A short post substantiating my tweet yesterday asserting this, which was picked up by the Guardian, but, all on its own, to those not swimming in this stuff, might look rather odd.
We could think of an ECB purchase of a package of bank loans (an ABS) in two steps. First, it agrees to buy a government security from the bank. Then, in step 2, it agrees to swap this for an ABS issued/held by the bank. In reality, of course, the purchase involves a single step, a straight swap of electronic reserves for the ABS.
However, thinking of the purchases in two synthetic steps highlights why these purchases might be more stimulative than the Fed/BoE asset purchases, which involved straight swaps of reserves for gilts. [Leave aside the earlier Fed purchases of agency debt, and the tiny amounts of corporate paper the BoE bought]. Unless you think the swap stage would have no stimulating effect on the bank, or a negative effect, the ABS purchase must be more stimulative. If one supposes that the value of the government securities is effectively underpinned by Draghi’s earlier promise to invoke ‘Outright Monetary Transactions’ (OMTs), then we presume that the private bank and its funders feel its balance sheet to be less risky if it dispenses with an ABS than a government security. (In the past I blogged that I thought that OMTs were an almighty bluff and was puzzled that markets had not called it. They don’t look like calling it any time soon, so this presumption seems fine.) Wholesale debt funding can now be sourced more cheaply, its equity price will rise, and it will feel able to extend new loans at lower cost, stimulating spending by households and companies dependent on that funding.
Actions like this were urged on the Bank in the early days of the crisis, both publicly, by former MPC member Adam Posen, for example, but also privately, by myself and others on the staff, precisely on the grounds that one would presume them to have a larger bank for buck using this logic. In that case there was less of a question surrounding the credit-worthiness of gilts either, so the conclusion that private asset purchases would be more stimulative was on firmer ground.
This said, as I tweeted, though more stimulative euro for euro, one would presume that the purchases will be on a significantly smaller scale than US/UK QE. [At least, assuming that there is no subsequent round of straight purchases of government securities].