The Five Key Differences Between The ECB's OMT And The Fed's QEternity

Tyler Durden's picture


With their recently announced additional bond purchase programs, both the Fed and the ECB have added a new chapter to their respective handbooks. While at first glance they are both simply the end-game of money-printing-monkeys, Morgan Stanley sees some similarities but more differences that are critical to understand when judging the awesomeness (or not) of these actions. The ECB’s Outright Monetary Transactions (OMT), in contrast to the previous SMP program, will be ex ante unlimited in size but conditional upon government action. Likewise, the Fed’s additional purchases of agency MBS are ex ante unlimited in size (the monthly pace will be US$40 billion but the program is open-ended) and conditional (though not upon government action but labor market performance). Another parallel is that there was only one dissenting member each in the two policy committees (Jeffrey M. Lacker and Jens Weidmann). However, this is where the similarities end. Looking at the details, the two programs actually differ in five important respects.


Via Morgan Stanley:

First, the Fed’s MBS program is up and running and started last Friday. By contrast, the start of the ECB’s OMT is conditional upon a country going into an EFSF/ESM program or a precautionary program (ECCF), or a country in an existing program regaining market access. Hence, while this is not our base case, there is a possibility that the OMT will never be activated.


Second, while both programs are aimed at unblocking the monetary transmission mechanism, the Fed’s MBS purchases are targeting the mortgage market, while the ECB will buy short-dated government bonds. Both make sense to us, because the origin of the US financial crisis was in the mortgage market, which in the Fed’s analysis requires ongoing support, while the epicenter of the current European crisis is in the government bond markets.


Third, while the Fed’s buying program will lead to a further increase in the central bank’s balance sheet, the ECB plans to fully sterilize its purchases. Note, however, that sterilization is merely a fig leaf to placate German concerns because the size of the ECB’s balance sheet is entirely demand-driven due to its current policy of full allotment at its refinancing operations. Provided they have enough collateral, banks can take out any amount of liquidity they like. Note also that the term deposits which the ECB offered to banks when it sterilized the SMP purchases were eligible as collateral in the refi operations.


Fourth, the conditionality attached to the Fed’s and the ECB’s purchase programs is very different in nature. The Fed has tied its MBS purchases to an economic variable – it will continue until there is a substantial improvement in the labor market, while the ECB has tied the OMT to a political variable – whether or not a country goes into and adheres to an adjustment program. As government action (or non-action) is unusually more difficult to predict than labor market performance, this makes the scope of the OMT much more difficult to predict than the Fed’s MBS program.


Fifth, while the Fed’s action is fully aligned with its dual mandate, which includes ‘sustainable employment’ alongside price stability, there are some – the Bundesbank and the German Constitutional Court – who view the ECB’s OMT as potentially violating the ECB’s mandate, which prohibits direct monetary financing of governments. While the ECB’s position is very clear – it views the secondary market bond purchases, which are aimed at unblocking the monetary transmission mechanism, as in line with its mandate – the challenge coming from Germany provides additional uncertainty about the scope and effect of the program.

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Wed, 09/19/2012 - 13:05 | 2811710 Rapada
Rapada's picture

My first post!! Am I suppose to say Bitchez?

Wed, 09/19/2012 - 13:07 | 2811725 LongSoupLine
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Wed, 09/19/2012 - 13:21 | 2811763 Kitler
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The Fed has tied its MBS purchases to an economic variable – it will continue until there is a substantial improvement in the labor market...

Or until unicorns shoot Skittles out of their asses.

Wed, 09/19/2012 - 13:21 | 2811782 Precious
Precious's picture

Rule zero of the fight club:  "Never ask what to say."

Wed, 09/19/2012 - 13:30 | 2811799 redpill
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There are many differences between what happened to the RMS Titanic and the RMS Lusitania, but both of them wound up at the bottom of the ocean, didn't they.

Sink due to overconfidence and arrogance (Fed=Titanic) or sink due to the Germans eventually torpedoing you (ECB=Lusitania).  Why, that allegory worked out even better than I'd hoped.

Wed, 09/19/2012 - 13:47 | 2811891 vast-dom
vast-dom's picture

 what a fucking mess out there..... maybe there will never be a crash.... maybe unicorn shit = skittles = QEi = no crash, ever = PONZI forever 

Wed, 09/19/2012 - 14:15 | 2812054 Zadok
Zadok's picture

Kind of like the victim of a nucle-r blast debating the relative merits of Pluto-nium versus urai-m.
Really! Who cares? The devastation is awful regardless!

Wed, 09/19/2012 - 14:16 | 2812056 palmereldritch
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Added bonus:

It is argued that the sinking of the Lusitania was a LIHOP false flag that dragged the US into WWI which facilitated the collapse of Russia and rise of Communism, created President Wilson's League of Nations (an early world government precursor) and destroyed American isolationism once and for all.

This event was parlayed into multiple dividends which in addition to the above geo-political re-ordering, translated into staggering munition profits and increased taxation for the usual suspects who are no strangers to false flag themselves, past and present....

Woodrow Wilson was re-elected by a hair. He had hased his campaign on the slogan: 'He Kept Us Out of War!'. . . Just five months later we were in it. The same crowd which manipulated the passage of the income tax and the Federal Reserve System wanted America in the war. J. P. Morgan, John D. Rockefeller, 'Colonel' House, Jacob Schiff, Paul Warburg and the rest of the Jekyll Island conspirators were all deeply involved." -Gary Allen, “None Dare Call it Conspiracy”


Wed, 09/19/2012 - 21:59 | 2813639 White.Star.Line
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Overconfidence and arrogance could prevent you from considering that the Titanic sinking was one of the greatest unsolved murders of all time.......

Thu, 09/20/2012 - 03:27 | 2814081 zhandax
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Unsolved by whom?

Wed, 09/19/2012 - 13:23 | 2811791 GetZeeGold
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Or until unicorns shoot Skittles out of their asses.


That crap looks like candy.....but it's not.



Wed, 09/19/2012 - 13:33 | 2811832 whatsinaname
whatsinaname's picture

Asked on earlier thread - if (as I believe) the BOJ has been doing the equivalent of QE for 15-20 years then is the BOJ almost the owner of the entire Japanese bond market ? wondering who owns and what share of the JGB market...

Wed, 09/19/2012 - 13:45 | 2811882 Son of Loki
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Completely dependent on Banker Bonuses.

Wed, 09/19/2012 - 13:34 | 2811833 lasvegaspersona
lasvegaspersona's picture

actually I think the correct answer was ....yes

unless this site has lost all respect for TRADITION

Wed, 09/19/2012 - 14:59 | 2812315 MillionDollarBoner_
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U have to earn the right...

Wed, 09/19/2012 - 13:07 | 2811726 francis_sawyer
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No ~ you're just supposed to get JUNKED & take it like a man... Welcome to Fight Club...

Wed, 09/19/2012 - 13:10 | 2811736 francis_sawyer
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after that ~ you need to buy a boat... go out fishing in it... take all your gold with you... and proceed to SINK IT...

Wed, 09/19/2012 - 13:16 | 2811757 GetZeeGold
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My first post!!


If it's your first're suppose to fight.


Wed, 09/19/2012 - 13:15 | 2811743 Dr. Engali
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The 8th rule of fight club.. If this is your first night at fight club you have to fight. Welcome to fight club bitch.

Wed, 09/19/2012 - 13:18 | 2811772 Rapada
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But. . . but. . . all you guys just say Gold Bitchez a lot and stuff. . . I thought that was how to fit in. . . (ducks)

Wed, 09/19/2012 - 13:22 | 2811785 Vincent Vega
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Perhaps a better way to fit in here is to find a comment you don't necessarily agree with and respond: Fuck OFF Shit Head.

Wed, 09/19/2012 - 14:01 | 2811977 AnonymousCitizen
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Fuck OFF Shit Head

Wed, 09/19/2012 - 14:05 | 2812001 Vincent Vega
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Finally. I put a lay up out there hoping the new kid would catch it. But he didn' did. Got to be quicker new kid.

Wed, 09/19/2012 - 14:29 | 2812137 Rapada
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I was scared!

Wed, 09/19/2012 - 14:39 | 2812191 Vincent Vega
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Look for comments from RobotTrader and MillionDollarBonus. Reply: Fuck OFF Shit Head to them. You'll get lots of practice and you can't go wrong. Good luck.

Wed, 09/19/2012 - 17:01 | 2812862 mark mchugh
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Warning: Replying "Fuck off shithead" to MillionDollarBonus will only reveal that you are a noob.  MDB is a true comic genius.

Wed, 09/19/2012 - 13:22 | 2811787 Dr. Engali
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That's only for those proven to be worthy. For everybody else there's fiat.

Wed, 09/19/2012 - 13:36 | 2811844 mayhem_korner
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Wed, 09/19/2012 - 13:22 | 2811788 mayhem_korner
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anyone who uses four sets of elipses is too sharp to "fit in"...we want you to bring it unabashed.  "Me too" posts with double (or triple) digit up arrows are usually entertaining but not insightful.  The ones with twenty each way are the ones that people are thinking about.

Wed, 09/19/2012 - 13:28 | 2811807 francis_sawyer
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 "I thought that was how to fit in"...


 "I would never join a club that would accept me as a member"

~Groucho Marx

Wed, 09/19/2012 - 13:29 | 2811809 francis_sawyer
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Junk myself for fat fingering the SAVE button...

Wed, 09/19/2012 - 14:37 | 2812126 xtop23
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If you actually care about fitting in, which I would argue most of us don't, speak your mind and don't be a pussy about it.

If you have something useful, insightful, or thought provoking, lay it out there so that the community can use it.

Punchy rhetoric thrown out there to garner favor is what politicians do. Don't be a fucking politician. The world has FAR too many of those already.

Quality > quantity. 

Just because you always hear "Gold bitchez" doesn't mean that we're all just brainless syncophants that regurgitate shit we heard and haven't done our homework.

Gold is a means to an end. When the game changes, we will adjust accordingly (at least anyone with any sense that is, and admittedly it may be quite some time until a true reset occurs).

Keep an agile mind and learn to think around corners. This is your only true means of surviving in a system bent on reducing you to a ledger entry.

Accumulate physical assets, keep the ownership of said assets to yourself, own a passport and if possible dual citizenship, turn off the goddamned television and use the alternate media while it lasts, own a gun and enough ammo to fuel it, and drink plenty of water while you maintain a high fiber diet.

Constipation is a bitch.




Wed, 09/19/2012 - 13:28 | 2811811 slaughterer
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Morgan Stanley ws net short with a ES PT of 1100 going into last Thursday FOMC.  Know who you are dealing with here.  

Wed, 09/19/2012 - 13:32 | 2811825 slaughterer
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One day we will wake up and Draghi will be half bald and have a "Ben beard"

Wed, 09/19/2012 - 14:00 | 2811961 Zadok
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Try adding some value!

Wed, 09/19/2012 - 14:11 | 2812034 Silver Bug
Silver Bug's picture

QE to infinity all around! Look out China should be annoucing a new QE program in the next 30 days as well.

Wed, 09/19/2012 - 13:06 | 2811716 apberusdisvet
apberusdisvet's picture

The real difference is that the Rothschild controlled ECB is seeking totalitarian control over the European sheeple through fiscal contrainst on sovereign authority.  Here in the US, we already have totalitarian control; most just haven't realize it yet.

Wed, 09/19/2012 - 13:07 | 2811720 resurger
resurger's picture

Two heads of the same rotten hydra

Wed, 09/19/2012 - 13:10 | 2811740 mrktwtch2
mrktwtch2's picture

where is america??

Wed, 09/19/2012 - 13:12 | 2811742 LongSoupLine
LongSoupLine's picture

The differences spelled out are ones that are public, and touted through CB media.


The reality is there are no differences.  They both work for the banks.

Wed, 09/19/2012 - 13:13 | 2811747 fonzannoon
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I truly hate Margin Stanley

Wed, 09/19/2012 - 15:01 | 2812322 GetZeeGold
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I switched to J.T. Marlin.....and I've never looked back.


Wed, 09/19/2012 - 13:13 | 2811748 Vincent Vega
Vincent Vega's picture

Fuck You Bernanke! Fuck You Dhaghi! Sorry I just don't see 5 differences.

Wed, 09/19/2012 - 15:56 | 2812550 earleflorida
earleflorida's picture

"5 Years late and 5 reasons out of 'phase"

a Pythagorean nightmare where the secant'...cosine's the tangent,...

note: which came first... the housing bubble [chicken] or the unemployment debacle [egg]?

answer: everyone knows the chicken came first!

Ps. bond`ing had nothing to do with neither...

Wed, 09/19/2012 - 13:13 | 2811750 Duke of Con Dao
Duke of Con Dao's picture

is this a modern Benito Cereno?

are we Captain Delano to Obama's Babo? 


Wed, 09/19/2012 - 13:17 | 2811766 DavidC
DavidC's picture

"the Fed’s action is fully aligned with its dual mandate, which includes ‘sustainable employment’ alongside price stability".

NO. It's not. Price stability means unchanging, NOT an inflation target of 2%, which is an exponential increase!


Wed, 09/19/2012 - 13:18 | 2811768 mayhem_korner
mayhem_korner's picture



If you scrape up five meadow muffins (cow chips, if you will), and spray paint them all different colors, are they different?

Wed, 09/19/2012 - 13:48 | 2811886 Zero Govt
Zero Govt's picture

clearly not

and we've yet to see bubble Bens fatuous claim the Fed has "innovative policy tools"

all poison dwarf has done is print, thrown money at it

his only creativity is to cover his single policy option in smarmy names, re-branding the same lame one trick pony in a dozen different names

he's a slippery little shit

Wed, 09/19/2012 - 14:23 | 2812100 americanspirit
americanspirit's picture

Hi mayhem_korner - you would probably have to step on them with your bare feet and examine what comes up between your toes carefully. Please let us know.

Wed, 09/19/2012 - 13:22 | 2811786 timbo_em
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"both [MBS program and OMT] make sense to us" where I stopped reading. I don't know whether it was Margin Stanley's purpose but this sentence is very cynical. Fucking criminals!

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