Last week the US Federal Reserve Board announced that it would help liquidity by making dollars available to other central banks. This announcement followed days of speculation that the Federal Reserve Board was about to ride to the rescue of the eurozone possibly by buying eurozone government bonds. The Federal Reserve Board’s announcement triggered a wave of buying in the international money markets, which continued until Friday.
On the face of it all this is baffling. As Paul Krugman for one correctly says in his blog the Federal Reserve Board merely announced that it would do what it routinely does anyway. Given that this is so it is unclear why the Federal Reserve Board felt the need to announce it. As for the idea that the Federal Reserve Board might buy eurozone government bonds, at a time when the US government is struggling with its own deficit this would be impossible if only for political reasons.
Over the last day or so I have however heard a rumour, which might explain the mystery. This is that the Federal Reserve Board’s announcement was made to provide cover for an international bailout of a major French bank, which was on the brink of collapse.
I do not know whether or not this rumour is true. I do however remember how similar rumours were circulating in the summer of 2008 about problems at a US bank. The eventual collapse of Lehman Brothers showed that those rumours were true.