Last week we mentioned that the European Central Bank (ECB) said it would accept Greek debt as collateral despite rating agencies' decision to downgrade it below investment grade. This was the prelude for the ECB's weekend announcement to conduct "interventions in the euro-area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments, which are dysfunctional." Imagine if the Treasury borrowed on behalf of the Fed, which then used the funds to buy, for example, California's municipal bonds. Recall that it took 'quantitative easing' the Fed's outright asset purchases and massive expansion of its balance sheet (along with the stress tests and forced bank recapitalizations), to calm the financial storm last year. Ultimately, government had to demonstrate that it stood behind the banking system, however flawed, even to the extent of essentially taking over the mortgage market. While not exactly analogous, we believe the ECB today is in a similar predicament with respect to its weaker member states and is now willing to use the power of its printing press.

David Fuller's view Absolutely. The last two years and counting will be long remembered as the Great Experiment in Quantitative Easing. Meanwhile, the long-term consequences of QE, for this particular cycle, remain largely unknown.

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