Friday, May 29, 2009
Quantitative Easing Among US, UK, and Eurozone
--Unlike US and UK, ECB has refrained from quantitative easing over the concern of inflation --Still ECB has its own version of QE. European banks bought $250 bil worth of government bonds --It serves two purposes. First, it helps Eurozone governments fund themselves, plugging the budget deficit. In US, banks only contributed 10th of its budget deficit. --Second, it helps European banks recapitalise themselves while they shelt in a regulatory twilight. Banks borrow unlimited 12-month money from ECB at 1% and lend to government for 10 years at about 4%, earning a spread. --This is a more honest way to plug budget deficits as the private sector is providing funds rather than the printing press. It is eqivalently effective in controlling interest rates, as showen that yield curves in Europrean is similar to US and UK.