The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.
Now it’s Europe’s turn to imitate the U.S. As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.
Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion. In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.
But any QE program would be modest in comparison with the Fed’s. And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.
The ECB’s action raises a few questions:
If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now? The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy. Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE. Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets. (more…)