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Is the ECB too cautious or too reckless?

The European Central Bank has long been criticised for being too cautious in its response to the financial crisis. Didn’t the inflation hawks of Frankfurt raise rates in July last year just as the credit crunch was about to reach its climax? Despite their massive injections of liquidity into the money markets, Jean-Claude Trichet and his colleagues were pilloried as timorous clones of the Bundesbank for cutting rates too slowly and refusing to follow the Fed and the Bank of England into Quantitative Easing by buying government and corporate debt.

But after last week’s helicopter dump of a record 442 billion euros in liquidity in one-year lending on demand to banks at its 1.0 percent refi rate against a broad range of collateral, the bank suddenly stands accused by some critics of being more reckless than the Anglo-Saxon central banks.

Anatole Kaletsky, writing in The Times, argues that the ECB is now printing money faster than the Fed by spraying cheap cash at the banks against poor-quality collateral, taking much greater credit risk than the U.S. central bank.

Unlike the Fed and the Bank of England, which only accept AAA public bonds as collateral for their lending operations, the ECB now lends against low-rated mortgage bonds, commercial loan books and other dubious assets that the markets would treat as “toxic” were it not for the ECB’s willingness to turn them into instant cash. The ECB has been praised for the boldness with which it has set aside the traditional rules of central banking in the crisis — and this is perfectly justifiable, but the ECB’s apologists cannot have it both ways. Those who praise the ECB for its “imaginative” response to the crisis must also acknowledge that it has accepted much greater credit risks than the Fed.