How Europe's Stimulus Sausage Is Made: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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The European Central Bank announced its latest -- and belated -- program of quantitative easing last week. The ECB made fresh commitments to buy a series of asset-backed securities (ABS), various bonds and expanded its previously announced Long-Term Refinancing Operations (LTROs).

The ECB's brand of quantitative easing is an incredibly complex process. I could try to write 2,000 words explaining how the ECB uses bonds, loans and cash to prop up the European economy, stimulate lending and lower the value of the euro. But that mind-numbing exercise isn't necessary thanks to the flow chart below from Bespoke Investment Group.

According to Bespoke:

[The ECB's program] is a much more direct approach than the Fed's multiple rounds of QE in the U.S. The ECB is trying to turn banks into pass-through conduits for loans by giving them an end market for covered bond and ABS sales.

Marking last week's announcement, European equities rallied while the euro declined 1.5 percent against the dollar. The market's endorsement is encouraging. Whether it's temporary enthusiasm or the beginning of a successful stimulus/bailout for the ailing euro zone is unknown. Time will tell if the ECB's attempts at jump-starting credit and the economy catch up to the Federal Reserve's.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net