World’s Most Powerful Bank Reverses Course, to Avoid a Global Depression
German Economic News, Translation (and closing Note) by Eric Zuesse | Published: 22:07:15 20:10 clock
The Bank for International Settlements (BIS) acknowledges in its annual report that the policy of cheap money has failed. All the trillions in monetary stimulus have produced no growth in the real economy. Central banks cannot salvage the economy. Governments – fiscal stimulus – must now resolve the economic crisis. Political leadership is required.
In November 2008, the Federal Reserve in the US began to purchase many billions in securities, to stabilize the markets after the collapse of Lehman Brothers. Later, the Fed bought also US Treasuries, and cut interest rates to a record low of zero to 0.25 percent. So, they set off a global devaluation race. As a result, between just January 1st and March 12th of 2015, one-fifth of all central banks lowered their key interest rates. China was last to join this currency war, but when they did, their easing of monetary policy helped spark a credit-driven bull market that now produces the biggest Chinese slump in 20 years.
The Basel-based Bank for International Settlements (BIS) is considered the “central bank of central banks.” It was originally founded in 1930 to handle German reparations after the First World War. Today the BIS networks together central banks around the world, and manages on their behalf nations’ gold reserves. Its 85th Annual report analyzes the global financial system, seven years after the 2008 crisis. An entire chapter is devoted to shortcomings of the international monetary and financial system. It says that instead of promoting sustainable and balanced growth of the global economy, this system actually undermines growth long-term.
The loose monetary policies of the central banks have produced no significant growth in the real economy, the report’s authors say. On exchange rates and capital movements, the loose conditions have transferred money to countries that do not need it, and this has promoted financial vulnerabilities. The world’s record low interest rates are signs “of a larger malaise.” BIS finds that the long period of low interest rates has generated “unusually long stagnation,” and they warn of a vicious circle of continued falling interest rates. In the longer term, this could weaken the financial sector and lead to permanent dependence on debt.
Claudio Borio, head of the Monetary and Economic Department of the BIS, says in the annual report: ”The most obvious symptom of this malaise is continued extremely low interest rates. They have been extremely low for a very long time, and by any standards. Moreover, the negative yields in some government bond markets are simply unprecedented and previously unthinkable.” Central banks would grope futiley in search of historical parallels. But by now, interest rates have shown very clearly that burdening monetary policy with the task of stimulating growth cannot succeed.
In their attempts to overcome the weakness of the world economy, central banks have become the largest players in the global equity markets. This is according to a study by the Research Institute OMFIF, an international research and advisory group. The study was presented in June 2014 and is based on 29.1 trillion dollars of investments by global central banks and other public institutions. It covers bonds, stocks and commodities. The authors conclude that “In the aftermath of the financial crisis, different forms of ‘state capitalism’ have come to the fore, and, ‘Whether or not this trend is a good thing may be open to question, but what is incontestable is that it has happened.’” Thus, public institutions are mutating to become a large part of the capital markets, and this will potentially overheat share pricess.
Says Borio: ”There are indications that recent years have built up financial imbalances. And this could affect the rest of the world much more than before, because emerging economies have now gained considerable weight.”
The warning comes at a time when the growth of the global economy cools noticeably. In the United States, China, Japan and the BRICS, there was seemingly limitless growth, until recently. Only the deep oil price drop could cover up these negative effects. “The fall in oil prices has encouraged all in all, the global economic growth, and temporarily reinforced the downward pressure on prices – a real godsend,” said Borio. However, the economic policy leeway is now frighteningly small.
“Seven years after the global financial crisis, the policy mix remains very unbalanced. It is still too heavily dependent on monetary stimulus, while the progress in structural reforms is still insufficient,” said Jaime Caruana, General Manager of the BIS, at the launch of the report in Basel.
In a Reuters interview, South Korea’s Hyun Song Shin, the chief research economist of the BIS, warned of new turbulence in financial markets. This time, however, the trigger would not be at the big banks, but at pension funds and asset managers. The International Monetary Fund (IMF) recently warned of the systemic risk posed by pension funds. Low interest rates have again accelerated investments in riskier asset classes, to promote an aggressive search for yield.
“Currently all looks indeed very good, but it may build up to a painful and very destructive outcome,” said Shin. The consequences cannot be foreseen. “We are entering completely uncharted territory.”
BIS economists advocate a triple realignment of the global economy. They propose to move away from the “illusory fine-tuning” of the overall economy in the short term and instead to pursue medium-term strategies. Moreover, economic policy should focus less on short-term output and inflation and instead focus more on the slower than expected financial cycles. Finally, Nation States must realize that it is no longer enough today to keep their own houses in order. A realignment must become aware of the dangers posed by purely national measures.
The BIS says: “It’s more important than ever to replace the short-term perspective by a longer-term view. Financial markets have reduced response times, and policy makers in financial markets are always chasing shorter-term rewards. That’s an increasingly narrow, indefensible position.”
NOTE from Eric Zuesse: The BIS report is cagey about its implications for fiscal policy. All it says, really, is on page 22 (28 of the .pdf): “For countries that do have fiscal space and need to use it, the challenge is how to do so most effectively. This means, first and foremost, facilitating private sector balance sheet repair, supporting reforms that boost long-term productivity growth and a greater but judicious emphasis on investment at the expense of current transfers. The quality of public spending matters more than its quantity.”
The BIS is in the business of marketing monetary policy, and shuns Keynesian macroeconomic policies that aren’t based upon standard microeconomic theory. Unlike at the IMF, which likewise markets monetary policy, the economists at BIS don’t even look outside monetary policies. However, the IMF’s economists do. Thus, an “IMF Working Paper,” issued January 2013, and titled “Growth Forecast Errors and Fiscal Multipliers,” presented a definitive empirical study, a meta-analysis of the empirical studies, on the question of the size of the Keynesian multiplier, and found that during economic recoveries from crashes and other distressed economies, it’s much larger than had been assumed by the aristoracy’s economists, such as at BIS and IMF. Basically, this comprehensive empirical study showed that Keynes was right and that the macroeconomic policies that after 1970 re-introduced microeconomically based macroeconomic theories, and that continue to be applied even today – not only by the BIS and IMF but by economists generally – are empirically false. In other words (for example): the policies of “austerity” or in econospeak “fiscal consolidation,” fail miserably, so that what is being done to Greece (and will be done to Ukraine) is bound to fail. Unfortunately, however, aristocrats, investment insiders, benefit enormously from such “austerity” policies, which starve the public in order to benefit investors. Economic growth isn’t really what’s being sought. So: the empirical economic studies are simply ignored, and economic theoreticians still build upon the standard microeconomic foundation, of falsehoods. Essentially, economists get rewarded for promoting those falsehoods. Standard economic theory has no scientific justification, and now it has actual scientific disproof. The BIS study added confirmation to that, but didn’t mention this fact. The BIS management don’t want to call attention to it.
Investigative historian Eric Zuesse is the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.