This threat being, on the other hand, a priority. In fact, President Draghi himself had to make a strong effort a few weeks ago to separate inequality in the distribution of wealth and income from exceptional financial conditions. In his opinion, the medium-term danger of maintaining near-zero interest rates in an environment of high liquidity was evident. However, until now it had been essential to combat a scenario of deleveraging and deflationary pressures.
It was preferable to generate favorable financial conditions to adjust debt, at the cost of reducing the return on savings. Without such favorable financial conditions, the risk was precisely that the debt adjustment would be much more drastic in an environment of deflation and recession. However, eight years after the start of the Great Recession, the time has come to consider whether all the previous benefits continue to outweigh the potential costs.
An academic exercise, but with evident practical implications. I can already tell you that this cost/benefit analysis will be common in upcoming central bank meetings. And as I said at the beginning, in my view the previous benefit/cost ratio is clearly unfavorable for the financial sector. It is not only that I consider the costs to outweigh the benefits in a regulatory environment as complex as the current one. In fact, the risk is that we will ultimately see a deterioration in credit conditions to the private sector with greater volatility in financial markets and reduced risk-taking capacity by banks. However, I also believe that the future risk is now not marginal either in terms of deterioration in economic and inflation prospects resulting from zero interest rates and flat yield curves. Here I am already thinking about the return on savings in an environment of growing medium- and long-term uncertainty resulting from the progressive aging of the population.
Lower capital stock, low marginal productivity, and demographic deterioration are the three arguments that explain the low potential growth of major economies. The first two factors have apparently barely benefited in recent years from extremely loose financial conditions. Could they now be harmed if these conditions are maintained over time? Answering this question is not easy. The President of the BIS stated a few months ago that if interest rates remain low, even negative in some cases as is currently the case, they could trigger new phases of financial instability in the future. In fact, he also warned that these artificially loose financial conditions could cause a new excessive increase in public and private debt. A global scenario like the current one, with more debt and more sensitive to the behavior of financial markets, could increase the already high complexity of the current financial situation. Caruana also referred in the previous conference to low productivity and profitability of productive investment, calling for an appropriate combination of policies to increase them. No, he was probably not referring to more monetary expansion.
President Draghi considered in the speech I referred to at the beginning that the measures taken by the ECB so far have been appropriate to protect savers: ensuring a faster adjustment of the output gap and thus preserving the economic growth potential on which savings income depends. However, it makes no sense to consider that these benefits can be maintained indefinitely. Constancio himself stated this week that the medium- and long-term consequences of a scenario of low but positive inflation and negative interest rates can be very negative for the financial sector, savers, and pensioners. My opinion? The use of monetary policy has its limits. And it does not serve to resolve structural problems. In fact, used excessively, it can pose new challenges and costs in the future. Yes, it is good that we think about the future when evaluating decisions made in the short term, too biased until now on day-to-day matters.
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