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ECB v Fed

ECB v Fed

QUESTION: Martin,

You mentioned in a recent blog post that the ECB, unlike the FED, can go bankrupt.

Can you explain further?

Not sure where you get the time, energy and resources to research and write all that you do buy it is truly amazing.

Regards,

M

ANSWER: The Federal Reserve does not need permission to create elastic money. It has the authority to expand or contract its balance sheet. However, it cannot simply print money out of thin air. The ECB is the only institution that can authorize the printing of euro banknotes. The Federal Reserve must back the banknotes by purchasing US government bonds. The Fed buys and sells US government bonds to influence the money supply whereas the ECB influences the supply of euros in the market by directly controlling the number of euros available to eligible member banks. This structure was created because of Germany’s obsession with its own hyperinflation of the 1920s.

Each member state retained its central bank and those central banks issue the banknotes — not the ECB. Therefore, the ECB works with the central banks in each EU state to formulate monetary policy to help maintain stable prices and strengthen the euro. The ECB was created by the national central banks of the EU member states transferring their monetary policy function to the ECB, which in effect operates on a supervisory role.

There are four decision-making bodies of the ECB that are mandated to undertake the objectives of the institution. These bodies include the Governing Council, Executive Board, the General Council, and the Supervisory Board.

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