We have been waiting to see what the ECB will do to match the latest measures by US (sons of TARP e.g. TARF + US Treasury & FDIC soft terms for non-banks to buy impaired bank assets, Germany's 'bad bank' emulated by Ireland, both using bonds, and UK's Asset Protection Scheme with the innovation of payment by unremitted cheque as opposed to the usual Treasury Bills). The answer is ECS - enhanced credit support?The ECB's concept here applies to the Euro Area. In the total EU, the regulatory authority is the European Commission, which is setting up an intricate approvals and review system to examine aid-schemes for banks by Governments (states) and each individual case to check for competition issues and possible restructuring requirements.
For the ECG, Trichet said in his speech (as per article in the FT), "Exceptional times call for exceptional measures. The European Central Bank, like other central banks, has introduced non-standard measures to tackle the financial crisis and cushion its impact on the economy – what I call 'enhanced credit support'. These have contained the threats to the stability of the euro area’s financial system and supported the flow of credit to companies and households over and above what could be achieved through interest rate cuts alone. Because of their exceptional nature, these measures will have to be unwound once economic and financial conditions normalise. We at the ECB designed the non-standard measures with our exit strategy in mind, and we are ready to implement this strategy when the appropriate time comes. Stressing the importance of the exit strategy should not be confused with its activation: it is premature to declare the financial crisis over. Today is not the time to exit. Four issues will shape our approach to exiting the non-standard measures."
The criteria for normal conditions may be debated, but are likely to turn on whether banks continue to have a need for government and central bank help i.e. it may not be the ECB that can determine when consitions are normal, by which it may be inferred is also meant 'stable' where wholesale funding is again flowing thickly! Another implied criterion is maintaining flow of credit to households & companies. It has become assumed that the tap is turned on or off by banks. But, in reality, banks either respond to demand or not. At present, while many borrowers need loans rolled over and many may seek 'equity release' for high borrowing, the majority seem to be rentrenching and restructuring their debt as well as reducing their net debt. Banks may think they prompt borrowing levels, but are now learning that borrowing levels do also depend on what customers want, and customers (unlike banks) are not always seeking to borrow more even when rates are relatively low; they are risk averse. Furthermore, borrower confidence in the general economy and in their own businesses take as a strong indicator the ease with which they can borrow from banks. Whatever the central banks do, even in terms of conditions attaching to bail-out measures, the fact is that borrowing is now more complex and banks are giving out strongly negative signals about their ease and willingness to lend.Trichet has four planks to his raft:
"First and foremost, should the non-standard measures trigger risks to price stability, we will immediately begin to unwind them and ensure the continued solid anchoring of inflation expectations. The timing and sequencing of our exit strategy depends on our real-time assessment of the economic outlook and the health of the financial system in line with our contribution to financial stability.
Second, a degree of phasing out has been built into the exit through the design of our measures. In the absence of new policy decisions, several of these measures will unwind naturally. Given that the overwhelming majority of the liquidity has been provided through repurchase agreements, a new policy decision would be necessary in order to roll these operations over once they mature.
Third, the ECB’s operational framework is well equipped to facilitate the unwinding of non-standard measures as the need arises. This framework comprises a varied and flexible set of instruments, including fine-tuning operations, allowing the absorption of surplus liquidity – promptly, if necessary. Moreover, with its interest rate corridor, the framework allows short-term interest rates to be changed while keeping some non-standard measures in place, should continued credit support be needed. The governing council can therefore choose the way in which interest rate action is combined with the unwinding of the non-standard measures.
Fourth, the outright purchases of securities by the eurozone’s central banks have been measured in both scope and volume. They have focused on the market for covered bonds and have acted only as a catalyst. We opted for a purchase programme with a volume that was significant enough to improve the activity and functioning of the market, but not so large as to dominate the market or the balance sheets of eurozone central banks. The measured programme facilitates its future unwinding or its offsetting by other policy operations."
It is in the nature of the ECB being multinational that it cannot take action or make statements out of synch with its constitutional remit. It 'owns' the money market (treasury bill) operations of its constituent central banks on the basis that this gives it a collective firepower to defend the strength of the Euro. But, Treasury Bills have many other useful functions such as facilitating short term transfers and balances between arms of government, between Ministry of Finance funds and so on, and these days most of all in providing an off-government-budget on central bank balance sheet funding power to make asset swaps with troubled banks - to support the finance sector when it is in systemic crisis. This important aspect of the role of central banks has not been clearly enunciated in the ECB's charter and this is why Trichet has to refer to 'exceptional' measures. 
In reality, such measures should not be exceptional or abnormal, merely doing what central banks should be doing to ensure financial stability at any time, except this time on a much larger scale than is usual when economies are not at the bottom of a credit cycle and economic cycle. It is the use of "exceptional" and by stating there is a strategy well worked out for getting back to normal working that Trichet uses to be able to say, what he has been unable to say until now, that the ECB is thereby now 'unrestricted' in what it may do!"With regards to future actions, we are unrestricted in our ability to take decisions, given the strong institutional independence of the ECB. This reflects the clear dividing line in the euro area between the responsibilities of the central bank and those of the fiscal sphere (Government deficit spending). That the ECB has not purchased government bonds is in line with this institutional framework."
The ECB is restricted in issuing bonds - how else could it buy Euro Area governments' bonds? It has been a political obstacle for two decades since the Delors Plan (which proposed one trillion in ECU bonds) that led to currency union that the Commission and ECB should not be able to issue a lot of debt to equalise national debts or make transfers between EU states. The ECB is stating that it absolutely dislikes having to intervene in exceptional ways and wants to get back to normal inflation-setting and currency defending for whcih it was exclusively established. Hence, the repeated emphasis on 'exit strategy'.
"The ECB has an exit strategy from its non-standard measures in place. Its implementation will build on three self-reinforcing elements: credibility, alertness and steady-handedness. These form the basis for the strong anchoring of inflation expectations in the euro area – our main asset. This strong anchoring is based on our determination and ability to act decisively whenever the need arises. The ECB’s governing council will continually assess whether policy adjustments are necessary and implement those adjustments to maintain price stability in the euro area over the medium and longer term."
Fine abstract phrases expressing conservative prudence - no Keynesian culture here. The ECB's main economic model for assessing all these matters in the wider economy is a New Keynesian model (a newspeak term for non-Keynesian micro-, supply-side, Monetarist & general equilibrium synthesis) with only about 90 simultaneous equations i.e. a small model that cannot really assess individual countries or the finance sector/s in any detail. Despite a prponderance of trained economists on the ECB board, the ECB is flying blind (a drone operated by humands back at the office working off a simple flight simulator). The ECB therefore will not be ahead of events leading from the front. For that the Euro Area will still rely on individual states to make their own assessments and pay for interventions expensively using longer term bonds (i.e. taxpayre' funds on account).
trichet ends with, "Our fellow citizens can have full confidence in the determination and ability of the ECB to deliver price stability. This confidence will, in turn, contribute to a sustainable recovery."
I had hoped for more following the meeting of central bankers at Jackson Hole, Wyoming, but it seems we are still having to wait for the ECB to get all ducks in a row before it is prepared to envisage any real duck-shooting on the scale of USA & UK financial authorities. There will not be much complaint about this politically just now because the Euro Area states are hoping they are already through the recession, uniquely in history out before the US & UK despite falling into it later. My view is this was a fals recession period for the Euro Area, merely a shock effect of the Credit crunch. Euro Area's real recession is around the next corner.
