"My message to young people: stop trying to create money"

Translation of an interview with Mr Agustín Carstens, General Manager of the BIS, in the Basler Zeitung, 25 June 2018.
Read the original on the Basler Zeitung website here.

Agustín Carstens, the new head of the Bank for International Settlements, on the future of cryptocurrencies, his home country Mexico and his arrival in Basel

by Christian Egli and Christoph Hirter

"San Agustín", Saint Augustine, is how he is still referred to by many Mexicans - exceptional reverence for a former politician in a country where the most powerful are more often than not sent packing. As finance minister and later as central bank governor, Agustín Carstens brought stability to Mexico in turbulent times. When the price of oil plummeted in 2009, he saved his country from serious fallout with a hedge that brought in $5 billion.

The 60-year-old economist earned the respect of not only fellow citizens but also his central bank colleagues around the globe. They pay homage to him as a brilliant, exceptionally gifted economist. His fellow academics in Chicago, where he gained a doctorate, praise him also for his patience and his humour. Given such adulation, it is hardly surprising that the Mexican in 2011 came close to becoming Managing Director of the International Monetary Fund - he would have been the first non-European at the IMF helm. He ultimately lost out to Christine Lagarde, accepting his defeat sportingly. Since joining the Bank for International Settlements (BIS) in December 2017, he's been playing in the premier league of the world of finance.

Basler Zeitung: Mr Carstens, how are you liking it in Basel?

Agustín Carstens: I already knew the city before I moved here. Over the past eight years, as head of the Mexican central bank, I had been to Basel over 40 times. Now that I'm living here with my wife and our two dogs, I have time to explore the region. We've already tried out a few things. For example, we went to Art Basel, and we've been to the old town to enjoy the Rhine. Unfortunately, we haven't made it to the zoo, though, as our dogs are not allowed in. But we make up for that by going on frequent walks with them in the surrounding area.

You grew up in Mexico in the 1960s and '70s. You experienced at first hand the dramatic devaluation of the peso. Savings vanished into thin air. Was it this that led you to become an economist or central banker even?

Yes, I would say so. There's one day in particular that has lodged in my memory. I was around eight years old. My father dropped me off at school on his way to work. Before I got out of the car, he pressed as many pesos into my hand as I'd need for the bus journey home. But as I was getting on the bus after school, I was unable to pay the fare, as prices had gone up in the course of the day. I ended up having to walk home. As soon as I got in, I asked my mother how this had happened.

And did your mother have an answer?

Yes, my mother explained. That's how I learned what inflation means. I also recall that many things were scarce in Mexico at the time. When the government started to artificially fix the prices for some products like milk, sugar and meat, those items vanished from the shops. There were times when you just couldn't buy certain things. These occurrences were the reason why I got interested in economics at an early age. I experienced back then that inflation and financial instability can adversely affect people's lives.

Do you still have that at the back of your mind today - the thought that your actions and deeds can influence people's daily lives?

Absolutely. Money is one of humanity's greatest inventions. It enables you to specialise in one profession instead of having to do everything by yourself or go through all the fuss of bartering goods. It brings the best out of every individual, according to individual capabilities. Money is, so to speak, the oil that makes the machinery work. But this system is fragile. Problems quickly arise when there's too much or too little money in circulation. It's the central banks' job to forestall such problems.

In the wrong hands, monetary policy can be something destructive.

That's also my view. Monetary policy determines the level of purchasing power, wealth and pensions. There's no disputing the fact that monetary policy can also have far-reaching social repercussions. In my experience, it is always the poorest who suffer the most from inflation. It is therefore the duty of central bankers to ensure that purchasing power is maintained. Moreover, there has to be a guarantee that money is able to fulfil its important role in the economic system and that monetary policy can help growth and income distribution.

Did you act according to this credo as the head of the Mexican central bank?

Yes. And it is also an important part of what the Bank for International Settlements is about. One of the tasks of our economists is to analyse how different central banks meet these challenges. In monetary policy, there is no one-size-fits-all solution. Every country has its own characteristics, its own intricacies. And the BIS enables the heads of 60 central banks to meet in Basel every two months to exchange views and learn from each other. I think this is an important contribution to the global economy.

The BIS has been around since 1930. You're the first BIS General Manager from an emerging market economy. Why did it take so long?

The BIS decided in the mid-1990s to position itself more globally. Eventually, in September 1996 nine central banks from developing, or emerging market, economies were invited to become BIS members. This is how the central banks of Brazil, China, India, Russia and Mexico, among others, joined the BIS. Other countries followed. That was a landmark decision. It then of course took a while till a representative of these countries applied for the top BIS post.

So my appointment reflects, on the one hand, the openness of the BIS and its member institutions and, on the other, the fact that the emerging market economies have become increasingly important on the global economic stage. Today they account for around half of world GDP - 30 years ago, the figure was only about 30%. It is thus very significant that the BIS as an institution recognised at an early stage that the global balance had shifted.

You praise the openness of the BIS. Are the other international financial institutions lagging behind?

As you know, I was in the running to become Managing Director of the IMF. In the end, I lost out to France's Christine Lagarde. She got the post on merit, and I think she is doing an outstanding job. But during the process- [pauses to reflect]. Let me put it this way: up to now, IMF Managing Directors have all come from Europe, and World Bank Presidents exclusively from the United States. This pattern was adhered to with the appointment of Lagarde. The fact that the BIS now has a General Manager who hails from an emerging market economy could serve as a model for other institutions.

Does it matter at all where the GM comes from? Or, to rephrase the question: do you view the euro crisis with a different pair of eyes?

It's irrelevant whether the GM comes from Spain, Italy or Mexico. In this role, you lay your nationality aside, you are neutral, and you want the best for the institution and its members. However, someone from an emerging market economy brings something to the table that, in my case, is bound to have been an important factor in the nomination process: we have a lot of experience in dealing with all kinds of crises. When I was Deputy Managing Director of the IMF between 2003 and 2006, the thinking was that major crises were a thing of the past, except in emerging market economies. A few years later, the global financial crisis broke out, and it had its origins in the industrialised countries. Many of the decision-makers caught up in the crisis, however, had no experience at all of such situations. I, on the other hand, had worked for many years in the Mexican government and international institutions. For me and others, crisis management was the default setting.

The BIS has repeatedly warned that interest rates have been too low for too long, and that the burden of supporting the global economy which has come to rest on the shoulders of central banks is too great. Are central banks gradually moving in the right direction?

I think so. Central banks played a major role in resolving the crisis. They had to step in in order to contain the crisis and restart global growth. They have managed to do this so far without triggering greater problems - for example, in the shape of higher inflation. But at the same time, the prices of property and other assets as well as the level of indebtedness due to low interest rates have risen sharply in many countries, which could become a problem in the future.

What's to be done?

Central banks should now normalise monetary policy with a view to preventing ructions in the financial markets as well as the emergence of further imbalances due to low interest rates, as the measures that were taken in the context of resolving the crisis are unprecedented. If you had asked me 15 years ago if it was at all possible to set negative interest rates, I would have said no. But the need for such measures arose, and ultimately they have been quite successful. The challenge now is to get back to normal without jeopardising what's been achieved so far.

What are your biggest concerns at present?

Three things above all. First, that interest rates could rise too quickly. Not because of central banks, but as a reaction to market dynamics. This could considerably complicate the normalisation of monetary policy and ultimately threaten financial stability. Second, I'm worried about the increasing protectionism in global trade. The entire dialogue on this issue is not constructive. One shouldn't forget that global trade is essential for global growth; the benefits it brings for the economy as a whole are undisputed. I fear that we could very soon end up in a lose-lose situation, as the protectionist measures on the table will be damaging first and foremost to export-oriented countries - above all, those that themselves impose no or only minimum tariffs. In a global economy based on the division of labour, however, they also affect suppliers or domestic producers that depend on the import of semi-finished products. And in the end it's always the consumer who has to pick up the tab, in the form of higher prices and less job security.

And third?

I'm concerned by the pace of technological progress. In principle, it's a positive thing. But when innovation hurtles ahead, it can be destructive, for workers in particular. The challenge lies in using innovation to our advantage while containing the damage it causes. Here I'm thinking, for example, of the impact of information technology in finance - fintech - on, say, the business models and ultimately the stability of banks and other financial institutions. This is one of the topics we address in this year's Annual Economic Report. But the challenges involved are of course greater and concern the economy as a whole.

Isn't that part and parcel of "creative destruction"? The jobs lost in unproductive sectors reappear in emerging sectors.

We have seen signs of this creative destruction in the past. What's unusual is the pace of technological progress. The people who are driven out of certain job sectors don't necessarily have the time or possibility to adapt their skills in order to get a new job. Solutions have to be found.

Is there an ideal pace for innovation at all?

Who's going to tell Jeff Bezos or Bill Gates to take their foot off the gas pedal? Or who's going to stop a young entrepreneur in Zurich or Basel? We shouldn't be putting a brake on them; on the contrary, we must encourage them. The problem is that those affected might not have a chance to prepare for the change that's under way.

What should be done?

Our governments have a duty to guarantee good education and also facilitate re-education. Although individuals could themselves take the initiative, I believe there is a need for a comprehensive state policy. But in many regions of the world, this is - at least to date - not the case.

There's also a need for action in your home country of Mexico. Is a return to politics an option for you?

I won't have any time for that in the future. As finance minister of Mexico, I have already been a politician. Even if I was appointed to this role as a technocrat, I was ultimately acting politically. Taking money from people and redistributing it is one of the most important political duties. My forte is not politics but financial questions and the economy. I am very satisfied with my job, as I wish to have a global view of things.

You delivered a speech on cryptocurrencies which generated a big echo among fans of Bitcoin. Are cryptocurrencies money?

No, they are not money; they are a form of investment, an asset. They cannot assume the functions of money for the simple reason of how they are created. Those who have the biggest incentive in the system of these so-called cryptocurrencies are those who produce the assets - the miners. By producing "money", they wish to make a profit, and in return they deliver, as it were, the infrastructure that keeps cryptocurrencies going. This incentive, however, is not compatible with maximising the usefulness of money. Cryptocurrencies do not fulfil any of the three purposes of money. They are neither a good means of payment, nor a good unit of account, nor are they suitable as a store of value. They fail dramatically on each of these counts.

So, how do you account for the hype surrounding them?

The hype came about because this was something completely new and because you could ostensibly make sure-fire profits in a short space of time. But if you look at them closely, cryptocurrencies are, in a nutshell, a bubble, a Ponzi scheme and an environmental disaster - the latter because of the high energy consumption needed to run the infrastructure for these cryptocurrencies.

... which were precisely the words that annoyed the crypto-community. You don't think there'll be a happy ending?

No, definitely not - no need to beat about the bush on that count. One mustn't forget that central banks have been providing electronic means of payment for decades. In Switzerland, for example, the National Bank's electronic payment system is top of the line. I can't imagine something coming along any time soon that would be more efficient and generate the same level of trust.

The market capitalisation of cryptocurrencies is low, so there is no threat to the financial system. Should central banks intervene at all?

It is important to draw a clear distinction between the underlying technology, such as blockchain, and cryptocurrencies per se. The technology may have useful applications, but producing money is not one of them. Central banks and governments should raise the level of protection for investors and consumers because in the meantime a lot of people have become affected by cryptocurrencies. In addition, central banks must assume responsibility for strengthening national anti-money laundering legislation and for measures against the financing of international terrorism. While central banks are not law enforcement authorities as such, they can still show how these pseudocurrencies serve as vehicles for illegal activities.

Bitcoin emerged some 10 years ago. Why did it take so long for the BIS to comment on cryptocurrencies?

For a long time it wasn't a significant topic. Cryptocurrencies were more an oddity that aroused the curiosity of only a handful of people. Interest in them was minimal. But as more and more people got interested and the first major price fluctuations occurred, the potential for harm increased. Added to this were misinterpretations about the nature of cryptocurrencies - misjudgments that can lead to wrong decisions being taken. So we felt the need to come out very strongly to put the phenomenon into proper perspective.

Don't you think it's a positive side effect that Bitcoin has got many young people thinking about money, money creation and the financial system?

Glance back into the past and you will see that creating gold or money from nothing has been a regular obsession. It never worked. Even the great physicist Isaac Newton was at one point in his life obsessed by alchemy and the idea of making gold. He was very successful in a number of fields, but in this one he failed. Newton ended up as head of the British Mint. Why? Because he could detect at once if a coin was counterfeit. After he failed in his attempt to make gold, he switched sides and sent counterfeiters to prison. So my message to young people would be: Stop trying to create money!

What's the main thrust of your argument?

Central banks are trusted, and that trust is something they have built up over decades and for which there is no substitute right now. Trust is a valuable commodity. It is easily destroyed, but winning it takes time. Money has become established. Young people should use their many talents and skills for innovation, not reinventing money. It's a fallacy to think money can be created from nothing.

A well respected book about the BIS made reference to the "secret bank that rules the world". How secret is your bank in actual fact?

Well, here you are sitting inside it, so - so much for secrecy! But seriously- We have made it our goal to present a more diverse and more human picture of the BIS - among other things, in our Annual Report and through our internet presence. We want to become more approachable. Much of what we do here is public. The bulk of our research, for instance, is public. Obviously, there are some activities, also discussions, which by their nature are subject to confidentiality. But I can assure you that such business is less exciting than some people imagine - and as for ruling the world: hardly! In two years' time, we'll be celebrating the 90th anniversary of the Bank's founding. We want to use the occasion to better explain what we do here and how important our activities are.

Is there a reason for opening up like this?

Central banks have in general become more transparent. We should reflect that trend and in turn become a more open and more transparent organisation.

What are your priorities during your five-year term?

First and foremost, I want to preserve the BIS in Basel as the premier venue for central bankers and the leading representatives of financial authorities from across the globe to meet regularly to exchange views. This cooperation and collaboration is necessary in a globalised world. We are closely connected and mutually dependent. A central bank governor can't fulfil their mandate by concentrating exclusively on their own country. We provide the platform for the cooperation that is needed, and this platform is extremely useful for everyone.

Do you have any new projects in the pipeline?

In the coming years, we want to become a kind of centre of knowledge for the use of new technologies and their impact on financial markets and the global financial system - which means that we have to adjust our activities and the focus of the BIS so that it responds to the times.