The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different”
The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. The response by the Fed: the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The “swapped” amount went from practically zero to a peak of $582 billion on December 10, 2008.
The USD shortage back, and the Fed’s subsequent response, was the topic of one of our most read articles of mid-2009, “How The Federal Reserve Bailed Out The World.”
As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks’ abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic “Dollar short” on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history. This is how the BIS described first the mechanics of the shortage:
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