Why are monetary policies the object of debates nowadays?

Lecture 4 – Exceptional talk with Jacques de Larosière

Why are monetary policies the object of debates nowadays?

Over the last 20 years, the monetary policies have been a key subject of discussion. In order to fight the recession appeared in 2008, BCE loosen its monetary policy.

As the credit bubbles exploded, the financial system was fragile, caught in a contagious phenomenon. Corporations in difficulties to pay their debt, asked restructuring of those debt by creditors. Large banks, too much exposed to the market risk had to request the support of the public sector.

Central banks acted as financial absorbs: induced massive liquidity to the market.

And lower interest rates.

But, the excessive indebtedness that caused the crisis was the result of weak supervision of the credit bubble and abundance by the same central banks.

Central banks actions in 2008 were repairing actions and the ones before 2007 were not preventing enough.

They were more concerned about mastering inflation than about the stability of the financial system.

🡪 in a great part CB are responsible for the indebtedness crisis.

CB bought securities that nobody wanted to buy and exploded their balance sheet.

Quantitative Easing: not conventional policy.

The FED sets the terms of the international Mondial monetary policies (influences the ECB).

What are the consequences of low interest rates?

Policy to lower the interest rates for long term, novelty.

Bought treasury bonds for 3, 5 and 10 years that injected liquidity in the market, the interest rates yielded because of these actions of the CB. Therefore, the prices went down everywhere.

The problem is that it affects a question of harmony in the relationship of interest rates all over the world. Market will size occasions of more interesting higher interest rates in other countries.

Even if some other markets aligned their policies to the most important CB of the world.

The difficulty is reaching an efficiency in lowering interest rates!

At the beginning of this monetary policy (since the 2008 crisis) people did not suppose it would have lasted so long.

In 2017 the FED judge the American economy vigorous enough to rise the interest rates (even If inflation targets were not met), and suspended the program of acquisition, interest rates went up.

The ECB did not judge that low/negativ interest rates had a draw back on European economy, In a period where unemployment was decreasing.

Which was a mistake and the ECB continued this monetary policy.

2% inflation target: was probably ok 20 years ago but today it does not take into account  the structural factors of today’s world.

4 Factors

• Aging society: less consumption, less investment’s and expectancy of return
• Opening of international trades to imports off shoring, wage elements in the composition in prices, in export wages are a massive reduction in the main component of prices
• Labor market change: people who have a job are less inclined that 20_30 years ago to revendicate a higher salary and trade it to go from a country to another. Phenomenon less apparent due to unions in the private sector.
• Productivity: influenced by the digital economy. Increased the productivity of large segment of the economy, distribution in particular,

🡪 the basic inflationary equilibrium has changed, for him the target should be around 1% and not 2%.

The figures of 2% that has been kept for reasons of bureaucracy’s constancies.

It is not reachable and objective.

Not only a technical point but a fundamental point: the objective and the instruments used to reach those objectives are not rights and do not reach the points.

No relationship with the objective of inflation and the phenomenon of deflation: where we have a dynamic cycle of prices reducing more and more.

Methodological mistakes:

1. Encouraging excess indebtedness which was the cause of the crisis
2. Encouraging indebtedness, encourage bubbles: the value assets go up, and even more of the structural valuation
3. The CB take away the role of interest rates to assess a comparability with assets: difficult to have positive rates for different assets, and limiting arbitrage and risks sizing
4. Banks margin: not being beneficially for the all economy because it is not beneficial to the transmissions of the economy

Consequences

Pension funds balance sheet: in the asset they have to keep a % of treasury bonds, however they yield interest rates near to 0% and they do not held the business to make money (as assets should be).

In countries like Italy: why the productivity has been so low in comparison to last decades. Italian family firm, with the problem of transmission, and companies stay only alive in mediocre ways and do not invest even with low interest rates.

Investors tend to search for yields, and there is a category of dividend active products triple BBB which are 40% of some investor portfolio. Those assets are the ones that first fail when there is a crisis.

However, they are the ones more rewarding and profitable, therefore appealing.

15 trillions of obligations have a negative yields because of the negative interest rate policy.

Criticism

This policy have allowed the system to survive?

Justification of JDL[pic 1]

• The level of non-residential gross fixed investment as a % of GDP in failing. From 2001 at + 10% to 8.5% in 2017.

Foreign Capital is invested has been going down

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