jean - claude trichet : interview with the wall street journal interview of mr jean - claude trichet, president of the european central bank, with the wall street journal, published on 23 march 2009. * * * wsj : you ’ ve shown a bit of optimism recently, saying we could see a moderate recovery in 2010. where will recovery come from? mr. trichet : i have not been alone in mentioning that in europe 2009 will be a very, very difficult year. as regards 2010, i always mentioned not only our own diagnosis, but the fact that an overwhelming majority of observers, economists and international institutions would say that in the course of next year there will be a progressive gradual recovery. it ’ s neither an optimistic vision nor a pessimistic vision. it ’ s the present, realistic vision. wsj : federal reserve chairman ben bernanke spoke recently about “ green shoots ” in the u. s. economy. do you see similar green shoots in the euro - zone economy? mr. trichet : again, we have to accept that in europe as in the world 2009 is a difficult year and you have, in the present situation, elements that you could see as very negative. you have some that are a little bit reassuring on both sides of the atlantic. but all taken into account, we are still in a situation where the trend is downward. wsj : what will turn the downward trend around? mr. trichet : i see four main possible factors behind a progressive gradual recovery in 2010 : first the expansionary effect of the fall in the price of oil and commodities ; second the activation of the economies through discretionary fiscal policies and automatic stabilizers which are very substantial ; third the extraordinary measures that have been taken to put the financial sector back on its feet : on this side of the atlantic the commitments of the executive branches in the form of recapitalization, guarantees and other options represent around 23 % of the gdp ; fourth the policies of the central banks : as an example for the ecb and the eurosystem the size of the balance sheet represents now 16 % of the gdp when it was 10 % before the crisis, namely an increase of 600 billon euros ( approximately 800 billon dollars ). a number of other factors are also very important in the perspective of a medium - term recovery : the continued surge of technology, the considerable growth potential of the emerging economies. but as regards a relatively prompt recovery what is decisive

have an effect on longer - term interest rates comparable with that of purchasing mbs. my view was that the effects would be similar, because purchasing longerterm treasury securities removes as much duration risk from the market as purchasing current - coupon mbs. 6 the two approaches differ, however, in that purchasing mbs also removes prepayment risk from the market. if the market were to begin having trouble digesting that prepayment risk, the spread between mbs rates and treasury yields could widen. a significant widening of mbs spreads to treasuries, whether due to this or other factors, could affect policymakers ’ decisions about which assets to purchase. the chairman ’ s speech in jackson hole and the august fomc minutes both indicated that reinvesting in mbs rather than treasury securities might become desirable if market conditions were to change. balance sheet expansion as a policy option as you can see, the decision to simply keep the balance sheet unchanged involved a number of considerations and choices. let me now turn to the possibility that the fomc could go a step further and expand the balance sheet beyond its current levels. this policy option has been the subject of intense focus among market participants. chairman bernanke has indicated that any decision about expanding the balance sheet would depend on the fomc ’ s assessment of the costs and benefits involved. of course, that assessment is difficult to calibrate. federal reserve bank of new york president william dudley discussed many of the relevant issues in his speech last friday. 7 in terms of the benefits, balance sheet expansion appears to push financial conditions in the right direction, in that it puts downward pressure on longer - term real interest rates and makes broader financial conditions more accommodative. one can reach that judgment based on the empirical evidence from the earlier round of asset purchases, as mentioned before. in addition, the market responses to more recent news about the balance sheet also lean in this direction. the market response to the reinvestment decision at the august fomc meeting seemed largely in line with the estimated effects from the earlier round of asset purchases, once we account for the size of the surprise and the anticipatory pricing that occurred ahead of its announcement. and the increased expectations for balance sheet expansion in response to the september fomc statement also generated a sizable market response. to be sure, i think it is fair to say that this is an imperfect policy tool. even under the estimates noted earlier, the