What did the ECB decide to do?

While the FED was clear about stabilizing the crisis with lowering interests rates dramatically, the European Central Bank (ECB), which first was expected to stimulate its rates, decided to keep its interest rates in the Eurozone on hold at 4%.

The ECB was even expected to raise rates in a bid to stem rising inflation, after the BNP Paribas freezed three investment funds with connections to American asset backed securities (BNPQY, News, People) earlier this year.
Somehow though, expectation went completely wrong as the ECB decided to do whatever it’d take to preserve price stability, and as such pay huge amounts of money in order to prevent inflation.





In August 2007 the ECB offered to loan more cash to banks to help ease the troubled market. By then its attempt to add more liquidity to money markets has seen the ECB lend over 253 billion euros.
Furthermore the ECB indicated afterwards, that they were willing to inject much more liquidity into the markets as they’d do whatever it’d take in order to contribute to orderly conditions. This statement made analysts believe that unchanged interest rates were confirmed, given the ongoing financial market turmoil, July's sharp fall in consumer price inflation, and the current major uncertainties about the inflation and growth outlooks.

By December 2007, the ECB was one of five central banks that had injected billions in emergency cash into money markets, with the aim of cutting the cost of lending between retail and commercial banks.
At this time the hope was that lower interbank rates would mean that banks would be able to make funds available at cheaper rates to companies and individuals. By cutting short-term lending rates, the two-week euro Libor rate fell sharply and the ECB succeeded, however the rate still remained above the 4% ECB refinancing rate.

Anyhow, the main aim of the ECB, while boosting liquidity into the banking sector, was to ensure banks kept offering credits to businesses, as those banks feared that they might need any spare cash in order to cover their losses and stopped lending.

Until today, the ECB has not followed the Fed's lead in lowering official interest rates and the Bank of England has also proved more reluctant to ease policy.
Analysts believe that the BoE should not follow the Fed's example with big interest rate cuts and said central banks were taking similar action to ease lending conditions by providing additional funds as required.

To end up with, we can underline the fact, that even though the ECB is making a huge amount of debts, its strategy helps easing the crisis a lot, as even though the ECB keeps on boosting liquidity into the market, the strong held of its interest rates assures price stability.

What did the US government and the Federal Reserve decide to do?

With the US economy now clearly in recession, the latest -- and potentially most dangerous -- phase of the global financial crisis is under way.
When the credit crunch had heavily affected all the parts of the US economy, it was absolutely indispensable for the US government to find a way of stopping the constant growth of the amount of market liquidity.
This is why in early 2008 the US central banking system, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. At this stage it was important to put all the efforts into pursuing all the macroeconomic objectives while always considering the monetary policy and taking into to account the support of market liquidity and its functioning.
All in all the Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit.



To start with the FED lowered the discount rate, which is the interest rate charged to commercial banks and other depository institutions on loans they receive from the FED, in August — 50 basis points. That was followed by another 50-point cut in September ... a 25-point cut in October ... another 25 in December ... a whopper 75-point cut on January 22 ... then another 50 eight days later.
During that same time period, the federal funds rate was slashed from 5.25% to the current 3%. And by all indications, we'll see another 50-point or 75-point cut into the 2s at the Fed's March 18 gathering.


Furthermore the FED conducted open market operations to ensure member banks have access to funds.
All this was primarily done to stabilize the financial system and stop the constant creation of extra money, which the US doesn’t have. These available funds stimulate the commercial paper market as well as general economic activity.




Basically the FED was using the TAF, Term Auction Facility, fro the first time, to provide liquidity to banks, in order to enhance the ability of financial institutions to sell mortgage-backed and other debt.
When all this didn’t seem to suffice, the FED had to use the TSLF, Term Securities Lending Facility, which allows major firms to swap their less-liquid, somewhat impaired mortgage-backed securities for highly liquid, rock-solid US treasuries. They hope that this will help ease pressure on balance sheets and help reduce mortgae rates in a fast and effective way.

Moreover regulators and legislators are considering action regarding lending practices, bankruptcy protection, affordable housing, tax policies, the licensing and qualifications of lenders… These regulations can influence the transparency required for all the legal entities and securities involved in these transactions.
They concluded that in order to stabilize the crisis as well as to prevent it from growing even further a nationwide licensing of mortgage brokers, as well as credit rating firms (which are supposed to update their rating scales in order to distinguish between structures products and traditional bonds) had to be implemented.

Even though the US is trying hard, trying a way of cleaning up the mess produced so far, there is no certainty about when the downward spiral will come to an end.