Great Graphic: ECB Big Bazooka or Johnnie Come Lately?

Many observers are claiming the ECB's announcement was a big bazooka.  The Financial Times Gavyn Davies is reluctant to call it a "credible regime change" in Paul Krugman's terms.  However, he does recognize it as a "major philosophic shift."   

But who exactly shifted views?  The two Germans on the ECB, Weidmann and Lautenschlager opposed the new asset purchases.  Nowotny, Know and Hanson had reservations.  Although Merkel herself has not publicly objected, German Finance Minister has. While refraining from questioning the conduct of monetary policy, he indicated that the "only problem" is moral hazard.      Weidmann also echoed the idea that the asset purchases remove incentive for structural reforms. 

The ECB's decision was consistent with its incremental modus operandi.  It earlier asset buying program has amounted to about 10 bln euros a month, which is disappointingly low.  Headline CPI has fallen into negative territory.  

These Great Graphics were posted on the Financial Times by Davies.   The top chart shows the size of the major central bank balance sheets as a percentage of GDP.   The seeming shrinkage Federal Reserve and Bank of England's balance sheet is due to continued growth of the respective economies.  The bottom table compares some the details of the US (QE3), BOJ's QQE and the ECB's program.  The one point we would add is that where Davies says that the ECB's sovereign bond purchases will 50 bln euros, we would have it a bit less, allowing for the purchases of 5 bln euros a month of European institution bonds.   This is a minor point, but would lower most of Davies  

The success of the ECB efforts will ultimately note reside in these technical details.  The key issue will it boost CPI?  It is the only metric Draghi cited.  ECB's model says it will the purchases will boost CPI by 0.4% this year and 0.3% next year.     In December, eurozone CPI was -0.2% year-over-year.  On January 30, the preliminary January reading will be published, and deflationary forces likely intensified.  Even if the ECB's projections are accurate, so what?  Headline CPI could be, what slightly positive in 18 months?  

Saying, as some observers are, that the ECB's efforts are better than nothing, is beside the point, even if true.  The choice was not really between doing nothing and this particular asset purchase program.   One way to have signaled a philosophic shift would have been to reset the ECB's target to core inflation, which is low but not in deflationary territory.    It could have chosen to buy buy assets as long as core inflation is below 1.5% for example.       It could have excluded buying negative yielding instruments, as many had expected.