The European banks are particularly exposed, much more so than U.S. banks or Japanese banks. A big chunk of that exposure is to central and eastern Europe, and as you suggest, we see significant risks to the European banks as a result of that exposure. What makes it even ...

I would add that I think the ECB in particular has a real aversion to policy activism. In fact, Trichet was on the wires this morning indicating that they are not really comfortable with where they are right now. They may pause in January, and I think it really would ...

Yes. We see the current account deficit, as Shaghil said, bouncing between 3 and 3½ percent of GDP through 2009 and 2010. In the near term, you have much weaker foreign growth and a stronger dollar, but that is offset by the lower level of oil prices, so that keeps ...

Mexico is experiencing increased financial stresses, particularly in its corporate sector, where recently some bad bets on structured finance products have emerged, and Ortiz was very concerned about continued confidence in the Mexican economy. Now, that said, from what he had to say, dollar funding pressures had not yet emerged ...

Yes, absolutely.

Indeed.

I don’t have details on that. As I’ve mentioned, I know that they have created a facility with the Hungarians, a €5 billion facility. They were also approached by Iceland at the same time that we were. I would speculate, but I don’t have any basis for ...

I’m earning my pay today.

Again, we’re drawing lines here. I am not prepared to give these folks carte blanche. That’s why we’ve added additional safeguards and additional governance structures to these facilities. Maybe the Committee has a different view on that, but I wouldn’t be prepared to let them do ...

No, and maybe the folks in New York want to talk a bit more about this. The transaction with the Swiss National Bank was a very special transaction that occurred outside the typical constraints of the swap lines that we’d be agreeing to with these folks. In the swap ...

Just to put some numbers on IMF lending capacity—total IMF lending capacity is about $250 billion. To get even that high they have to call in some special arrangements that they have with a variety of countries. The maximum capacity is $250 billion. So the $120 billion that we ...

We have already said “no” to some of those.

Our press release that we are negotiating lists, as clearly as one can in a press release, the criteria that we were looking at—that they are large, well-managed, fundamentally sound, systemically important countries. So we are trying to communicate that. In addition, in conversations when these folks come to ...

Well, I guess I’m not sure I know exactly what you’re driving at. Are you concerned that, by moving on these, we’re sending a negative message about the ones we’re not moving on?

Oh, I thought I got it. What was the first part?

As outlined in the memo and then also my remarks, the first is that we are looking for economies that are large and systemically important. The second is that we are looking for economies in which their policies have been strong and it appears that they are largely being influenced ...

I would guess that it is a joint problem.

A couple of thoughts. Certainly these home-versus-host issues bedevil many, many discussions of banking issues right now. They are true in Mexico, as you suggested, and they are true in spades in Central and Eastern Europe, where instead of U.S. banks there are European banks in the tension between ...

That’s right. We’re not advertising.

We have done everything we possibly can to discourage it.

Yes, indeed, we have. We have been approached by 552 U.S.C. (b)(4)

, and we have had very informal inquiries from a couple of other countries, including 552 U.S.C. (b)(4) .

Wherever you draw the line, there is going to be somebody who is just a bit away from the line that says, “I am very similar to those folks.” I am reasonably comfortable with where we draw the line. Here there is as much gap as you’re going to ...

I would hope that initiating these swaps would reduce the probability of bad outcomes in the emerging market economies. Certainly, if Brazil, Mexico, and Korea are up against the ropes and experiencing significant financial stresses, my sense is that it would be an environment in which many other EMEs would ...

I think you put your finger on two very difficult judgments that we made when structuring this facility. I don’t see the risk of creating stigma for emerging market economies that are not in our swap network as being a first-order concern. It is broadly recognized that the folks ...

Could I just respond to President Rosengren’s second question?

In principle, if you were so inclined, you could probably just raise the size of the existing swap line to $30 billion. However, we built in a variety of mechanisms and safeguards in this proposal. In addition, the structure of what we’re putting forward is tailored particularly to meet ...

We do have a swap line with Mexico. It’s a standing swap line. It’s $3 billion under the North American Framework Agreement. It’s the counterpart to NAFTA. Under that agreement, we also have a $2 billion swap line with Canada. Here we would be adding a new ...

For what it’s worth, the ECB has entered into something similar to that with the Hungarians, in which the Hungarians are able to repo to them long-term euro- denominated stuff and get euros back.

I agree.

They could do that. But any drawing under the swap agreement would be no longer than three months, and some drawings would be much shorter. So they would have to move very quickly, given the short nature of these transactions. But there are certain states of nature that are so ...

Yes, indeed. Maybe Trish and Bill want to jump in here as well. What this means is that, in extinguishing any obligation that arises from the swap agreement, if the central bank for some reason doesn’t pay us, we can take other assets on the books that are being ...

Absolutely. These would function very similarly to the swap lines that we have with the advanced economies. In addition, we are going to allow them to draw only $5 billion at a time at the discretion of the Foreign Currency Subcommittee. When the Foreign Currency Subcommittee makes the determination as ...

I very much agree with the thrust of the question—it would take a very severe state of nature for us to sustain losses on these. We are protected by the full faith and credit of our central bank counterparty. In addition to that, when we give them dollars, we ...

In response to intensified global financial stresses, the central banks of four major emerging market economies—Mexico, Brazil, Korea, and Singapore—have recently expressed interest in temporary liquidity swap lines with the Federal Reserve. For the reasons outlined in our background memo, which was circulated on Friday, the staff recommends ...

Since the last Greenbook, the economic indicators for the foreign economies have generally surprised us on the downside, notwithstanding the fact that our expectations in the Greenbook for foreign growth were already pretty grim. In the euro area, measures of consumer and business sentiment have continued to retreat. Industrial production ...

The science of monetary policy.

Yes. Yesterday the PBOC cut its main policy rate 27 basis points. I guess they felt that 26 would not have been enough and 28 would have been too much. [Laughter] And 27 was just the right number. I’d say a couple of thoughts were there. One important point ...

I also will be very brief in summarizing economic developments abroad. Indeed, I would just like to make six very brief points. The first one is that the incoming data we’ve received since the last Greenbook for the foreign economies have been extraordinarily soft. Indeed, we’ve marked down ...

I believe that number is about $180 billion of dollar reserves in the euro system. The ECB itself has control of only a fraction of that.

Yes. The spike that we have seen is driven particularly by commodity prices. The depreciation of the dollar has played a secondary role, so the decline in core import price inflation to below 2 percent next year is conditioned crucially on commodity prices flattening out and the dollar not depreciating ...

Oh, absolutely.

In the process of preparing our forecast, we do come up with estimates of slack for the emerging market economies, but we are not inclined to put a whole lot of weight on them. The concept of an output gap is not really a well-defined construct for, say, China. Nevertheless ...

You are asking particularly with respect to the emerging market economies?

Thank you, Mr. Chairman. Given that developments in global commodities markets have continued to have influential effects on our forecast for domestic activity and prices, we felt that it would be useful for me to lead off with the international portion of the chart show, which will include a discussion ...

It is, quite frankly, pretty tough to get a straight and compelling answer out of the OPEC folks about how they think about the oil markets. A number of us have sat in international meetings and listened to various explanations. In fact, at one recent meeting in Basel, the representative ...

Much as Dave just described for the domestic economy, our forecast for economic activity abroad also is little changed from the last Greenbook. Recent data have come in consistent with our view that the slowdown in U.S. activity and the ongoing financial turbulence will leave an unmistakable imprint on ...

Over the intermeeting period we have lived through an experience that manifests the upside risk to our inflation forecast; and I would indicate that, with the ¾ percentage point markup to headline foreign inflation in 2008 in our forecast, the vast majority of that is a reflection of these red-hot ...

The global economy has likewise seen some extraordinary developments during the intermeeting period. Notably, the spot price of WTI has surged more than 15 percent, briefly reaching $110 per barrel, and many nonfuel commodities prices have moved up by similar magnitudes. The exchange value of the dollar, which had been ...

Right. Just a word of background. The rationale for the falloff is the expected decline in these commodity prices and the expected slowing of global demand. Now, thinking about the risks, I am reasonably convinced that global demand is going to slow, which I believe will translate into reduced demand ...

We are happy to hear that there is demand for a bigger international section. [Laughter] You had better be careful what you wish for.