US Fed, ECB Balance Sheets Are ‘Profoundly Abnormal’ (Dec 2012)


In the financial crisis of 2007-2008 and the following years, when major financial institutions in US, UK and EU were staring collapse in the face, the central banks rode to their rescue by putting private debt on the public account. Trillions of currencies were created out of thin air to shore up the failing financial institutions. That was then. Today, the debt load of countries are even higher, many of the same financial institutions are even more levered. And the balance sheets of central banks are expanded profoundly as compared to pre-crisis days.

When a relapse of the crisis happens again(its a matter of when, not if), central banks will not be able to play the role of the saviour as effectively since they themselves have undertaken excessive debt.

Source: CNBC – Trichet: Fed, ECB Balance Sheets Are ‘Profoundly Abnormal’

Ballooning central bank balance sheets across the U.S., Europe, the U.K. and Japan are “profoundly abnormal”, according to Jean-Claude Trichet, the former president of the European Central Bank.

“If you look at the increase in the size of balance sheets since the crisis erupted in 2007, you see the same order of magnitude: at least 12 percent of gross domestic product… You see something which is profoundly abnormal in the U.K., Japan, Europe, and the U.S.,” Trichet told CNBC…

According to its own data, the Bank of England’s balance sheet topped 20 percent of annual gross domestic product (GDP) in the first quarter of 2012, and was roughly four times larger than at the start of 2007.

In the same period, the Federal Reserve’s balance sheet reached more than three times its pre-crisis size and neared 20 percent of GDP, while the European Central Bank (ECB)’s balance sheet topped 30 percent of euro zone GDP.

“I expect we will not remain eternally in the present situation. This situation is not the new normal that is acceptable,” said Trichet.

Much of the expansion of the Federal Reserve and Bank of England balance sheets has been driven by their purchases of government bonds.

Meanwhile the ECB’s balance sheet has been inflated by its long term refinancing operations (LTROs) to banks.


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