Hussman’s weekly commentary makes a small but crucial distinction between ECB bond purchasing versus ECB lending. There has been much chatter in the blogosphere in the last few weeks about the ECB’s recent deployment of the “LTRO” facility. This is the one which is taking collateral from the Euro banks and given them euro’s instead. Many have been calling this a “stealth” QE, and a form of debt monetization. Hussman begs to differ, and reminds me that during the first phase of the crisis in 2007-2008, the Fed also did a lot of lending (as opposed to purchasing) which didn’t seem to help much. Only when they started buying bonds outright and expand their balance sheet with freshly printed dollars injected into circulation did things stabilize (a bit). Hussman’s point: The ECB lending is much more easily reversible than purchasing: you just ask for your money back. So it is truly the provision of liquidity rather than QE.
With true QE, the Fed as owner has the problem of how to sell all the toxic assets on its books in to the market. The theory apparently is something like this: once growth resumes and real estate starts to rise, even slightly, and incomes also begin to rise slightly, selling RMBS back to private parties will be possible — or at least won’t be impossible.
But is liquidity enough to help the Eurozone?
In Europe, as Soc Gen explains in a recent note excerpted at FT Alphaville: … the success.. .. of the ECB-style QE ought to be judged through the money multiplier. The latter measures the ‘commercial bank money’/’central bank money’ ratio; e.g. M3 money supply divided by base money (currency in circulation + reserves held by counterparties in the Eurosystem + deposit facility).
But a picture says a thousand words; check out this SocGen graph from the FT Alphaville site:
The graph shows that there is no multiplication effect: money being provided by the ECB is not expanding the M3 supply — instead, it is just being parked back at the ECB. The net effect would appear to be the stabilization of the big banks but continuation of a credit crunch in the real economy. And as recession numbers flow back into the models, the provision of more and more ECB liquidity will be necessary to shore up weak sovereigns and banks, but probably not always on time — so a few train wrecks seem likely.