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Fed vs ECB

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the_trat
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Fed vs ECB  Reply with quote  

Hi to all,

I have the impression that the fed is moving towards a system similar to the ECB one, I wanted to know your opinion on that matter.

Just wanted to see if I had a clear idea of the traditional differences between the Fed and the European Central Bank, and what it implies in the current situation :

-Fed traditionally had most of its assets as Securities (treasuries), by selling and buying them it regulated the money supply M1. See August 2007 on the table : http://www.econbrowser.com/archives/2008/10/the_federal_res.html. It also offered loans to banks with the discount rate, but in comparison it did not amount to much.

-While the ECB had a majority of loans to banks and very few securities.http://www.ecb.int/stats/money/aggregates/bsheets/html/outstanding_amounts_2007-03.en.html

Now If I am right, can someone explain to me why is that ? Why did the Fed have almost only securities as assets and the ECB almost only loans ?

Now if we have a look at the current situation, the fed has more loans than securities but the ECB kept its ratio...(about 4 of loans per 1 of securities ).

Then my question is what does that imply ? and is this really bad as many analysts say ? when you've seen that the ECB had almost only loans in good financial times....

Well waiting for your thoughts...

Thanks

Smile [/list][/list]
Post Mon May 04, 2009 2:20 pm
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coaster
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I think you're making too fine of a distinction. Treasury securities ARE loans, and loans ARE assets. I'm not familiar with the ECB, so I don't know what you're referring to as "loans" that the ECB is holding. From the context of your question, I'm guessing they're general bond market debt? And your question is about the change in the asset mix of the Federal Reserve System? I'm guessing it's just due to meeting the needs of the moment, not any particular fundamental policy shift. Remember the Fed is NOT a branch of the US government; it's just a collection of banks that have a special relationship with the US Treasury. Technically, the Fed is supposed to be just a tool to implement US government monetary policy.

Since our member are primarily US residents, maybe you could do us a favor and explain the ECB to us? Smile

~Tim~
Post Tue May 05, 2009 3:45 am
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the_trat
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Hi, Sorry for the two weeks delay. Smile

Well there is actually a very big difference, Treasury securities are loans made by the Treasury, i.e. the government of the USA, that were bought and sold by the Fed to regulate the money supply. No risks there, as treasuries are considered as risk free assets.

While the loans I was talking about are actually loans made by the Fed to inject liquidity into financial institutions, which implies a much higher level of risk, some of it may never be recovered with the current crisis.

Well as far as I understand, the ECB is a euro-zone equivalent of the Fed, but much more independent in practice as we do not have a strong central European government. It is kind of a Fed made of Feds from each country...
Post Thu May 21, 2009 11:09 pm
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coaster
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I think there's still some confusion over the terminology. Treasury securities are not loans made by the U.S. Treasury; they are debts incurred by the U.S. Treasury on behalf of funding the operations of the U.S. government. There is a series of Treasury securities not sold to the general public that are only sold to the Federal Reserve. The Federal Reserve buys these special securities and it's these it uses to buy and sell to regulate the money supply. The Fed only deals directly with the Federal Reserve system; it doesn't buy and sell directly to other financial insitutions. The Treasury securities in question would, by GAAP accounting, be carried on the books of the Treasury as a debt obligation and on the books of the Federal Reserve as an asset.

That's how I understand the process and how it works under normal operations; I have no idea how current operations have changed, or if they have, under the TARP and TALF programs. There seems to be a lot of stuff going on that's way beyond "normal operations"

Treasury securities as "risk free" assets due to the "full faith and credit" of the U.S. Government is a fiction that's starting to become recognized by the rest of the world finally as indeed a fiction.

~Tim~
Post Fri May 22, 2009 6:57 am
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coaster
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mod's note  Reply with quote  

There is a forum rule against resurrecting very old threads. I'm waiving that rule in this instance because the appended post adds new and relevant information, and the topic itself remains current. It would be better, though, if the poster would care to add some comments in addition to just posting a graphic.

~Tim~
Post Fri May 17, 2013 2:52 pm
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LottomagicZ4941
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Re: mod's note  Reply with quote  

quote:
Originally posted by coaster
There is a forum rule against resurrecting very old threads. I'm waiving that rule in this instance because the appended post adds new and relevant information, and the topic itself remains current. It would be better, though, if the poster would care to add some comments in addition to just posting a graphic.


Thanks for waiving the rule. Rules should never be more important then the reason for the rule. This is interesting stuff;) Still wrapping my head around it so nothing to productive to add beyond thanks for the info.

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Post Fri May 24, 2013 2:57 pm
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