Speed and Independence

Pedro-Pablo Kuezynski likened ESF and Fed bailouts to the actions of a financial fire brigade that responds to crises quickly in an effort to prevent them from spreading elsewhere.[1] Implicit in his analogy is the observation that, relative to IMF credits, US ILLR mechanisms can respond far more swiftly to unfolding crises. Unlike Fund programs, which must pass through numerous veto players involved in a lengthy, two-stage approval process, credits via the Fed or Treasury can be deployed at a moment’s notice. Although the IMF cannot make lending decisions independent of its member states, both US ILLR mechanisms have near complete autonomy. For instance, Fed swap lines have, for their entire history, operated free of congressional restraint. When the central bank initiated its first currency swap agreements in the early 1960s (a case I consider in chapter 3), congressional approval was neither sought nor necessary due to the Fed’s independence. Indeed, former Federal Reserve chairman William McChesney Martin believed that a major advantage of central bank currency swaps was that the Fed could "undertake the task without new legislation and the inevitable horse-trading that went with it.”[2] Moreover, unlike IMF loans, which generally require policy reforms on the part of the borrower, Fed swap lines do not impose conditionality on the borrower. This further speeds up the lending process because negotiating such reforms can be bypassed.

Like the Fed, the Treasury’s use of ESF resources has largely been independent of Capitol Hill. Congress created the ESF in 1934 for the purpose of intervention in foreign exchange markets on behalf of the dollar and updated its mandate in 1976, directing the Secretary of the Treasury to use ESF resources "as he may deem necessary to and consistent with the United States’ obligations in the International Monetary Fund.”[3] Thus, by law the Secretary of the Treasury is the lone authority controlling ESF resources, contingent only on the consent of the president. In effect, the ESF is a tool that enables the president to autonomously bail out a foreign economy in crisis without having to undertake the time-consuming and potentially contentious process of seeking congressional appropriation of funds. Unlike Fed swaps, ESF credits typically come with one condition attached: The borrower must seek long-term financial assistance from the IMF. However, the lengthy process of negotiating a reform program is outsourced to the Fund so that ESF assistance can be provided up front. In chapters 4 and 6, I explain how the United States regularly tapped the

ESF to provide "bridge loans” to heavily indebted countries in the 1980s, in effect providing speedy loans while the IMF worked to hammer out long-term policy reforms to complement the financing.

Of course, both mechanisms have limits to their independence. Both the Fed and the Treasury’s ESF operate with legal mandates granted to them by Congress. Occasionally, some members of Congress have opposed the use of these mechanisms. For instance, various Fed chairmen have been called before Congress to explain and justify their foreign activities.[4] However, at no time has Congress imposed limits on the central bank’s ability to open currency swap agreements. With respect to the ESF, its role in bailing out foreign economies has raised the eyebrows of some members of Congress as well. The first such action came in 1978 when Congress passed legislation that required the Treasury to provide monthly statements on ESF activities to the House and Senate. However, this only served to increase the transparency of its use. Treasury maintained full control over the use of ESF resources.[5] The most ambitious effort to restrict Treasury’s autonomy over the ESF came in 1995 after its resources were used to provide a $20 billion bailout to Mexico. A bill introduced by Senator Alfonse D’Amato (R-NY) in 1995 passed both houses of Congress, which, for the first time, temporarily imposed constraints on the president’s ability to use ESF resources for foreign credits. The new law required congressional approval for loans greater than $1 billion and with maturities beyond 60 days unless the president assured "in writing to the Congress that a financial crisis in that foreign country poses a threat to vital United States economic interests or to the stability of the international financial system.”[6] The amendment remained in place for the fiscal years 1996 and 1997. With the exception of this brief interlude, however, the institutional independence of the ESF has been otherwise unchallenged.

  • [1] Kuezynski 1984. Similarly, the ESF’s contribution to the financial rescue of Mexico in1982 is referred to as a "classic example of a ‘fire brigade’ exercise” by Robert Pringle in thepreface to Joseph Kraft’s book, The Mexican Rescue (1984).
  • [2] Bremner 2004, p. 167.
  • [3] US Senate 1976, p. 18. For a detailed historical account of the ESF’s origins, seeHenning 1999.
  • [4] For instance, as recently as 2010, Federal Reserve Chairman Ben Bernanke was calledto testify before Congress to justify the use of central bank swaps. Representative Mike Pence(R-IN) expressed his displeasure with the Fed saying, "From Johnstown, Pennsylvania, toMuncie, Indiana, the American people have had it with bailouts” (Hilsenrath 2010).
  • [5] Osterberg and Thompson 1999.
  • [6] US Congress 1996, p. 109.
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