Fed vs. ECB in charts, part II

Tuesday, May 19, 2009

I wasn't able to get this out before the housing starts report, but that report simply adds ballast to this story: the central bank (Fed) has facilitated the still imminent stabilization of the US economy. The Census Bureau reported that housing starts dropped 13% in April to an annualized 458,000 - below its previous low in January 2009. But within the report, single family starts grew almost 3%, their third consecutive month of "not declining".

If you asked me, that's certainly much better news than the headline number would suggest. New single-family building adds a lot of extra spending to the economy. And furthermore, it does bolster the argument that the stabilization in housing is afoot, as the single-family market represents the fundamental trend in the residential housing market.

In my opinion, we have the massive Fed policy to thank for that. This post revisits the Fed vs. ECB on balance. The Fed is moving forward; the ECB says that it will but still looks the same on balance.

The chart is one in which you are familiar - it lists the Fed's asset holdings on balance (excluding the TSLF program, which is an off balance program). As of week end, May 13, the Fed's balance sheet totaled $2.1 trillion.

The obvious shift occurred when the Fed amped up its outright purchase programs of MBS and Treasuries. That is in full swing now, as illustrated by the sharp upward move of "securities held outright" (blue section). This has helped to keep mortgage rates under 5%.

And recently Trichet caved to pressure, announcing his "plan" to purchase covered bonds. From Forbes:

At a press conference to announce the ECB's cut in interest rates to 1.0%, Trichet said that the ECB had agreed in principle to purchase covered bonds, a type of private-sector bond which has additional "cover" because it is not held off-balance-sheet and the default risk is not transferred entirely to investors. Covered bonds were promoted by the United States Treasury as an alternative source of mortgage financing after the subprime-mortgage crisis hit in late 2007.

Trichet refused to go into any of the technicalities surrounding the planned purchase of covered bonds until the next planned meeting in June. It is likely to be a tricky balancing act, given the euro zone's 16 different member economies, as well as the fact that covered bonds are a German invention and still have their heartland in the German bond market.
If you are curious about covered bonds, here is a nice discussion by Ryan Avent at It seems that the ECB's balance sheet, which hasn't shown any real shifts (beyond the massive liquidity facilities put in place as it cut the refi rate to 1%), will soon to show some action.

The chart illustrates the asset side of the ECB's balance sheet (similar to the Fed's above). Under the covered bond purchase program, the section "securities on euro area residents denominated in euro" would presumably rise (purple) would presumably grow.

We will have to wait, though, until June at the ECB's next monetary policy meeting.

Rebecca Wilder


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