“Rates, liquidity, inflation: it’s like 1929”: finance after Credit Suisse

A new 2008? Quite a new 1929“: here’s what the international financial system faced with the system flaws made evident by the crash of Svb in the USA and by the crisis of Swiss credit. Massimo Amatoeconomist and professor of Economic History and History of Economic Thought at the Bocconi University of Milan, comments with IlGiornale.it the global perspectives of the economic-financial system.

There was no systematic rate hike in 2007-2008”, comments Amato, one of the economists most attentive to the structural problems of finance in the Italian panorama and one of the theorists of the European Debt Agency. “In 1928, a year before the outbreak of the Great Depression, in the United States the monetary tightening on rates hit markets that were certainly hyper-liquid but due to very high financial leverage. A very similar situation to today”.

The turning point in monetary policies after the long decade of quantitative easing globali has produced structural problems also because “there is still a widespread and erroneous perception that the transmission of monetary policy to the real economy is neutral and smooth”. But it isn’t like that. The markets react in moods and volatile expectations to central bank decisions and finance is not a flat territory but a terrain for the transmission of economic policies and a space for the generation of investments, savings, expectations and strategies. It is necessary, notes Amato, “that financial stability is pursued as public good, even at the cost of impacting operators’ short-term profits, and above all taking into account the effective functioning of the markets, which often differ from the simplifications of macroeconomic models. Finance impacts macro policies, and vice versa, and often in unpredictable ways”.

Decision makers are often faced with the dilemma, already pointed out by the former chief economist of the International Monetary Fund Olivier Blanchard, according to which those who have an eye on “micro” data largely lose sight of macroeconomic policy, and vice versa. However, according to Amato, this does not justify “incredible cases” such as that of Credit Suisse bailout, according to the Bocconi professor “a case of casual abjuration of the liberal principles which, according to all operators, should govern the markets”. One might say, to paraphrase the economist Mario Seminerio, that just as there are no atheists in the trenches, there are no liberals in the face of financial system crises. But Swiss credit it is a case that stands out because “the idea of ​​saving a bank by making bondholders pay before equity holders is inconceivable”.

The Credit Suisse and UBS merger created three problems

The crisis opened by the different economic and monetary policies conducted with respect to the past, for Amato, creates a threefold problem: “in the first place, this dangerous inversion of priorities is created which subordinates bondholders to shareholders, in spite of any liberal or competitive principle; secondly, all this happened with the blessing of the Swiss National Bank called on paper to supervise the proper functioning of the markets; third point, the resolution of the Credit Suisse crisis has created a significant problem because it is all to be seen if mergers like the one between Credit Suisse and Ubs they will be good for the market”. Who will be vigilant, asks Amato, in the face of a giant capable of having such market power, even in the credit sector?

The risk of possible moral hazard

Then a structural problem arises, i.e. understanding what banks actually are today. “First of all, notes Amato, the principle according to which the banks must not go bankrupt opening up to the possible moral hazardby financial decision makers. Furthermore, it is necessary to understandwhether in the conception of the operators banks should be treated as businesses like all the others or if one is being created which Martin Wolff sul Financial Times he defined a potentially great contradiction between banks understood as businesses and banks called to function as utilities”.

2023 as a new 1929, at least potentially, therefore brings with it the recessive spectra of a structural banking crisis. To which is added a threat inherited from the monetary policies mentioned above: the idea of ​​”cure in monetary form a complex inflation in its genesis” and that also the Nobel Prize Joseph Stiglitz defined as largely generated by non-monetary causes. “I wonder”, comments Amato, “why the Federal Reserve intervened so aggressively to cool high demand whose growth had been driven by wage growth”. And a system is at least bizarre in which, notes Amato, “we proclaim ourselves supporters of the market, but when the labor market rewards wages according to a supply and demand mechanism, a central bank moves to slow growth, but the same does not happen for the extra profits of companies, very often due precisely to the cost-driven, not wage-driven inflation. In my opinion”, sinks the economist, “this is one class choice, or at least a choice that rewards some interests against others”.

Europe is in check

The Fed’s moves acted by dragging on the priorities of the European Central Bank. What if “on the one hand it was understandable that in part the Eurotower followed the Fed, on the other it is disheartening to note that the ECB does not have real monetary policy autonomy. Europe hurt itself” and in the face of mounting recessionary risks “it has an overdependence on American rate decisions”. In essence it is “Europe which is in check. On the one hand, fortunately, with the Basel supervisory rules fully applied, EU banks seem more resilient than US or Swiss ones; on the other hand, they are full of government bonds whose yields could diverge significantly in the event of further interest rate tightening”.

The ECB’s dilemma between rates and spreads

And from this point of view, what Europe must watch with greater attention is precisely “a stability crisis that brings the ECB between the Scylla of pursuing the rate hikes decided in the USA and the Charybdis of higher spreads between sovereign debts . A problem amplified by the fact that the TPI activated by the ECB, the famous “anti-spread shield”, has very uncertain and currently uncertain rules of engagement. In short, a far from clear picture.

Recession in the face of a worsening of the macroeconomic scenario would follow in cascade, but it is the structure of the financial system that is being called into question on the eve of what could become a new 1929 rather than a new 2008.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.