In the global crisis, monetary policy reigns supreme. Both in the United States, where Ben Bernanke's Fed is doing the impossible to revive the economy still feeling the effects of the financial disaster of 2008-2009, and in Europe where Mario Draghi's ECB is entrusted with the exit from the crisis of the EUR. The reasons for and the role of monetary policy are at the center of a research presented at a recent seminar of the Bank of Italy by Giangiacomo Nardozzi, fine economist of the Milan Polytechnic, which will become the focus of a forthcoming essay. Let's hear what it is about from the words of the author.
FIRST online – Professor Nardozzi, monetary policy has gained a leading role in the crisis: what emerges from your new essay?
NARDOZZI - The essay is the result of work carried out with two colleagues on the global financial crisis triggered by American sub-prime mortgages, a work that we discussed a few months ago in a seminar at the Bank of Italy. So it is not about subsequent developments or the euro sovereign debt problems that we are still suffering. But in fact it has its relevance.
FIRSTonline – What?
NARDOZZI - Policy deficit (the one with a capital P) and too much monetary policy.
FIRSTonline – In what sense?
NARDOZZI - It's a long story. In our work we have taken it from the beginning of this century, but we can go further back. Do you remember the great stock market boom of the XNUMXs that started from the USA?
FIRSTonline – Sure, so what?
NARDOZZI - Here, that extraordinary boom had been fueled, rather than by real progress in the productivity of the American economy, by an accommodating monetary policy. A collapse of Wall Street with possible catastrophic consequences was therefore seriously feared. When the bubble deflated in the early XNUMXs, the disaster was miraculously averted by monetary policy itself with an exceptional cut in interest rates. But then, even after the attack on the Twin Towers, monetary policy continued to be exceptionally expansionary, drugging the growth of the American economy, this time with a housing bubble. This is the story, you know, from which we started: it shows a government of the economy mainly entrusted to monetary policy which has produced a regime of bubbles then exported to the rest of the world.
FIRSTonline – And the sequel? How do you arrive at the financial crisis?
NARDOZZI - Since 2000, long-term interest rates have declined not only in the United States, but also globally, while profit rates in the real economy have continued to rise due to the opportunities offered by globalization and the pressure on wages that it has resulted. A gap has thus opened up between the real capital return, which is growing, and the financial return, which decreases to historically very low levels. The banks, I mean the major ones, have tried to bridge this gap, which is unfavorable to them. And they are more than successful, in the classic ways: by increasing leverage and taking greater risks with the use of new toxic instruments readily provided by the major investment banks, with off-balance sheet transactions and transforming securitization with the "Originate to Distribute" model . All of this dulled their actual assets and liabilities, creating that sudden distrust among banks that triggered the crisis, and made it so bad, following defaults on US subprime mortgages that would otherwise have been a limited problem. .
FIRSTonline – But deregulation and accommodative supervision are to blame here…
NARDOZZI - They certainly counted for a lot. But, in the continuous run-up between regulators and regulated, the incentives to transgress or circumvent the rules that come from the context must also be considered, and I believe above all. These incentives are strong when interest rates are very low and liquidity is large. These things are determined by monetary policy which has ended up producing, in this specific case, even a credit bubble. With the enormous low-cost liquidity then injected to arrest the crisis, the hunt for yields restarted as soon as possible by many large banks which again took high risks, even if in this case the central bankers could not do otherwise given the seriousness of the situation.
FIRSTonline – However, five years after the start of that crisis, US monetary policy continues to be very expansionary, also adopting unconventional instruments. In Jackson Hole, Ben Bernanke said Fed policy would be further eased if needed, with even more "unconventional" measures to boost economic growth.
NARDOZZI - This is a good confirmation of what I was saying about the deficit of Politics. After such a traumatic experience as that of the terrible financial crisis that started in the United States, it was precisely the politics of that country that had to take over the ball to ensure a new era of growth without financial instability. Instead we have returned to forcing the economy with money; as in the pre-crisis era, we rely on the Fed which even now is pursuing hitherto unknown paths in monetary policy, with possible costs that Bernanke himself has listed. Certainly, at the moment, with the weakness of the recovery of the American economy, the slowdown of the world one and the risks that come from the Eurozone, there seems to be no alternative. But the fact remains that by nature monetary activism is short-sighted and we have already seen the results. In the conclusions of our analysis of the crisis we support the need to "stabilize" monetary policy by moving interest rates around longer-term trends in the return on capital, as Wicksell proposed at the end of the 800th century. And these are the trends that Politics should deal with, which is the only one capable of shaping them through the work of persuasion of the voters that is due to it, permanently influencing those expectations in the economy and in finance with which central banks must continuously confront.
FIRSTonline – And how do you see the European situation? Short-sighted monetary policy here too? Instead, it seems to me that Mario Draghi is working well with the declared objective of the survival of the euro, which is not exactly short-term.
NARDOZZI - Yes, it's true, Mario Draghi is working admirably also because he manages to act as a substitute without making it appear as such, showing the coherence of the ECB's interventions with its statute. But it is still a matter of supply, exercised with the limits of monetary policy. The crisis from which Draghi is trying to get the euro out is a blatant demonstration of a political deficit dumped on the central bank. It seems to me a really good result of political management to have managed to bring an area as important as the euro into recession, to question the survival not only of the single currency but also of the EU itself and to create a financial upheaval following problems, albeit serious, of little Greece!
