Sunday, March 22, 2009
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.