As we know, the USA tends to let Adam Smith’s invisible hand do the job in the economy, whereas in Europe, it’s the national governments who tend to be more involved. However, at the beginning of the crisis back in the summer 2007, it was pretty much the other way around.

Indeed, while the Fed started to make its move, the ECB decided not to act yet, as first of all any economic impact only hits Europe between 8 and 12 months later. Second of all, the ECB’s main goal is to keep inflation under control, which is why they did not decide to inject any money in the economy yet.
However, this situation shifted when the illiquidity started to hit Europe and started to become unbearable. At the beginning of 2008, Bear Stearns was in severe trouble, affecting its surroundings and a huge amount of write-downs started to occur around the European Banks.
So, this led to a lack of liquity, up to a point where national governments requested an action to be taken by the ECB, despite inflation risks.
The ECB basically poured several billion Euros into the economy in order to increase the money supply and thus the liquidity in the economy. The ECB, a very generous bank one could say, even provided liquidity to American and Bristish banks, if they have branches or subsidiaries in the euro area.
Basically, the world’s largest banks now launched their latest co-ordinated action in order to appease the credit market. The Fed, the ECB and central banks in the UK, Canada and Switzerland will inject billions more into the market. This collaboration shows how global and severe the crisis has become, up to a point where banks have to support eachother, across boundaries.
However, it is not sure whether these actions would help bring back confidence into these nervous credit markets in the longer term. Indeed, the bank could solve the liquidity problem in the short term, but could do little to ease worries about long-term solvency at some financial institutions. In addition to this uncertainty, the LIBOR has now further increased, while banks are reluctant to lend to eachother out of fear that the banks they lend to will not be able to repay their loans.
We have in other words, a crisis of confidence in bank solvency. It’s not that they do not have the cash to lend anymore, but a more deeper reason.....they do not trust eachother to have sufficient assets. As we all know, it’s all about trust between lenders and borrowers, for an economy to work well, which does not look too good right now.
Another important point to mention is that the ECB started to inject money and decrease interest rates in order to devalue the strong Euro. Indeed, by doing so, the ECB allows the Eurozone to become more competitive again in overseas markets, which was not the case anymore due to the strong exchange rate. This would certainly help against a threat of recession, such as the one faced by the USA right now.
Finally, as opposed to the Fed, the ECB did not accept the security backed mortgages in exchange for loans, as this is an issue dealt by the national governments. What the European governments did instead, was to use the tax payers’ money in order to stuff the holes and repay those defaulting mortgages.

Basically, the ECB was faced with a very rough decision, because by increasing the money supply there will be an eventual increase in prices and therefore inflation, the ECB’s biggest enemy, as it affects basically the entire economy. However, in the end, in a moment of crisis, what is more important? Financial and market stability or inflation targets....