In a post from yesterday on the relationship between global financial markets and central bank activity, we wrote something upon which we’d like to expand:On the surface, the Fed’s QE, and the ECB version of bond buying (OMT) look the same, because they’re both bond buying. But whereas the Fed isn’t in the market to facilitate US fiscal policy, the ECB (whether it will admit it or not) is playing a quasi-fiscal role, facilitating borrowing and spending by weak countries (assuming the program ever gets off the ground).
After the last couple weeks of CentralBankapalooza, this is a point that seems to be lost on people, as they discuss the latest round of monetary easing from the Fed, ECB, and the Bank of Japan.
But to say that the ECB “eased” policy at its last meeting is actually a gigantic understatement. What Mario Draghi did is almost nothing like what Bernanke did.
Sure, both are using the central banks’ unlimited balance sheet to buy bonds, but whereas the Fed is buying up bonds in order to (in part) push money into riskier areas of the market, the ECB is hoping to buy up bonds to bring a bid back into the peripheral sovereign bond market.
More broadly, as stated above, the Fed is trying to influence the market and the economy through fairly technical channels (reduce yields, hope money then goes into riskier areas), whereas the ECB is offering to backstop weak European governments, so that they can keep spending without fear of completely busto.
Under the guise of ensuring the transmission of monetary policy, Mario Draghi is slowly upending the old system of government financing in Europe.
Furthermore, it’s precisely because the bond buying scheme is so revolutionary, that it’s made even some mainstream ECB defenders blush. CNBC’s ace ECB reporter Silvia Wadhwa thought it was beyond the pale that Draghi’s plan requires sovereign governments to undergo certain actions in order to get help. She identified this as a threat to democracy.
If Draghi’s new plan (dubbed the OMT) gets off the ground, it’s a very big deal in a way that QE can’t compare.
Europe’s not out of the woods yet (heck, Spain hasn’t even asked for a bailout yet… a necessary step in order to partake in the plan) but thinking about what happened just in terms of world central banks printed money is missing the point a little, at least on the European front.
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