I have argued that the ECB didn't do enough to support the Eurozone (a few examples here, here, here) - further monetary policy was warranted. As the financial crisis abates and key economies mend, I want to revisit this issue just one more time. Now, it seems that the Fed could beef up its lending, as the money supply growth rate turns red.
To be fair, the ECB's balance sheet is large relative to the size of the Eurozone, but nevertheless, its monetary support has relatively small compared to the BoE and the Fed (they did provide credit support by purchasing covered bonds, but nothing of the quantitative easing flare like in the US and the UK).
The chart illustrates the size of the central bank balance sheet as a % of GDP for the Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB) as of September 2, 2009. Relative to the size of its economy, the Fed and the BoE engaged in large expansionary policies by growing their balance sheets in order to stablilize the financial system. On the other hand, the ECB, while dropping its rate to 1% and supporting the credit system through its covered bond purchase program, did not.
However, credit is still quite restricted (see previous post on the US credit crunch) - so much so that the 3-month annualized growth rate of the money supply - M4 in the UK, M3 in the Eurozone, and M2 in the US - is low, even negative.
I wonder what Friedman would say....more deflation is on the way? It's way too early to turn off the money valve - the lack of credit flow precludes much money growth right now. Just look at how weak was the consumer credit report.