The Politics of Rescuing the World's Financial System: The Federal Reserve as a Global Lender of Last Resort

During the financial crisis of 2007-10, the Federal Reserve (Fed) served as a global lender of last resort by establishing currency swap agreements with 14 foreign central banks, including several in East Asia. These agreements were controversial internationally because the Fed selectively established swaps with some central banks and not others, raising concerns about access to the Fed's dollar-creating facilities. Within the United States, the swap agreements were controversial because they appeared to be a new and unauthorized kind of foreign aid to bankers. I analyze both the Fed's decision to establish swap lines with certain central banks and the domestic political response to these agreements. I find that the Fed was more likely to establish swaps with central banks whose jurisdictions were important to U.S. commercial banks, suggesting that the Fed discriminated in ways that served U.S. interests. To analyze the domestic reaction to the foreign currency swaps, I examine voting in the House of Representatives on a proposal known as "Audit the Fed" that would open the Fed's relations with foreign central banks to scrutiny and reduce the Fed's independence from Congress. I find that campaign contributions from large commercial banks to representatives were negatively correlated with voting "yes" on this proposal. I also find that right-wing representatives were much more likely to support this proposal than left-wing representatives, which suggests that new congressional coalitions are forming on the role of the Fed in the (global) economy.