In fact, it was so straightforward that, in other words, it was one of the most obvious conclusions of the recent IMF annual meeting. This is problematic, as avoiding it becomes a priority task. It was also reflected in this way in the summit’s final summary. Yes, changes and reforms were also called for to allow greater ease in financial institutions’ balance sheet adjustments. However, unlike the explicit demand from the IMF Managing Director to consolidate and strengthen banks, the meeting’s conclusions warn about the risks to financial institutions stemming from excessive expansionary monetary policy and the need to end regulatory uncertainty. In short, these are requests from international authorities to national authorities, but focused on financial investors who continue to have doubts about the medium-term profitability outlook for the global financial sector, and especially for European banks. I must admit that I have often thought about this: monetary policy, forcibly expansionary to maintain sustained financial markets, thereby posing a threat to the stability of banks. If I were a trader, I would understand it as selling short-term volatility to buy it in the medium and long term. <\/p>\n
The problem arises when extreme expansionary monetary policy is also not enough to guarantee market stability in the short term. And also when the risk of future instability in the financial sector becomes an increasingly imminent variable. As you know, markets thrive on anticipating the future. And any threat of tomorrow is discounted today. This is where we stand. And this has been acknowledged by global economic authorities after the weekend meetings. In this scenario, it is normal to call for a shift in the leading role of economic policy, from monetary to fiscal, accompanied by structural reforms. Especially in developed countries. On the other hand, it is also normal for this to be considered complicated, given the high public debt in developed countries, central banks’ distrust in developing economies which makes it difficult for them to lower interest rates, and also in the face of high international political uncertainty. <\/p>\n
What remains of all this? Indefinition. But, with clear ideas about the medium-term risks assumed if nothing is done. In my opinion, it is curious that we have more certainties in the medium and long term than in the short term. Although it is no longer so intellectually appealing that these medium and long-term certainties are negative. Not at all. I know you will tell me this is unlikely, but what if the expansionary monetary policy applied over the last eight years finally started to bear fruit? Not in terms of growth, considering that its effectiveness in this regard has traditionally been asymmetrical\u2014more efficient at cooling the economy than at improving it. But we can consider a slow recovery of inflation, in a (also slow) environment of external price recovery, and that all this translates into wage improvements. <\/p>\n
Furthermore, financial asset inflation could help. Don’t you see? Low interest rates on medium and long-term debt, synonymous with low capital stock, also mean minimal returns on savings. And global stock markets, for the moment, do not reflect a scenario of improved growth. Nor of price recovery. This is the reality. However, it is also evident that the initial objective of financial stability from central banks has resulted in relatively high financial asset prices from a historical perspective. Given all the above, it is no longer just the destabilizing effect on the financial sector, but also that central banks lose credibility in their ultimate inflation target. Nevertheless, the truth is that monetary normalization in a situation like the current one is extremely complex. It is not surprising that global monetary authorities, starting with the Fed, are so reluctant to establish a strategy for withdrawing stimulus. <\/p>\n
How can the much-defended short-term financial stability be questioned? This is the issue facing the US monetary authority since the end of last year. What has changed in recent months is that, as I said before, the risks of prolonging this exceptional situation are increasingly evident. Recognizing them is undoubtedly a good step. Limited, but in the right direction. <\/p>\n