Yves Smith:
“The financial media is all
atwitter (no pun intended) over the Bank of International Settlement’s just
released annual report, since it shook a stern finger at central banks for
keeping super low interest rates and warned them about the difficulty of renormalizing
without kicking up a lot of upheaval.
It’s hardly news that getting
out of the corner that the Fed and ECB have painted themselves in won’t be
easy, as the taper tantrum of last year demonstrated. The ECB is thus urging
central banks to have a hawkish bias, based on the notion that that protracted
low rates are destabilizing. That’s highly likely to prove to be true in the
long run, as investors continue to reach for return in a low interest rate, low
volatility environment. But the BIS implicitly endorses austerity, when it’s
austerity that has led to the perverse mechanism of falling back on a
protracted period of super low interest rates to keep banks and through the
confidence fairy, economies chugging along despite that. We can see how well
that is working in the US and Europe. The US “recovery” is running just above
stall speed, and Europe’s is a technical recovery.
So while some of the BIS’
warnings are valid, it chooses to ignore that the reason these low interest
rates were implemented in the first place was due to poor [crisis] responses, a
fact set it omits.
So
on the one hand, the BIS correctly warns about the risk of overheating
financial markets as a result of super low interest rates. As the Financial Times put it:
‘While the global economy is struggling to
escape the shadow of the crisis of 2007-09, capital markets are “extraordinarily
buoyant”, the Basel-based bank said, in part because of the ultra-low monetary
policy being pursued around the world. Leading central banks should not fall
into the trap of raising rates ‘too slowly and too late’, the BIS said, calling
for policy makers to halt the steady rise in debt burdens around the world and
embark on reforms to boost productivity.
In its annual report, the BIS also warned
of the risks brewing in emerging markets, setting out early warning indicators
of possible banking crises in a number of jurisdictions, including most notably
China.’
Some
related discussion from the report proper:
‘Financial markets have been acutely
sensitive to monetary policy, both actual and anticipated. Throughout the year,
accommodative monetary conditions kept volatility low and fostered a search for
yield. High valuations on equities, narrow credit spreads, low volatility and
abundant corporate bond issuance all signalled a strong appetite for risk on
the part of investors. At times during the past year, emerging market economies
proved vulnerable to shifting global conditions; those economies with stronger
fundamentals fared better, but they were not completely insulated from bouts of
market turbulence. By mid-2014, investors again exhibited strong risk-taking in
their search for yield: most emerging market economies stabilised, global
equity markets reached new highs and credit spreads continued to narrow.
Overall, it is hard to avoid the sense of a puzzling disconnect between the
markets’ buoyancy and underlying economic developments globally…
Through its impact on risk-taking
behaviour, monetary accommodation had an impact on asset prices and quantities
that went beyond its effects on major sovereign bond markets. Credit spreads
tightened even in economies mired in recession and for borrowers with
non-negligible default risk. Global investors absorbed exceptionally large
volumes of newly issued corporate debt, especially that of lower-rated
borrowers. And, as the search for yield expanded to equity markets, the link
between fundamentals and prices weakened amid historically subdued volatility
and low risk premia.’
Gee, what about
Bernanke/Yellen/Draghi put don’t you understand? Well, actually they do:
‘Frameworks that fail to get the financial
cycle on the radar screen may inadvertently overreact to short-term
developments in output and inflation, generating bigger problems down the road.
More generally, asymmetrical policies over successive business and financial
cycles can impart a serious bias over time and run the risk of entrenching
instability in the economy. Policy does not lean against the booms but eases
aggressively and persistently during busts. This induces a downward bias in
interest rates and an upward bias in debt levels, which in turn makes it hard
to raise rates without damaging the economy – a debt trap. Systemic financial
crises do not become less frequent or intense, private and public debts
continue to grow, the economy fails to climb onto a stronger sustainable path,
and monetary and fiscal policies run out of ammunition. Over time, policies
lose their effectiveness and may end up fostering the very conditions they seek
to prevent. In this context, economists speak of ‘time inconsistency’: taken in
isolation, policy steps may look compelling but, as a sequence, they lead
policymakers astray.’
This sort of thing sounds all
well and good until you read more carefully: the ‘fiscal policies run out of
ammunition’ part. The BIS simply does not grok that you can’t cut deficits
without [producing] even larger contraction in the economy, worsening debt to
GDP ratios. The IMF ‘fessed up to that last year but it appears the BIS did not
get the memo.
So
the report urges that countries need to put more emphasis on “structural
reform” which means balancing budgets and deregulating labor markets even
further. Someone needs to send them the video in which venture capitalist Nick Hanauer explains that you can’t kill consumer ([who]
also happen to be laborers) and expect to have a robust economy.”
Click here
for the full blog post at Naked Capitalism.