Economist David Cano talks about monetary policy, banking and pensions

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I had the pleasure of meeting David Cano at the “Economists face to face” debate, held in Vara Café (Burgos) on November 30. On that occasion, David Cano and Jesús Zamanillo (whom we already interviewed for Economipedia), starred in an exciting debate on debt and monetary policy. Well, today we have the pleasure of interviewing the economist David Cano.

Our interviewee has a Bachelor's Degree in Business Administration and Management from the Autonomous University of Madrid and a Master's Degree in Quantitative Finance from AFI. Currently, David Cano Martínez is the General Director of Analistas Financieros Internacionales. Behind him he has an extensive career as an economist, since since 1998 he has devoted himself to economic analysis and the study of markets.

David also works in everything related to advising pension funds, investment funds and portfolios of financial assets. And it is because his work as an economist has allowed him to develop a very multifaceted profile: he is the author of numerous books on economics, a professor of postgraduate studies in specialized centers and a collaborator in various media related to economics and finance.

Q: As an expert on monetary policy, how long do you think low interest rate policies will last?

A: We are near the beginning of its end, but with differences between geographical areas. The process is more advanced in the US, whose central bank has already raised rates five times. If we do not have negative surprises in the economic and financial environment, it is possible that by the end of 2018 the interest rates in that country will be in line with inflation (2.0%), so we could say that then the rates will no longer be "low". The Bank of England has already raised rates, but rather it has been the correction of the summer cut of 2017 associated with the results of the referendum on Brexit. In the case of the Euro Area, where we are behind the US for about 5 years, the ECB will not begin to raise them until 2019 and we can say that until 2022 or 2023 we will have expansionary monetary conditions. Along with interest rate hikes, the normalization of monetary policy consists of “destroying” all the money (monetary base) created by central banks since 2009 (about USD 20 trillion) and which has been largely allocated to the purchase of fixed income assets. As the outstanding balance of bonds is reduced, we should see a rebound in interest rates. In short, we are in the process of rate hikes, but it will be gradual and it may take between 5 and 10 years to return to "normal" levels.

Q: In Japan they have had interest rates close to zero for 20 years. What are the consequences of this policy?

A: The case of Japan is exceptional. And it can be given as an example of those in which monetary policy has not worked (in contrast to the US). And this may be due to many reasons, among which we can highlight the slowness in solving the solvency problem of the Japanese financial institutions, which had to face the simultaneous bursting of the real estate and stock market bubble in the late eighties. The aging of the population or opposition to the entry of foreign capital are other factors that may explain the poor performance of the Japanese economy in recent years.

Q: There are analysts who question the control of circulating money as monetary policy. What is your opinion on this?

A: Monetary policy is one more tool of economic policy. In fact, in this crisis it has shown that its field of action is superior to what it had shown up to now: controlling inflation. The action of central banks serves to mitigate the negative effects of financial crises and disruptions in the functioning of the intermediation of savings through the banking system. Central banks have shown that assuming the role of "investor" is compatible with that of "lender of last resort" for financial institutions (and, of course, "guardian of inflation"). With the very narrow scope of fiscal policy, we needed to make maximum use of the power of monetary policy, and not so much the conventional one (exhausted shortly after the crisis started) but the unconventional one: the so-called Quantitative Easing (QE) . Not only am I not against the actions of central banks in this crisis, but I believe that they have been the main responsible for us to come out of it. Now, and in line with what was stated in the previous question, it is time to start thinking about gradually “demonstrating” all expansionary measures, both conventional (raising rates) and unconventional (reducing the outstanding balance of investment in income). fixed and destroy monetary base).

Q: Tell us about Basel III. Do you think the current banking regulation is enough? Is there too much regulation? What can be improved?

A: We run the risk of falling into the law of the pendulum. If regulation, especially regarding solvency, was excessively lax before the crisis, thus sowing one of its seeds (credit growth was disproportionate), current demands are excessive. Capital requirements for entities are above reasonable, even in a recessionary context. The consequence is that it is much less profitable for financial institutions to grant financing, a situation that is exacerbated in the current situation of very low interest rates (and which, as I have mentioned, will continue for five years). Therefore, the flow of credit is lower and the profitability (ROE) of banks is reduced, damaging their performance on the stock market, which in turn makes future capital increases difficult. Complex environment for credit institutions, for the "traditional" banking system that should make us reflect on the possibility that Basel III has gone too far in regulatory matters.

Q: What are the challenges facing the financial sector?

A: The financial sector is in a deep transformation. The need to take money from where savings are concentrated to where it is needed to invest persists and it is the financial system that is in charge of this intermediation. Now, if the credit institutions were the main protagonists (through the collection of deposits and the granting of credits), the demands imposed by Basel mentioned above make this channel difficult, thus opening the opportunity for others, such as the capital markets, collective investment institutions, pension funds, venture capital, participatory financing platforms, etc. The financial sector is very much alive and immersed in a profound change that must culminate in greater efficiency, power and solvency, thus becoming a basic pillar for higher GDP growth. We are in one of those "structural reforms" that economists like so much.

Q: In Spain, the pension box is running out. What alternatives do we have for pensions? Are private pension plans really an option? How can we get a reliable and profitable pension plan?

A: Spain has one of the most generous pension systems in the OECD which, together with the increase in life expectancy, causes a deficit that threatens to increase year after year. One option to maintain it would be to increase the contributions of those who currently work, but it seems to me that it is to impose an excessive intergenerational solidarity. It seems clear that the adjustment must come to a greater extent from a reduction in public pensions, which can be complemented by private savings. For me one of the best ways to save in the long term are pension plans, but others will think that real estate, jewelry, works of art or simply "keep it under the mattress" are better. Each one who chooses what he considers best, but who saves in the long term for when he retires to be able to supplement a pension that is fair taking into account the tax burden that contributors will have to bear at the time.

Tags:  Spain history accounting 

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