Here’s more from the article to explain a little bit why we are doing it:
Some believe the Fed’s swaps to prop up Europe’s banks are a foolish bet.
“[Fed Chairman Ben] Bernanke’s assurances aside, I don’t see how they can easily be repaid,” warns Gerald O’Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.
Here is how the swaps work. The Fed and, say, the European Central Bank agree to exchange a set amount of each other’s currencies at a certain exchange rate for six months, with a provision to renew the terms at maturity. The ECB uses the money to help aid bank-bailout packages for countries like Belgium, Finland, Hungary and Ireland that have troubled dollar-based assets. (Asian central banks are also part of the program, but haven’t utilized it nearly as heavily.) The Fed gets a promise from the ECB to repay the debt in six months.
A big hitch: Europe’s commercial banks have more exposure to wounded emerging markets than U.S. counterparts. By one estimate, European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging-markets exposure exceeds that of U.S. lenders to Alt-A and subprime loans.
That doesn’t tell me WHY. It sounds to me like a sinking ship is trying to save a faster-sinking ship. Isn’t that pointless? Shouldn’t the sinking ship just worry about itself?
My gut says that when this is all over, somebody is going to lose really big, and somebody is going to win really big. Does this make sense?