–ECB LTRO Also Eased Threat of ‘Bank Run’ in European Banks
–Central Bank Long-term Bond Purchases Can Help Even In ‘Steady State’

By Chris Cermak

WASHINGTON (MNI) – The European Central Bank’s two rounds of
long-term repurchase operations made sense to ease the threat of a bank
run in Europe and were clearly targeted at encouraging purchases of
sovereign debt, IMF Chief Economist Olivier Blanchard said Friday.

Speaking in Washington at a Federal Reserve conference of central
bankers, Blanchard said it was the “possibility of a bank run” that
spurred the ECB to act, as there was a “risk that European banks could
not rollover their debts,” though he said the clear goal of the LTROs
was to fuel additional purchases by banks of European government bonds.

The result of the ECB’s LTRO was to “help banks, but you don’t care
directly about the banks, you want to help the sovereigns,” Blanchard
said.

Blanchard said one had to “ask the question” in Europe of whether
the ECB should have used LTROs or instead tapped the primary bond market
with direct purchases of sovereign debt, though he did not specifically
express an opinion either way.

Speaking more generally of the merits of quantitative easing by
central banks, Blanchard said the efforts had been successful during the
economic crisis largely because of their “indirect effects” on various
financial assets, rather than the direct effects on lowering yields of
long-term government bonds.

Blanchard also suggested there could be a role for the purchase of
long-term bonds by central banks even in normal times, when benchmark
interest rates are not at extreme lows. There was “an argument for doing
it even in a steady state” due to its effects on raising bond prices.

Blanchard was responding to a paper on the effects of quantitative
easing by New York University Professor Mark Gertler, who argued QE was
most successful when central banks purchased private assets, rather than
government bonds, and only had a major effect on interest rates at the
zero lower bound.

The two-day Fed conference in Washington is entitled “Central
Banking: Before, During and After the Crisis” and includes panel
discussions and papers presented on central banks’ easy monetary policy
and new regulatory roles.

Fed Chairman Ben Bernanke, in introductory remarks to the
conference earlier Friday, included no comments on current monetary or
economic policy. He said policymakers still had “much to learn” about
the financial system’s vulnerabilities, connections to the broader
economy and the central bank’s expanding monetary and regulatory policy
tool chest.

Since the crisis, Bernanke said the Fed and other central banks
have deployed “a variety of new tools and approaches to carry out their
responsibilities regarding monetary policy and the provision of
liquidity, tools about which we still have more to learn.”

— Chris Cermak is a Washington reporter for Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

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