A few days ago, the president of BBVA together with the president of Santander warned about the effects that the ECB’s monetary policy is having on European commercial banks. Living with zero or significantly negative interest rates can be of some use, as long as the situation does not drag on.
Saving the economies of the Eurozone (especially those with problems) at the expense of the banks and, behind it, at the expense of taxpayers, is a situation that will hardly be maintained over time. And it is that, apart from the accounting effects that this has on bank accounts, it is a phenomenon that, if maintained for too long, will lead to worse scenarios. The effects on the business are evident: when the cost of capital does not match the profitability that capital requires, there is no other solution than to cover the cost of capital through additional income, that is, increasing commissions.
Which cannot be maintained over time either. First, due to the very essence of the market, the most efficient banks will tend to look for customers by improving commissions. And, second, because a banking business cannot be maintained on the basis of commissions in the long term, and strong organizational adjustments will be necessary (as is beginning to happen) in order to have lower structure costs. Another option, of course, is to solve the problems of the national economies through reforms.
And here we enter the difficult chapter of combining political interests with economic ones, always in permanent conflict. It can already be seen that one of the latest occurrences has been to “promise” the creation in Spain of 200,000 new civil servants. It is evident that the struggles for the vote sometimes do not allow reality to be seen, and they bet on the impossible, or on deceiving.
And it is that the real problem is the liquidity trap into which the ECB has led us. From which it is very difficult to get out, unless the reality of things is accepted. This is an idea imported from American economists, who in their day feared that the purchase of assets by the Federal Reserve to mitigate the effects of the economic crisis would not have the desired effects. In this way, monetary policy is used to encourage capital injections into the banking system not only to be used for the purchase of goods, rather than for bank capitalization itself. A mechanism that would increase inflation and economic activity.
What has happened, both in the United States and in Europe, has been completely the opposite. The monetary injections that have brought interest to zero have been used to feed the financial system in the purchase of bonds, derivatives and other similar products, or simply to the savings of institutions that have been left with trapped liquidity with no way out.
Perhaps, modern economists have forgotten their theoretical teachings at the University on the theory of money and monetary circulation. Keynes already said that the speed of money in the economy is not constant. Thing that in the classical theory it was considered that the monetary production coincides with the nominal growth as long as its circulation is constant. The reality is that interest rates remain trapped at low levels whenever any small expectation in the increase in interest on bonds tends to rise, since the demand for money tends to grow strongly.
Any new money supply accumulates as interest rates fall, with expected returns on capital falling due to excess supply. With what the monetary demand grows as its circulation slows down. The result: a spiral of deflation. Consumers do not buy, money is trapped in bags, and everyone waits for further price declines on goods before spending what they have accumulated. A very perceptible effect today in the Stock Markets of almost all the countries that fluctuate in line with what we are discussing. No one wants to part with capital accumulated due to expectations. Which is logical, since the economy moves according to them.
The appeal of the ECB for zero or negative interest rates, fueled by permanent quantitative expansions (the famous QE), do nothing but accumulate the money supply on the demand side, bringing the speed of monetary circulation to a minimum. Result: the effective demand that drives the economy keeps getting weaker.
It is difficult to ensure that there is no longer time to get out of the Keynesian liquidity trap. But with the Chinese economy slowing down, with the United States seeing a complex future without knowing whether or not to raise interest rates, with emerging countries (especially Brazil) in a complex situation, and with moderate oil prices, everything indicates that The current monetary loop, if it does not get out of it, will lead Europe to a very difficult situation, with the prospect of returning once again to the need to rescue a sick bank.
Facebook Comments
Disqus