‘We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy’
The rain in Spain falls mainly on the plain.
“The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions.”
Ok, starters for ten. If a country has a balance sheet problem (i.e. too much debt) how is this problem eased by people having to pay higher interest rates? How do low interest rates make the debt problem more difficult to deal with?
Its either Goverment money or the shadow banking sector – this is not a difficult concept.
The world is simply not big enough for both now.
Listening to CNBC dribble now , it is quite instructive.
The commentators are fretting over if & How the Greeks will pay their taxes – its quite funny really.
The “markets” will have to destroy the value of the currency to survive.
The ECB is betting its anti -goverment money creation will prevail.
I hope to God they are wrong this time.
I hope their dreams of monetory malice go down in flames.
Of course Hope is a poor currency substitute.
Just more bladder from the banking cartel. Why does a man of Philip Lanes standing take this guys seriously. Have we learned anything yet. the BIS is the central bank of central banks and we all know how honest central banks are.
@ Karl Whelan
‘How do low interest rates make the debt problem more difficult to deal with?’
The BIS is rightly worried about the global inflationary threat. The Chinese boom and commodity price rises will eventually crash and/or bring down the tentative global recovery.
I beleive this inflation reflects US QE money seeking returns in the global arena. As the 1930s showed, such unilateral exercises have negative global fallout. That’s as true of politics as it is of economics, and pride comes before a fall.
Golden Fetters is a great read for these times. As Barry Eichengreen might see it, the US is no longer a global economic hegemon, and we lack a coherent system of international monetary co-operation. Monetary blocs eyeing each other up is a poor substitute.
The BIS doesn’t have a solution to a balance sheet recession on the scale we are currently experiencing.
Interesting Pro BIS, anti US treasury piece from Eric deCarbonnel
This game has been going on for centuries.
@Karl Whelan: “If a country has a balance sheet problem (i.e. too much debt) how is this problem eased by people having to pay higher interest rates?”
The increase in debt-service costs brings the farce to an end, by making it obvious to everyone that the debt simply can’t be paid. As in Keynes’s famous dictum, it transfers the problem from the debtor to the creditor.
But I don’t suppose that’s what the authors meant. Most likely it was written by a committee, whose members wanted to get this crap finished and go for a drink.
@ David Burke
Why does a man of Philip Lanes standing take this guys seriously. Have we learned anything yet. the BIS is the central bank of central banks and we all know how honest central banks are.
During the bubble, the economists at the BIS under the leadership William
White, stood apart from quiescent counterparts in most central banks including Ireland’s, in raising alarm about the risk of a disorderly unwinding of prevailing excesses.
White didn’t become rich like Nouriel Roubini because of his prescience but he had the courage to speak the truth to his nominal bosses including Greenspan.
He had even presented his case to the Jackson Hole shindig in 2003.
BIS experts described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”
In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”
“Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s, respectively. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived,” William White wrote in June 2007 in the BIS annual report, 2 months before the onset of the credit crunch.
So why were counterpart economists in member central banks afraid to tell emperors that they had no clothes?
According to William White, Greenspan gave him the cold shoulder after the presentation of the paper he had co-authored with a colleague, Caludio Borio.
Their warnings on the risks of financial stability materialised exactly 4 years later.
I’m not sure to what extent foreign investment is driving the Chinese housing bubble, but a proposal like “driving up private saving and taking substantial action now to reduce deficits in the countries that were at the core of the crisis” can surely only increase the flow of funds in that direction.
@ Kevin Walsh
That was probably a little careless. The main source of corporate funds in China is financial repression, which generates a massive poool of cheap capital for favoured enterprises. That all ends up as trillions of PBC dollar reserves and trillions of US private and governement debt. My source on China is the remarkable and amazingly communicative, Michael Pettis.
His take on capital flows and capital structure is well worth a read. ‘The Volatility machine’.
I am happy to be educated though. Why would paying down private and public debt ( ie saving) in the west lead to a flow of funds to China ?
@paul quigley
I certainly don’t claim to be more educated on the subject of China’s financial sources than you. But the US and the UK, which are the IIRC the two largest deficit economies, both have very weak domestic demand. So if they were to engage in both monetary and fiscal tightening, as the BIS appears to be recommending, you’d see the following effects:
Decreased domestic consumption, increased business costs, and a consequent fall in domestic business investment.
Decreased supply of government bonds.
Increased supply of investment funds due to increased domestic deposits.
Given an increase in investable funds, and a decrease in investment opportunities, the funds would almost necessarily go abroad. Hence there would be increased inflationary pressures in the countries that those funds were invested in.
@Kevin Walsh
“Decreased domestic consumption, increased business costs, and a consequent fall in domestic business investment.”
Doesn’t this depend on what the domestic consumption is on?
Here we have had tax rises and reductions in pay. There has been a fall in domestic consumption. It has been bad for government receipts. On the other hand, the trade balance has improved as imports have fallen. Given that we have a lot of external capital to repay, the accumulation of capital in the country must surely be a good thing (as JtO never tires of pointing out). No?
Either we reduce our consumption of imported goods and use that capital to repay debt, or we continue to borrow to consume. Is it a false dichotomy? You can’t make an omelette without oviparians.
On the subject of higher interest rates, remind me again what mortgage and other loan rates in Ireland are? How about deposit rates?
We already have the murket telling us that rates are too low in Ireland. It isn’t just about inflation, it is also about risk.
I have to commend BIS for talking about the elephant, though:
“Global current account imbalances are still with us, bringing the prospect of disorderly exchange rate adjustments and protectionism. But the imbalances extend beyond current accounts to gross financial flows, which today dwarf the net movements commonly associated with the current account. And they pose perhaps even bigger risks by giving rise to potential financial mismatches and facilitating the transmission of shocks across borders. Not only that, but cross-border financing makes rapid credit growth possible even in the absence of domestic financing. As the experience of the past few years reminded us, a reversal of strong cross-border capital flows can inflict damage on financial systems and ultimately on the real economy.
The imbalances in current accounts and in gross financial flows are related and need to be addressed together. Sound macroeconomic policies will play a key role in this regard, as will structural domestic policies to encourage saving in deficit countries and encourage consumption in surplus countries. Although the adjustment of real exchange rates is also required, it will not, by itself, be enough. Countries will need to implement policies that strengthen prudential frameworks and the financial infrastructure. Capital controls, best left as a last resort, can offer only temporary relief. ”
Nothing has changed to resolve unfettered capital flows. While nothing changes, the next crisis is just around the corner. Where next?
@hoganmahew
Well, it talks about the elephant in the room, but it doesn’t seem to propose anything concrete to do solve it. It’s all very well to say that Brazil, China and Germany should take measures to reduce their competitiveness, but what are the odds of them actually doing it? It says that capital controls can offer only temporary relief, but in the event of a financial crisis, that temporary relief can have long lasting beneficial effects (see how well Malaysia did in 1997 compared to other far Eastern economies).
As for deficit cutting measures in the US, the US is technically in a decent position to increase taxes and cut spending in certain areas without adversely affecting aggregate demand too much. It could let the Bush II tax era cuts expire, and implement the cost control measures in the Affordable Care Act. This would also have the positive effect of reducing the available funds on Wall Street. But if the US raises interest rates, then it cuts off its already weak recovery at the knees.
As for your point about the accumulation of external capital, whether it’s good for the economy or not depends on who accumulates it. If the income of ordinary people and the government had gone up, I would see that as a plus in this situation. Increased profits for the already wealthy don’t do us a lot of good.
Thanks Kevin and please don’t mistake me for someone with in depth knowledge of China.
Surplus countries won’t increase consumption for the same reason that deficit countries can’t easily eliminate spending. Vested interests and lobbying. The style may be different in Beijing and Washington, but the effect is probably the sam.
@ hogan
The BIS mentioned the elephant, but not the elephant driver.
16 replies on “BIS Annual Report”
‘We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy’
The rain in Spain falls mainly on the plain.
“The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions.”
Ok, starters for ten. If a country has a balance sheet problem (i.e. too much debt) how is this problem eased by people having to pay higher interest rates? How do low interest rates make the debt problem more difficult to deal with?
Its either Goverment money or the shadow banking sector – this is not a difficult concept.
The world is simply not big enough for both now.
Listening to CNBC dribble now , it is quite instructive.
The commentators are fretting over if & How the Greeks will pay their taxes – its quite funny really.
The “markets” will have to destroy the value of the currency to survive.
The ECB is betting its anti -goverment money creation will prevail.
I hope to God they are wrong this time.
I hope their dreams of monetory malice go down in flames.
Of course Hope is a poor currency substitute.
Just more bladder from the banking cartel. Why does a man of Philip Lanes standing take this guys seriously. Have we learned anything yet. the BIS is the central bank of central banks and we all know how honest central banks are.
@ Karl Whelan
‘How do low interest rates make the debt problem more difficult to deal with?’
The BIS is rightly worried about the global inflationary threat. The Chinese boom and commodity price rises will eventually crash and/or bring down the tentative global recovery.
I beleive this inflation reflects US QE money seeking returns in the global arena. As the 1930s showed, such unilateral exercises have negative global fallout. That’s as true of politics as it is of economics, and pride comes before a fall.
Golden Fetters is a great read for these times. As Barry Eichengreen might see it, the US is no longer a global economic hegemon, and we lack a coherent system of international monetary co-operation. Monetary blocs eyeing each other up is a poor substitute.
The BIS doesn’t have a solution to a balance sheet recession on the scale we are currently experiencing.
Interesting Pro BIS, anti US treasury piece from Eric deCarbonnel
This game has been going on for centuries.
Comes in 4 parts = from 1934 – to present
http://www.marketskeptics.com/2011/06/the-esf-and-its-history.html
@Karl Whelan: “If a country has a balance sheet problem (i.e. too much debt) how is this problem eased by people having to pay higher interest rates?”
The increase in debt-service costs brings the farce to an end, by making it obvious to everyone that the debt simply can’t be paid. As in Keynes’s famous dictum, it transfers the problem from the debtor to the creditor.
But I don’t suppose that’s what the authors meant. Most likely it was written by a committee, whose members wanted to get this crap finished and go for a drink.
@ David Burke
During the bubble, the economists at the BIS under the leadership William
White, stood apart from quiescent counterparts in most central banks including Ireland’s, in raising alarm about the risk of a disorderly unwinding of prevailing excesses.
White didn’t become rich like Nouriel Roubini because of his prescience but he had the courage to speak the truth to his nominal bosses including Greenspan.
He had even presented his case to the Jackson Hole shindig in 2003.
BIS experts described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”
In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”
“Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s, respectively. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived,” William White wrote in June 2007 in the BIS annual report, 2 months before the onset of the credit crunch.
So why were counterpart economists in member central banks afraid to tell emperors that they had no clothes?
According to William White, Greenspan gave him the cold shoulder after the presentation of the paper he had co-authored with a colleague, Caludio Borio.
Their warnings on the risks of financial stability materialised exactly 4 years later.
http://www.kansascityfed.org/publications/research/escp/escp-2003.cfm
@paul quigley
I’m not sure to what extent foreign investment is driving the Chinese housing bubble, but a proposal like “driving up private saving and taking substantial action now to reduce deficits in the countries that were at the core of the crisis” can surely only increase the flow of funds in that direction.
@ Kevin Walsh
That was probably a little careless. The main source of corporate funds in China is financial repression, which generates a massive poool of cheap capital for favoured enterprises. That all ends up as trillions of PBC dollar reserves and trillions of US private and governement debt. My source on China is the remarkable and amazingly communicative, Michael Pettis.
http://mpettis.com/
His take on capital flows and capital structure is well worth a read. ‘The Volatility machine’.
I am happy to be educated though. Why would paying down private and public debt ( ie saving) in the west lead to a flow of funds to China ?
@paul quigley
I certainly don’t claim to be more educated on the subject of China’s financial sources than you. But the US and the UK, which are the IIRC the two largest deficit economies, both have very weak domestic demand. So if they were to engage in both monetary and fiscal tightening, as the BIS appears to be recommending, you’d see the following effects:
Decreased domestic consumption, increased business costs, and a consequent fall in domestic business investment.
Decreased supply of government bonds.
Increased supply of investment funds due to increased domestic deposits.
Given an increase in investable funds, and a decrease in investment opportunities, the funds would almost necessarily go abroad. Hence there would be increased inflationary pressures in the countries that those funds were invested in.
@Kevin Walsh
“Decreased domestic consumption, increased business costs, and a consequent fall in domestic business investment.”
Doesn’t this depend on what the domestic consumption is on?
Here we have had tax rises and reductions in pay. There has been a fall in domestic consumption. It has been bad for government receipts. On the other hand, the trade balance has improved as imports have fallen. Given that we have a lot of external capital to repay, the accumulation of capital in the country must surely be a good thing (as JtO never tires of pointing out). No?
Either we reduce our consumption of imported goods and use that capital to repay debt, or we continue to borrow to consume. Is it a false dichotomy? You can’t make an omelette without oviparians.
On the subject of higher interest rates, remind me again what mortgage and other loan rates in Ireland are? How about deposit rates?
We already have the murket telling us that rates are too low in Ireland. It isn’t just about inflation, it is also about risk.
I have to commend BIS for talking about the elephant, though:
“Global current account imbalances are still with us, bringing the prospect of disorderly exchange rate adjustments and protectionism. But the imbalances extend beyond current accounts to gross financial flows, which today dwarf the net movements commonly associated with the current account. And they pose perhaps even bigger risks by giving rise to potential financial mismatches and facilitating the transmission of shocks across borders. Not only that, but cross-border financing makes rapid credit growth possible even in the absence of domestic financing. As the experience of the past few years reminded us, a reversal of strong cross-border capital flows can inflict damage on financial systems and ultimately on the real economy.
The imbalances in current accounts and in gross financial flows are related and need to be addressed together. Sound macroeconomic policies will play a key role in this regard, as will structural domestic policies to encourage saving in deficit countries and encourage consumption in surplus countries. Although the adjustment of real exchange rates is also required, it will not, by itself, be enough. Countries will need to implement policies that strengthen prudential frameworks and the financial infrastructure. Capital controls, best left as a last resort, can offer only temporary relief. ”
Nothing has changed to resolve unfettered capital flows. While nothing changes, the next crisis is just around the corner. Where next?
@hoganmahew
Well, it talks about the elephant in the room, but it doesn’t seem to propose anything concrete to do solve it. It’s all very well to say that Brazil, China and Germany should take measures to reduce their competitiveness, but what are the odds of them actually doing it? It says that capital controls can offer only temporary relief, but in the event of a financial crisis, that temporary relief can have long lasting beneficial effects (see how well Malaysia did in 1997 compared to other far Eastern economies).
As for deficit cutting measures in the US, the US is technically in a decent position to increase taxes and cut spending in certain areas without adversely affecting aggregate demand too much. It could let the Bush II tax era cuts expire, and implement the cost control measures in the Affordable Care Act. This would also have the positive effect of reducing the available funds on Wall Street. But if the US raises interest rates, then it cuts off its already weak recovery at the knees.
As for your point about the accumulation of external capital, whether it’s good for the economy or not depends on who accumulates it. If the income of ordinary people and the government had gone up, I would see that as a plus in this situation. Increased profits for the already wealthy don’t do us a lot of good.
Thanks Kevin and please don’t mistake me for someone with in depth knowledge of China.
Surplus countries won’t increase consumption for the same reason that deficit countries can’t easily eliminate spending. Vested interests and lobbying. The style may be different in Beijing and Washington, but the effect is probably the sam.
@ hogan
The BIS mentioned the elephant, but not the elephant driver.