
If we are going to focus on this and we want to avoid the appearance of an extension of credit, I would think that the duration has to be a lot less than a year.
Maybe it should be a matter of weeks.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
VICE CHAIRMAN MCDONOUGH. I would be astounded, since you addressed the question to me, if the duration were more than a few days.
My main motivation for getting the reverse repo capability for the Desk is that I do not want to deprive us, the FOMC, of a useful tool for our own purposes.
I am not really motivated by the objective of helping other central banks around the world.
A problem that sometime arises in our dealings with some of the Southeast Asian banks when they ask if we can do a reverse repo.
They understand fully the nature of that financial instrument.
When we say, "No, we can't do those," they think it implies, because a country competitive with us is encouraging them to have that view, that we are not a cooperative central bank.
It is not that they are saying they want us to do it.
They are not asking for any kind of an arrangement.
It is that they are thinking: Why in the world would a central bank not be able to do what would appear to be a completely normal transaction in its own Treasury securities in its own currency when it can do those any day of the week with Salomon Brothers?
I have constructed answers to such questions, but in fact it is not very comfortable to have to answer them.
So, I would like to be able to say that we have that technical capability, but they should not in any way have the view that we intend to use it.
They have access to all those Street firms that Mike Kelley referred to and they should go and do their business with them.
All kinds of people are eager to do business with those central banks, and that is where it ought to be done.
On the other hand, our not having that tool available to us is a product of the fact that in the 1970s, whenever it was, nobody thought we would need it, so we did not get it.
No one can recall a policy decision on this matter, but rather it appears to have been a case where nobody thought of it as something that might be needed.
MR. LINDSEY. I agree.
TO BE CONTINUED ...
My main motivation for getting the reverse repo capability for the Desk is that I do not want to deprive us, the FOMC, of a useful tool for our own purposes.
I am not really motivated by the objective of helping other central banks around the world.
A problem that sometime arises in our dealings with some of the Southeast Asian banks when they ask if we can do a reverse repo.
They understand fully the nature of that financial instrument.
When we say, "No, we can't do those," they think it implies, because a country competitive with us is encouraging them to have that view, that we are not a cooperative central bank.
It is not that they are saying they want us to do it.
They are not asking for any kind of an arrangement.
It is that they are thinking: Why in the world would a central bank not be able to do what would appear to be a completely normal transaction in its own Treasury securities in its own currency when it can do those any day of the week with Salomon Brothers?
I have constructed answers to such questions, but in fact it is not very comfortable to have to answer them.
So, I would like to be able to say that we have that technical capability, but they should not in any way have the view that we intend to use it.
They have access to all those Street firms that Mike Kelley referred to and they should go and do their business with them.
All kinds of people are eager to do business with those central banks, and that is where it ought to be done.
On the other hand, our not having that tool available to us is a product of the fact that in the 1970s, whenever it was, nobody thought we would need it, so we did not get it.
No one can recall a policy decision on this matter, but rather it appears to have been a case where nobody thought of it as something that might be needed.
MR. LINDSEY. I agree.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Stern.
MR. STERN. I have just a couple of comments.
I think swaps have outlived their usefulness.
My recollection is that one of the problems we have encountered with them is that foreign central banks have wanted to draw on their swap lines at times we did not think it was such a good idea.
I remember some balance sheet window-dressing on the part of a country whose name has already been mentioned a couple of times here.
That places us in a dilemma.
They come to us with the expectation that they are going to be able to make the drawing.
Do we want to say no, given that the facility is in place?
It gets to be very difficult.
So, I would think that we ought to try to extricate ourselves, as gracefully as possible, over time from these arrangements.
In terms of where we might go, I have some sympathy in the abstract for the flexible approach based on personal relations that Bill McDonough was talking about.
But this is politically sensitive stuff.
There is no escaping, it seems to me, that these arrangements and transactions are politically sensitive.
Where that leads me is to the view that we need some principles with regard to what we are prepared to do, under what circumstances, with whom, when, and so on.
It may be that, in extremis, we will need to interpret those principles flexibly, but I assume those situations would be rare.
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MR. STERN. I have just a couple of comments.
I think swaps have outlived their usefulness.
My recollection is that one of the problems we have encountered with them is that foreign central banks have wanted to draw on their swap lines at times we did not think it was such a good idea.
I remember some balance sheet window-dressing on the part of a country whose name has already been mentioned a couple of times here.
That places us in a dilemma.
They come to us with the expectation that they are going to be able to make the drawing.
Do we want to say no, given that the facility is in place?
It gets to be very difficult.
So, I would think that we ought to try to extricate ourselves, as gracefully as possible, over time from these arrangements.
In terms of where we might go, I have some sympathy in the abstract for the flexible approach based on personal relations that Bill McDonough was talking about.
But this is politically sensitive stuff.
There is no escaping, it seems to me, that these arrangements and transactions are politically sensitive.
Where that leads me is to the view that we need some principles with regard to what we are prepared to do, under what circumstances, with whom, when, and so on.
It may be that, in extremis, we will need to interpret those principles flexibly, but I assume those situations would be rare.
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Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President McTeer.
MR. MCTEER. I am not a fan of intervention by the United States in foreign exchange markets, and in any event we probably do not need swap arrangements for that purpose.
However, our swap partners might have such a need, so I am not sure what we would gain by giving up the flexibility to accommodate that need before we have an alternative in mind.
I would look for alternatives and keep the swaps around until we have one.
Just a word on Mexico: Nobody liked the way the Mexican support package was put together and it was certainly ugly.
But I still believe that we did the right thing, and it appears that it has worked and is working and will be successful.
I would keep the swap arrangement around so that it will be available in the next crisis.
The idea of hurrying to dismantle it before another crisis occurs where we might use it does not appeal to me.
TO BE CONTINUED ...
MR. MCTEER. I am not a fan of intervention by the United States in foreign exchange markets, and in any event we probably do not need swap arrangements for that purpose.
However, our swap partners might have such a need, so I am not sure what we would gain by giving up the flexibility to accommodate that need before we have an alternative in mind.
I would look for alternatives and keep the swaps around until we have one.
Just a word on Mexico: Nobody liked the way the Mexican support package was put together and it was certainly ugly.
But I still believe that we did the right thing, and it appears that it has worked and is working and will be successful.
I would keep the swap arrangement around so that it will be available in the next crisis.
The idea of hurrying to dismantle it before another crisis occurs where we might use it does not appeal to me.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Melzer.
MR. MELZER. Alan, I cannot add anything that has not already been said on the swaps issue.
I do want to say that I have a lot of sympathy for what Bill McDonough said in terms of how we ought to be thinking about this issue looking forward.
We ought to focus on making sure that we maintain the U.S. dollar as the principal reserve currency, and we ought to be thinking of vehicles that support that objective.
That is really how I view what Bill is saying in an environment where we are apt to have larger and larger cross-border settlements and the need for liquidity on relatively short notice.
The ability to provide the latter would certainly be in our interest.
People are going to look to us to make sure that dollar settlements throughout the world are in fact made.
We ought to be thinking in terms of a vehicle that helps facilitate that.
So, I think our focus ought to be shifted away from supporting foreign exchange intervention, and I think swaps are an anachronism in that context in any event.
We should be moving more toward payments system risk aspects and really supporting the U.S. dollar.
That is what this ought to be about as we think about the future.
TO BE CONTINUED ...
MR. MELZER. Alan, I cannot add anything that has not already been said on the swaps issue.
I do want to say that I have a lot of sympathy for what Bill McDonough said in terms of how we ought to be thinking about this issue looking forward.
We ought to focus on making sure that we maintain the U.S. dollar as the principal reserve currency, and we ought to be thinking of vehicles that support that objective.
That is really how I view what Bill is saying in an environment where we are apt to have larger and larger cross-border settlements and the need for liquidity on relatively short notice.
The ability to provide the latter would certainly be in our interest.
People are going to look to us to make sure that dollar settlements throughout the world are in fact made.
We ought to be thinking in terms of a vehicle that helps facilitate that.
So, I think our focus ought to be shifted away from supporting foreign exchange intervention, and I think swaps are an anachronism in that context in any event.
We should be moving more toward payments system risk aspects and really supporting the U.S. dollar.
That is what this ought to be about as we think about the future.
TO BE CONTINUED ...