World’s Most Prestigious Financial Agency – Called the “Central Banks’ Central Bank” – Slams U.S. Economic Policy

The “Central Banks’ Central Bank” Slams the Federal Reserve

The central banks’ central bank, the Bank of International Settlements or “BIS” – which is the world’s most prestigious mainstream financial body – has slammed the policy of America’s economic leaders.

This is especially dramatic given that the banks own the Federal Reserve, and that the Federal Reserve and other central banks – in turn – own BIS. In other words, BIS is criticizing one of its main owners.

Economics professor Michael Hudson notes:

Paul Krugman has urged the Federal Reserve to simply lend banks an amount equal to their bad loans and negative equity (debts in excess of the market price of assets). He urges a “Keynesian” program of spending to re-inflate the economy back to bubble levels. This is the liberal answer: to throw money at the problem, without seeking structural reform.

[BIS] disagreed last week in its annual report. It said – and I believe that it is right – that monetary policy alone cannot solve an insolvency problem. And that is what Europe has now: not merely illiquidity for government bonds and corporate debt, but insolvency when it comes to the ability to pay.

In such circumstances, the BIS explains, it is necessary to write down the debt to the amount that can be paid – and to undertake structural reforms to prevent the Bubble Economy from recurring.

For background, see this and this.

Too Big Has Failed

BIS has also slammed “too big to fail” banks:

The report [by BIS] was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.

See this for background.

Interest Rates Have Been Kept Too Low

BIS has also repeatedly criticized the Fed and other central banks for setting interest rates too low.

BIS’ chief economist William White warned against overly lax monetary policy as early as 2003.   As Spiegel reported:

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. [Low interest rates equal cheap money.] To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative — and hazardous….

The Telegraph noted:

“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.

***

“Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered,” said the report.

In 2009, BIS released a paper amplifying on this point:

Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to boom-bust type business fluctuations. In addition, some recent papers find a significant link between low interest rates and banks’ risk-taking ….

Indeed, BIS documents that interest rates which are too low are a grave risk financial to stability. See this, this and this.

The Fed Allowed Destructive Bubbles to be Blown … and then Used “Gimmicks” and “Palliatives” to Try to Paper Over the Mess

BIS also slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse.

As the Telegraph noted reported in 2008:

Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”

***

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.

In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.

BIS also slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.

But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors, the heads of congressional and senate banking committees, and the others in control of American, British, French, Japanese, German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.

Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!

“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.

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  • Tony

    It is unfortunate that this conversation goes on and on but rarely ever touches on the real issue, i.e. that the currencies are debt based in nature, therefore incredibly fraudulent and enslaving. This is something numerous great minds have discussed and written about including the founding fathers of this nation who said in various ways God help us all if the debt based money policies of Europe ever take hold here.

    This is what the founding fathers fought, this is what Jackson fought (his whole platform was on this topic and all associated with it), Lincoln dealt with it, and Kennedy was killed for proposing to revoke the powers of the Central Bank.

    When will people get the same game that the power brokers have wielded on them throughout history?

    This is so heinous a system as to enslave all that are subjected to it other than the banking cartels that run it. Offer money into the system via debt, immediately start assessing interest…..hmmmm…..so how does anyone every pay off their debts, govt or otherwise? That is actually a mathematical impossibility because there is never enough money in circulation to cover the debts and conduct commerce, and this is particularly impossible when you add massive interest on top of the fraud pile as that money doesnt exist. There is never enough money in circulation to cover all the debts much less the interest since the only money introduced into existence is through a debt!! Just ask the US Govt that does not create its own money.

    Why do we drone on and on endlessly about money, banking, and markets without having the slightest understanding of the playing field, thus the real problem?

    Please tune into The Secret of Oz by Bill Stills, Zeitgeist Addendum, The Creature from Jekyl Island, or numerous other works throughout history (its always been the same game) to get informed. Without this understanding all other covnersations are worthless because without unraveling the fraudulent money game nothing is going to change the pollution, the big pharma drugging of America, the wars, education woes, the oil price fixing, the metals suppression and related libor scandals, etc.. The underpinnngs of the manipulation of all aspects of society tie into this crushing debt machine that CANNOT be won by the people unless they reject it and start an equity based system – and sadly its so simple a child could get it.

    To the awakening.

    Do we really think the BIS is going to talk about this or is it going to play psychological games in the media? The BIS is not going to slit its own throat. Great theater, but at the end of the day they wont offer up the solution or give away the game.

 

 

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