Sunday, March 22, 2009

Fed vs. ECB in charts

As global central banks continue alternative policy measures and/or quantitative easing (raising the balance sheet beyond that required to attain a zero policy rate), the European Central Bank (ECB) is the odd man out. And recently, the ECB is being pressured to broaden its accepted collateral to include commercial paper and other stressed assets.

ECB council member Weber hinted at further rate cuts below the current 1.5% policy rate, which would bring the rate uncomfortably close to zero, but nevertheless, still by the book and using traditional monetary measures. Traditional measures include enough money creation to lower the ECB refi rate (the rough equivalent to the federal funds rate) to the target level, 1.5%. Non-traditional means would include buying commercial paper, buying government debt in excess of what is needed to attain a zero policy rate (quantitative easing), purchasing asset-backed securities, or really anything under the sun.

This is what the Fed is doing: buying (almost) everything under the sun

The chart illustrates the Fed balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, 130% to $2.09 trillion in the week ending on 3/18/09. Also notice that the composition of the balance sheet has changed drastically. The extension of bank credit (everything in the chart except for Other Fed assets, including gold, SDR's, and Treasury currency) has surged 139% to $2.04 trillion, mostly through non-traditional means.

Initially, the Fed added liquidity through traditional means, Term Auction Facility (TAF) or discount lending, but recently, and in addition to maintaining these lending programs, it is buying assets directly, including mortgage-backed securities, asset-backed securities (TALF, which only just begun), agencies, and more Treasuries (starts next week) than are needed for the (near) zero fed funds rate. See my recent post on how the Fed is shifting its focus. Basically, the Fed's balance sheet is big and holds a lot of alternative collateral and/or assets.

But not the ECB; it has done everything pretty much by the book.

The chart illustrates the ECB's balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, but by a much lesser degree than has the Fed's, just 58% to 1.83 trillion euro. Also notice that the composition of the balance sheet remains relatively unchanged. Foreign currency claims on euro residents and traditional open market operations, main refinancing operations and longer-term refinancing operations, account for the bulk of the balance sheet growth. Basically, the ECB's balance sheet is sort of big, and there is little by way of alternative collateral and no alternative assets on balance.

We will see if the ECB succumbs to growing pressures to grow their balance sheet in both size and scope.

Rebecca Wilder


  1. If the ECB can resist that pressure, I would think this would be the experiment that economists will study most when they look back at this time.

    Both economies are large and diverse enough to be comparable.

    The ECB seems willing to take a steepr immediate downturn in the hopes that in the long run they will be better off by not taking a lot more risk on their balance sheet.

    The US seems unwilling to face a large downturn and is willing to avoid or soften it by any means necessary.

    Unfortunately, these economies aren't really decoupled at all, so regardless of which line of thought proves better, it's hard to say how strong the conclusions will be for academics.

  2. The only type of bank asset that the FED can constantly monitor & absolutely control are inter-bank demand deposits owned by the member banks.

    I.e., the ECB can control their money supply using reserve requirements but legal reserves aren't binding in the U.S.

  3. Of course, "quantitative easing" is euphemistic expression for Money in Circulation (notes and coins) Inflation.

    Since Bernanke cannot get his way and force Americans to increase their cash renting from member Fed Res banks and thus increase their debt obligation, which would cause Credit Inflation, Bernanke can use his last tool -- printing money (buying U.S. Treasuries with newly minted, faked dollars that become computer database entries on the Fed Res books).

    Bernanke has caused the U.S. dollar to crash with his latest folly.

    Bernanke has become the world's biggest garage sale addict, buying everyone's discarded, used junk in sight.

    What a failure Ben Bernanke, a typical Academician Economist, who, like his academia economist brethren, knows nothing.

    In short, Ben Bernanke does not get money, does not know how money and credit works.

    Ben Bernanke's beliefs about the Great Depression are wrong, entirely.

    Ben Bernanke is the biggest fraud in history, far bigger than Bernard Madoff.

    Fixing the Banking Crisis

    This has been a Banking Crisis from the start, not a "financial crisis" or some other smokescreen label designed to place blame elsewhere.

    The correct fix to the Banking Crisis was tough medicine done thus:

    1) let AIG fail and all its bond holders
    2) close all banks -- bank holiday
    3) shutter failed banks -- Citi, BoA, Wamu
    4) transfer at full face value all demand deposit accounts, saving accounts and money market accounts at random to solvent, regional banks
    5) auction off all buildings, land and equipment of failed banks

    Instead, Bernanke and the U.S. Congress have made one giant mistake after another, all in hopes of keeping some unscrupulous rich persons rich while sticking the bill to wage earning taxpayers and shopkeepers.


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