Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

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 by contagion. The third piece is countries for which we believe that the swap line might actually make a difference.

Now, let me just give you a concrete case of the third criterion because that’s a little more abstract than the first two. Iceland came to us and requested a swap line of approximately $1 billion to $2 billion, which would have been 5 to 10 percent of Iceland’s GDP—so it was fairly large relative to the size of the country. But the liabilities of the banking system were on the order of $170 billion, and the underlying problem was really that there was a loss of confidence in its banks. We came to the conclusion that a $1 billion to $2 billion swap line was very little ammunition to use against a potential loss in confidence in this $170 billion financial system. For that reason, we as the staff recommended against a swap line for Iceland.

Those are the three conditions that we’d emphasize. Sort of subsidiary to that is that I think it is very appropriate for all the European EMEs to report to the ECB for their liquidity needs. That would further constrain the list of countries that we’d look at. As we work down the list of countries, I think it gets easier to say “no” in that fewer and fewer of the countries can make a case that they are large and systemically important. With the risk of creating stigma, some countries are big, and some aren’t, and that’s pretty darn objective. Now, you can debate about, well, what’s big and what isn’t and where you draw the line, but it just so happens that these three major economies that we’re putting forward all have GDP of around $1 trillion. That seems like a reasonable line to draw. Again, there’s an element of arbitrariness here, but any line you draw will have an element of arbitrariness to it.

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