Sunday, March 22, 2009
Today I compared ECB policy versus Fed policy in charts, noting that the ECB has not engaged in quanitative easing, while the Fed clearly has. Willem Buiter does a really nice job (of course) of addressing the ECB's reluctance to engage in non-traditional monetary measures, such as quantitative or credit easing policies. An excerpt from his post today on FT.com Maverecon (hat tip, reader M G):
"The fiscal hole at the heart of the Eurosystem
An entirely valid reason for the ECB/Eurosystem to refuse to engage in either outright purchases of private securities or in unsecured lending to the banking sector (or to the non-financial enterprise sector directly), is that there is no ‘fiscal Euro Area’, just as there is no fiscal EU. The absence of a fiscal Europe that matters here is a narrow one. I am not talking about the absence of a significant supranational fiscal authority in the EU (or in the Eurozone ), with significant tax, spending and borrowing powers -one capable of material system-wide fiscal stabilisation and cross-border redistribution. I am talking instead about two related fiscal vacua.
The first vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise the ECB/Eurosystem when the Eurosystem makes capital losses that threaten its capacity to implement its price stability and financial stability mandates.
The second related vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise systemically important border-crossing financial institutions in the EU or the Euro Area, or provide them with other forms of financial support.
When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person: Tim Geithner , the US Secretary of the Treasury. It is possible that no-one in the US Treasury will pick up the phone, as none of the senior political appointments below Geithner are in place yet, but Geithner clearly would be the man to call.
Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Euro Area member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose NCBs are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.
This situation is intolerable. We need a fiscal Europe, at least at the level of the Eurozone, to fill the first vacuum. If we are to fill the second vacuum, we need a fiscal Europe at the EU level also."
Read the rest of the post here, as Buiter proposes some solutions to the ECB's quandary. Hope that you are enjoying your Sunday!