The Bank of International Settlements (BIS) says in its annual report which was issued Sunday that the current global markets euphoria does not reflect economic reality and its general manger warned on interest rates that: " if they persist too long, ultra-low rates could validate and entrench a highly undesirable type of equilibrium - - one of high debt, low interest rates and anaemic growth."
The BIS is the bank for central banks and is the oldest international financial organisation, having been founded in Basel, Switzerland in 1930.
The annual report says: "The overall impression is that the global economy is healing but remains unbalanced. Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks' balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession."
The Wall Street Journal reported on Saturday:
"Financial markets are euphoric, in the grip of an aggressive search for
yield…and yet investment in the real economy remains weak while the
macroeconomic and geopolitical outlook is still highly uncertain," said Claudio
Borio, the head of the BIS's monetary and economic department.
“Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back,” the bank said pointing to the recent upturn in the global economy as a precious opportunity for reform while warning that policy needed to become more symmetrical in responding to both booms and busts.
Global markets are currently “under the spell” of central banks and their
unprecedented accommodative monetary policies, it said and warned that returning
to normal monetary policy too slowly could also be dangerous for government
Jaime Caruana, general manager of the BIS gave a speech on Sunday at the annual meeting of central bank governors.
Jaime Caruana was governor of the Bank of Spain in 2000-2006 and in 2004 he gave into pressure to relax the requirement on the main banks to make special 'rainy day' provisions during the good times - - Charlie McCreevy, the European Commission's financial services commissioner who was a former Irish finance minister, also pushed for a relaxation of the rules.
Caruana decamped to Washington DC in 2006 to take a job at the IMF where Rodrigo Rato, a former Spanish finance minister, was managing director. He then moved onto Basel in 2009 and his IMF job as financial counsellor and director of the Monetary and Capital Markets Department was given to José Viñals, a former Bank of Spain colleague.
So two leading executives of the boomtime Bank of Spain have been lecturing on prudence since the bust but like the sinning preacher while the credibility should be tarnished, the warnings of pestilence maybe merited!
Caruana said on Sunday:
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