In a past that seems increasingly distant, the real economy set the direction for financial markets. The expectations of investors and economic agents guided financial markets in an attempt to anticipate economic performance. The rises and falls in asset prices constituted a leading indicator of the economy. Reality then tested the degree of accuracy of investors. <\/p>\n
Currently, market behavior impacts the real economy, making them a fundamental component of growth and, at the same time, both judge and party to economic developments. The non-bank financial sector has significant weight in financing the economy in developed countries. The credit cycle, and its debt counterpart, can be exacerbated by financial markets that can move between extremes, from euphoria to panic, passing through optimism and fear. The instability of financial markets must be assessed calmly due to its more than likely undesirable implications for the economy. <\/p>\n
Central banks are aware of the relevance of markets. However, they recognize that they do not have sufficient instruments to supervise them and that they are subject to much more lax regulation than the strict and demanding regulation applied to banks. Financial stability, an intermediate objective of monetary policy, includes the behavior of the non-bank financial sector. This leads to the paradox that some authorities warn about the vulnerability of markets only to then call for more regulation on banks, understanding these institutions as a containment wall against the risks derived from potential excesses in financial assets. This is not only unfair, but also unreasonable and, taken to the extreme, causes us all to lose. <\/p>\n
The severity of the crisis led to extreme non-traditional expansionary monetary measures that may have distorted the behavior of some financial markets. This is the case with the purchase of debt in the secondary market or negative interest rates on the deposit facility. Negative real interest rates at medium and long term for public debt, flat or inverted interest rate curves, and the high risk appetite indicated by the valuation of lower-rated corporate debt are the subject of academic debate: do they reflect the economic expectations of agents or are they a consequence of central banks’ own decisions? Let us recall, for example, that the U.S. economy has accumulated forty quarters of expansion to date, with the unemployment rate at levels from the late 1960s, consistent with full employment. It is difficult to reconcile this data with the current dollar interest rate structure near historical lows. <\/p>\n
Financial asset prices continue to partially reflect the expectations of economic agents. However, they are also subordinated to the decisions made by central banks. Financial repression on savings is now joined by the risk that asset prices and their potential instability may also affect consumption and productive investment expectations. This vicious circle implies an additional difficulty in managing monetary policy, which is already oversized in its role in fighting a crisis that has already been overcome. It is desirable that economic policies take over in the future, giving priority to supply-side measures and using the existing margin in fiscal policy. <\/p>\n