What did the ECB due to the crisis?

After the bubble burst of the US house market and the financial situation got more and more worst, the European Central Bank (ECB) and the Federal Reserve (FED) were ones of the first banks in the world which reacted immediately by pumping money to the financial market in august 2007.

Until now the ECB injected more than 150 billion Euros to reach liquidity between banks and to keep from bankruptcies in the financial world. Another reaction of the FED was to cut down the interest rates dramatically, in hope to get more money for the banks, but the ECB didn’t follow this example. It raised interest rates from 3.75 % to 4% in June 2007 and ever since it didn’t changed it anymore. The ECB is really observant according to inflation and with this dealing it tries to avoid it. The president Jean Claude Trichet said he will not change the rates because our economic is still relativly stabil; the employment is robust, the unemployment low and the profitability are sustained. Both institutions injecting money to the market to keep business working, but they acting differenty according to cutting interest rates. Thus, the ECB is more focusing on the economic health by retaining the interest rates whereas the FED is reacting directly to the events to avoid a deep recession by repairing the accured damages.

To understand the reason why the ECB is going another direction as the FED you have to look at their mission and structure. The FED is founded 1913 to foster a sound banking system for the USA. The board of Governors which oversee the 12 Federal Reserve Banks in Washington D.C. is made of seven members who are nominated by the president and confirmed by the senates. Thus, the FED is much closed to the USA government and its board members are subordinate under a high pressure to satisfy the government to be voted again and to satisfy the US banks, who have not always the same interest as the government. Thereby the decisions are often emotional rather than rational in a finance point of view.

The ECB is unlike the FED very young it was founded 1998 and is located in Frankfurt. Together with the national banks of the European member states it constitutes the central banking system of the euro area. The ECB is an independent institution according to governments, financial organisations and decision making. The board members (6) are not elected by the national governances and their period is for 8 years. They can only be elected for one period, thus they don’t dare under a pressure from the government. Therefore their decisions can be taken more rational.

A lot of economists complain that the FED is acting emotional and the ECB rational in case of handling the financial crisis. The mission of the ECB is to provide the highest level of integrity, competence, efficiency and transparency. Objectives are high level of employment and sustainable and also non- inflationary growth. There main objective is the stability of prices and with obtaining the interest rates they try to keep the prices stable.

Every 14 days the board of the ECB is holding a conference, the solutions and all important dealings are published to the member states and public. By transferring information’s due to statistics and reports, the involved public trust the system and spend the money to the banks which makes them more liquid in times like today. It also created 16 million jobs till 1999 and the euro is getting stronger and stronger even before the financial crisis. All together the ECB is enjoying a very high confidence and credibility.

At the end the two banks have other backgrounds, so everyone by itself is acting how it best fits for them in this situation and nobody can say which strategy is turning out positively and which one not. So it still will be interesting how the different central banks are dealing with the current financial situation and how deep the crisis, which started as an US property bubble, will effect the whole world economy.

Blog 3

What did the US government and the Federal Reserve decide to do?

Nowadays it is not anymore a question of will the USA get into a recession, the question is how long and deep it will damage the US economy. The employment is decreasing 76.000 jobs in February 2008 and 80.000 in March. Due to a higher unemployment, encumbered citizen and flagging banks the economic growth will be weaker than in the years before. To stop or to diminish the coming recession the Federal Reserve and the US government tried to recover the markets by entrancing money and regulations.

In order to recuperate and to liquid the banks the Fed pumped 41 billion dollars into the market first November 2007 and than January, 2008 constantly 30 billion dollars monthly till 11 March, 2008, where they again decided to increase the amount to 100 billion dollars. Most economists assume that the reason is not only to keep circulating money it also should staved off the collapse of the Bank Stearns, the first bank that run into trouble in the sub-prime crisis. The Federal Bank will push more money into the global market if necessary.

At the end of October the Fed lowered for the first time the interest rates from 5.25% to 4.5 %. Now the interest rates reached 2.25% in March 2008. Cutting the rates give hope that the lenders will loose their anxiety to get some money back in the banks.

Furthermore the government decided to raise the taxes to get 150 billion dollars more for the market in 2008.

Another move to reduce the cost of high-end mortgages and to fill the financing gap is increasing the size of the loans FHA can insure, till now it is only a proposal of the government.

Other programs that the government started are called FHASecure and Paulson Plan. The FHASecure is designed to refinance borrowers with ARMs that are converting them into government insured FHA mortgages. The Paulson Plan is designed to streamline loan modifications that mean the borrowers with sub-prime ARMs can apply to get frozen interest rates at the loan start rate for 5 years.

With all these movements the USA try to calm down the credit crisis and to avoid a really bad recession, because economists claim this recession could be the worst after the World War II and maybe it is not causeless because there is already an estimated damage due to the credit crunch of 1.5 trillion dollar only in the USA and the credit market still not reached the safety zone, so unemployment and inflation is still rising what is the worst for an economy as we learned in class.