In April the General Manager for the Bank for International Settlements (Jaime Caruana) gave an interview that might be viewed as sort of a "state of the global economy" from a BIS point of view. The interview touched on some issues we cover here. Below are a few example questions and answers. Read the full interview here.
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Q: So, what's your overall verdict of the crisis policy of recent years - of the bond purchases (quantitative easing, QE) as well as the zero and negative interest rates?
A: A final verdict will only be possible when normalisation has been completed. We're a long way off that, and from normality. As regards what we have seen so far, my provisional assessment is the following. At the onset of the crisis, central banks played a decisive role. If they hadn't responded the way they did, the crisis would have been much worse. With regard to the later phase, we have expressed concerns about how the balance of risks and rewards worsens over time: the impact of ultra-expansive monetary policy on growth declines, and the risks of that policy are cumulating. Negative interest rates have their own set of problems.
Q: What do you mean exactly?
A: In particular, negative interest rates become a big problem when they persist over a long period. They increase risk-taking [but not necessarily where it is desirable]. They induce greater indebtedness. They act as a burden on financial institutions, particularly banks, and thus may affect their intermediation.
Q: Are negative interest rates ultimately more worrisome than QE?
A: I don't have a comparison of that kind in mind! But seriously: whether negative interest rates or asset purchases - it is the protracted duration that is worrisome. It suggests that we are trying to solve a problem that is not solvable by monetary policy alone.
. . . . .
Q: Under Trump the US seems to be setting less store by multilateral institutions or global cooperation, whereas the BIS has lately been calling for increasing cooperation among central banks.
A: Central banks have a strong sense of cooperation. But we need more than that. From our perspective, the most important thing is that the international consequences of national monetary policy decisions, meaning spillovers and spillbacks, be internalised in the processes concerned. In certain cases, central banks may want to reinforce their actions with some coordination, as occurred in the past. Furthermore, central banks may ultimately want to develop some common rules of the game for how to deal with excesses on the global financial markets. That is certainly the most difficult aspect, and not feasible at present. That's something we need to think about and develop for the future.
. . . . .
Q: Is there at present a danger of a bond market crash, similarly to 1994 when the Fed embarked on a cycle of raising interest rates?
A: There are a few similarities: a very long period of very low interest rates and the start of a normalisation process, beginning in the United States. But at the same time, there are also enormous differences. The biggest difference is that central banks today know how important communication is. In 1994, the Fed surprised the markets. That's different today. Therefore I'm not expecting a repeat of what happened back then. Nevertheless, there is of course the risk of a snapback - that is, that market rates will very suddenly start going up very quickly.
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My added comment: I call your attention in particular to this Q&A from above:
Q: Under Trump the US seems to be setting less store by multilateral institutions or global cooperation, whereas the BIS has lately been calling for increasing cooperation among central banks.
A: Central banks have a strong sense of cooperation. But we need more than that. From our perspective, the most important thing is that the international consequences of national monetary policy decisions, meaning spillovers and spillbacks, be internalised in the processes concerned. In certain cases, central banks may want to reinforce their actions with some coordination, as occurred in the past. Furthermore, central banks may ultimately want to develop some common rules of the game for how to deal with excesses on the global financial markets. That is certainly the most difficult aspect, and not feasible at present. That's something we need to think about and develop for the future.
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Added comments:
This reply from Mr. Caruana is totally consistent with what we have reported here many times. While there are many meetings and discussions etc. about trying to implement "some common rules of the game" globally, the reality according to BIS General Manager Caruana is that this "is not feasible at present" for dealing with excesses on the global financial markets. Getting global consensus on anything is difficult and the power of the status quo is somewhat entrenched. In an upcoming article, we will examine that idea in more detail.
Added note: Janet Yellen assures us that no new major crisis is likely "in our lifetime". If that is true, it will be time to close down this blog and I am happy to do so if no new crisis is coming. I will add that no sources or contacts that I talk to have indicated to me that they see any signs of a new crisis right now even though there are all kinds of systemic and geopolitical risks out there (debt, derivatives, pension funds, Middle East, N. Korea, Iran, China. etc).
Also, some recent articles appeared (here and here as examples) implying that the BIS was saying another "global crash" is coming. It turns out that was in error. Tomorrow I will have an article that clarifies what was actually said and how it was misinterpreted.The BIS always tries to point out any systemic risks they see that could stress the system, but they are not issuing any kind of "crash warning" right now. I confirmed that with the BIS.
Also, some recent articles appeared (here and here as examples) implying that the BIS was saying another "global crash" is coming. It turns out that was in error. Tomorrow I will have an article that clarifies what was actually said and how it was misinterpreted.The BIS always tries to point out any systemic risks they see that could stress the system, but they are not issuing any kind of "crash warning" right now. I confirmed that with the BIS.
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