By intervening in the Treasury and mortgage-backed securities markets at that time, the Fed provided reassurance that there was a liquidity backstop in place to enable markets to keep on functioning. This may have been its single most important effect.
European markets are quite clearly less stressed at present, so it is not clear whether similar official interventions will have the same effect. There are also some obvious differences in the nature of the eurozone’s financial structure, which may change how policy stimulus can be transmitted. Unlike that of the US, the eurozone’s is an overwhelmingly bank-based financial system, in which credit extended is largely held through loans on bank balance sheets. By forcing investors out of ABS or covered loans, it is not clear whether the funds freed up will find their way to credit-starved European enterprises.
Whether the combination of policies so far announced by the ECB will be enough to free up the monetary transmission mechanism, remains to be seen.
Jonathan Lowe is managing director of the global multi-asset group at JPMorgan Asset Management
