The Past, Present and Future of Federal Reserve Swap Lines (Part 1) [Premium]

What Can the 2007-2008 Crisis Teach Us About Their Future Use?

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The universe of people who know and think about Central Bank Liquidity Swap Lines is small (for an introduction to swap lines, see my early piece here). This is unfortunate, as there are many issues — especially geopolitical issues — which need to be thought through in the context of swap lines. In the fall of 2016 I sat in on Perry Mehrling’s “Understanding Global Money” seminar, along with a few other colleagues at the Modern Money Network.

As people focused on the financial system are inclined to do, one of the things we regularly discussed was what swap lines will look like in the next crisis. Our biggest shared concern was that the U.S. only pursued building such an extensive swap line network because U.S. assets had liquidity issues —- this was a worry that seemed universally shared among the participants in the seminar. To understand why that was such a big concern, it’s important to recount what the 2008 crisis looked like from the point of view of liquidity.

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