Is the ECB a Free Rider?

For as long as I have been alive, the world’s central banks have been in the business of providing welfare for the super rich. Together the Fed, ECB, BOE, and BOJ bought $10.7 trillion worth of assets from 2008 to 2014. During the same period, wealth increased by over $50 trillion in the following regions:

sources: FRED, BOE, ECB, Credit Suisse Global Wealth Databook 2014

sources: FRED, BOE, ECB, Credit Suisse Global Wealth Databook 2014

If we reinterpret the central banking mandate to be private wealth preservation using public risk, then the four central banks did remarkably well as a group: returning 481% in total over the last six years.

We see that the ECB is the clear winner from an ROI perspective; their citizens’ wealth increased by almost $14 trillion while the ECB only purchased $729 billion in assets. That’s an ROI over 1900%. Not too shabby for a central bank that is often criticized for lagging behind in asset purchases. The Federal Reserve put up some staggering figures: creating over $30 trillion in wealth increases through the purchase of $3.5 trillion in new assets.

The Bank of England (BOE) wins the prize for effort: acquiring almost $5 trillion in assets while only generating $3 trillion in new wealth. At over $6.6 trillion, the BOE’s balance sheet stands at the largest of any central bank. Clearly ROI is not the motivation; rather, its a chance to relive the bank’s glory days as lender of last resort.

This leads to the question of whether the ECB has deliberately engaged in a strategy of free-riding? Ben Bernanke based his career on what he would have done differently during the Great Depression. Thus it wouldn’t have been hard to imagine a huge easing of policy from the Fed and their acolytes at the BOE and BOJ. Did this slow Trichet’s hand at asset purchases? Did this help convince Draghi to reduce the ECB’s balance sheet?

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