The Big Bis Thread

[interestrateripoff]

http://uk.reuters.com/article/2014/09/14/uk-markets-bis-idUKKBN0H909N20140914

Financial asset prices are at "elevated" levels and market volatility remains "exceptionally subdued" thanks to ultra-loose monetary policies being implemented by central banks around the world, the Bank for International Settlements said on Sunday.

In its quarterly review, the BIS said financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth, but quickly returned to "exceptional lows" across most asset classes.

"By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility," the BIS said.

The comments echoed the institution's warning earlier this year that rock-bottom interest rates had led to "worrying" signs of unsustainable growth in property and credit markets in some countries.

The U.S. Federal Reserve is on course to bring its bond-buying programme to an end in October and is expected to begin raising interest rates next year.

But if the Fed is stepping back, the European Central Bank is stepping up. The ECB has cut key rates, will offer hundreds of billions of euros of liquidity to banks, and purchase hundreds of billions euros of assets to try and ward off deflation and revive flagging growth.

Anticipation of the ECB's largesse eclipsed concern over geopolitics and pushed credit spreads, bond yields and volatility back down again, the BIS said.

There were several references in the report to the "extraordinarily" and "exceptionally" low levels of volatility, suggesting the BIS feels markets may be getting too complacent and therefore vulnerable - and therefore ill-equipped to a shock.

http://www.bis.org/about/board.htm

The BIS Board of Directors ¹

Chairman: Christian Noyer, Paris

Mark Carney, London
Agustín Carstens, Mexico City
Luc Coene, Brussels
Jon Cunliffe, London
Andreas Dombret, Frankfurt am Main
Mario Draghi, Frankfurt am Main
William C Dudley, New York
Stefan Ingves, Stockholm
Thomas Jordan, Zurich
Klaas Knot, Amsterdam
Haruhiko Kuroda, Tokyo
Ann Le Lorier, Paris
Stephen S Poloz, Ottawa
Raghuram Rajan, Mumbai
Jan Smets, Brussels
Alexandre A Tombini, Brasília
Ignazio Visco, Rome
Jens Weidmann, Frankfurt am Main
Janet L Yellen, Washington
Zhou Xiaochuan, Beijing

^1 This list includes the observer mentioned above

[Executive Sadman]

'Some countries'

Very cryptic...who could they mean?!

[wonderpup]

There's an almost comic perversity about the fix in which the Central Banks now find themselves- having reinvented themselves as the saviours of the world they now find they have created a new religion in which their followers in the markets have such faith in their miraculous powers that they no longer feel the need to moderate their own actions or even concern themselves with the consequences- for in the event of disaster the FED/ BofE/ ECB shall provide the solution in the form of yet more printed money.

It's the ultimate moral hazard in which every risk is transformed by faith into another guarantee of Central Bank largesse.

[oracle]

http://uk.reuters.com/article/2014/09/14/uk-markets-bis-idUKKBN0H909N20140914

http://www.bis.org/about/board.htm

the indian guy is exteremly sensible.

frankly he is one guy I would trust as a central banker.he's pretty much told it as it is for a while.

[zugzwang]

A casual observer might think they have no idea what they're doing.

[Executive Sadman]

A casual observer might think they have no idea what they're doing.

I could forgive them if I believed they were idiots...well, maybe.

Nope. Theyre just too cowardly to deal with it on their watch. And I guess who can blame them in a way...if they didn't allow the politicians to inflate with impunity, theyd be out of a job.

[interestrateripoff]

BIS warns on 'violent' reversal of global markets

Investors take zero-rates for granted and unwisely believe that central banks will protect them, says the capital markets chief of the Bank of International Settlements

Well central banks have protected them, they have propped up the banks with ZIRP and now everyone expects the sugar rush to continue. Govts have funded large scale deficit spending with ZIRP this it appears for now is the new "normal"!

[interestrateripoff]

http://www.bis.org/publ/work468.htm

The redistributive effects of financial deregulation: wall street versus main street

by Anton Korinek and Jonathan Kreamer

Working Papers No 468
October 2014

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a formal model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties, pitting Main Street against Wall Street. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to Wall Street at the expense of Main Street.

[interestrateripoff]

http://www.bis.org/publ/work467.htm

Managing Default Risk

by Anna Zabai

Working Papers No 467
October 2014

High sovereign debt in advanced economies has recently revived the debate about the role of coordination problems and self-fulfilling beliefs as drivers of sovereign default risk. I show how default risk can be decomposed in a solvency-risk component and a coordination-risk component. I then study how fiscal policy can be effective in managing the risk of coordination and I characterise how the shape of the optimal policy is affected by the presence of this risk: making the deficit contingent on interest rate movements is more effective in managing default risk than using non-contingent fiscal targets.

[interestrateripoff]

http://www.zerohedge.com/news/2014-12-07/even-bis-shocked-how-broken-markets-have-become

Not a quarter passes without the Bank of International Settlements (BIS) aka central banks' central bank (also the locus of some of the most aggressive manipulation of gold and FX in human history) reiterating a dire warning about the fire and brimstone that is about to be unleashed upon the global economy.

It started in June of 2013, when Jaime Caruana, certainly the most prominent doom and gloomer at the BIS (who also was Governor of the Bank of Spain from 2000 to 2007 when this happened) asked if "central banks [can] now really do “whatever it takes”? As each day goes by, it seems less and less likely... [seven] years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy.... low-interest policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. Overindebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure...in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits."

The BIS' preaching did not end there, and hit a new crescendo in June of 2014, when in its 84th Annual Report, the BIS slammed "Market Euphoria", and found a "Puzzling Disconnect" between the economy and the market":

"it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally

", that "despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions" and that "the temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere"... "Particularly for countries in the late stages of financial booms,

the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on."

"The global economy continues to face serious challenges. Despite a pickup in growth, it has not shaken off its dependence on monetary stimulus.

Monetary policy is still struggling to normalise after so many years of extraordinary accommodation

. Despite the euphoria in financial markets, investment remains weak.

Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions

. And despite lacklustre long-term growth prospects, debt continues to rise.

There is even talk of secular stagnation.

Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing.

It did not end there either. In September of 2014, the warnings continued:

... the search for yield – a dominant theme in financial markets since mid-2012 – returned in full force. Volatility fell back to exceptional lows across virtually all asset classes, and risk premia remained compressed.

By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to support elevated asset price valuations

and exceptionally subdued volatility.

The spell of market volatility proved to be short-lived and financial markets resumed their rally soon afterwards. By early September, global equity markets had recouped their losses and credit risk spreads once again consolidated at close to historical lows. While geopolitical worries kept weighing on financial market developments,

these were ultimately superseded by the anticipation of further monetary policy accommodation in the euro area, providing support for asset prices.

The warnings continued. Earlier today, the BIS released its latest Quarterly Review report, where the most prominent warning this time revolves around the inverse Plaza Accord surge in the US Dollar whose dramatic, concentrated surge in recent months is unparalleled in history. In a nutshell, in "Currency movements drive reserve composition", BIS' McCauley and Chan warn that, in Ambrose Evans-Pritchard's words, "off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability."

From the full report:

The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy, in particular on EMEs.

For example, it may expose financial vulnerabilities as many firms in emerging markets have large US dollar-denominated liabilities. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions

.

Or it may not: because this is essentially a carbon copy of the warnings that were issued after Bernanke first hinted at tapering in May of 2013, leading to the Taper Tantrum^TM, which led to some short-term volatility which were promptly soothed by even more central bank liquidity flooding what's left of the capital "markets."

AEP has more:

A chunk of China's borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. "To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns," said the BIS in its quarterly report.

Good job the World Central bankers are all the directors of BIS...

[interestrateripoff]

https://uk.finance.yahoo.com/news/bis-ultra-low-interest-rates-021525266.html

BIS: ultra low interest rates could make global economy permanently unstable

Bank for International Settlements warns "persistent easing bias" by fiscal, monetary and prudential policymakers has lulled governments "into a false sense of security"

Ultra low interest rates and the failure of policy to "lean against" the build-up of financial imbalances are in danger of making the global economy permanently unstable, the Bank for International Settlements has warned.

In its annual report, the Swiss-based "bank of central banks" spelled out the risks of relying too heavily on monetary policy to stimulate the economy. The BIS warned that central banks including the Bank of England and US Federal Reserve could keep monetary policy loose for too long, with potentially damaging consequences.

"The prospects for a bumpy exit together with other factors suggest that the predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly," the BIS said on Sunday.

[interestrateripoff]

BIS warns on 'violent' reversal of global markets - Telegraph BIS chief fears fresh Lehman from worldwide debt surge Euphoric - Financial Times BIS: Central banks warned of 'false sense of security' - BBC Bank for International Settlements chief sounds another ... Governments Urged to Pick Up Pace on Economy - WSJ Bank of England hits out at BIS report warning over low ... Central Bankers, Worried About Bubbles, Rebuke Markets ...

[interestrateripoff]

BIS warning over borrowing | The Australian BIS spotlights home prices as early warning indicator ... Canada taken to task as BIS ratchets up warnings - The ... BIS Crash Warnings Remain Blacked Out in United States The BIS and the economic bubble warning we cannot ignore BIS warns central banks have done all they can - ABC News ... A Canadian Banking Crisis? 'Early Warning Indicators ... The Economic Recovery is an Illusion: The Bank for ... Asset prices, financial and monetary stability: exploring the ... BIS warns global economic imbalances now worse than ... The Man Nobody Wanted to Hear: Global Banking Economist BIS' warning to the world - New Economist Preparing for the next financial crisis - Asia Weekly - China ...

[billybong]

BIS = Bloat for International Settlements.

Edited December 7, 2014 by billybong

[interestrateripoff]

http://www.spiegel.de/international/business/the-man-nobody-wanted-to-hear-global-banking-economist-warned-of-coming-crisis-a-635051.html

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

[interestrateripoff]

Dollar surge endangers global debt edifice, warns BIS

Bank for International Settlements concerned about underlying health of world economy as dollar loans to emerging markets increase rapidly

[billybong]

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

and yet they still like to claim that nobody could have predicted it all.

Edited December 7, 2014 by billybong

[Venger]

Someone called John Hughes - independent economist (or something) was just on BBC Radio World Service being interviewed. For some time it was all about possibility of robust US recovery.

Then went to risks; said Bank of International Settlements ("the Central Bankers' Central Bank") recently been sounding the alarm more loudly and frequently about risk. Was talking about the $9 Trillion (dollars) lent to companies around the world in the last few years, at very low rates, and how dollar has since increased in value, with prospect of Fed raising rates too. He suggested US banks have recently tightened (made more expensive) loans to commercial/corporate sector, even though Fed hasn't upped the base rate.

[interestrateripoff]

Someone called John Hughes - independent economist (or something) was just on BBC Radio World Service being interviewed. For some time it was all about possibility of robust US recovery.

Then went to risks; said Bank of International Settlements ("the Central Bankers' Central Bank") recently been sounding the alarm more loudly and frequently about risk. Was talking about the $9 Trillion (dollars) lent to companies around the world in the last few years, at very low rates, and how dollar has since increased in value, with prospect of Fed raising rates too. He suggested US banks have recently tightened (made more expensive) loans to commercial/corporate sector, even though Fed hasn't upped the base rate.

This is likely to play out like the 1980's part II when Volcker increased US rates to curb US inflation and induced a 3rd World Debt crisis along with the savings and loans crisis. Even better this time the numbers are even larger and an increase of rates to 20% won't be needed. Increasing the Fed rate to 2% could lead to global carnage.

[interestrateripoff]

Monetary spillovers? Boom and bust? Currency wars? The international monetary system strikes back (Speech by Mr Fabrizio Saccomanni)

Working Papers

• Why does financial sector growth crowd out real economic growth?
• Liquidity and growth: the role of counter-cyclical interest rates
• Bank competition and credit booms
• The biofuel connection: impact of US regulation on oil and food prices
• Why did bank lending rates diverge from policy rates after the financial crisis?

From the BIS archives: Financial structure and the monetary policy transmission mechanism (BIS Paper)

[Guest_northshore_*]

...Why does financial sector growth crowd out real economic growth?

One push-back to conclusion (cause/effect - blame) of that report: http://spontaneousfinance.com/2015/02/20/crush-rwas-to-end-secular-stagnation/

"...Basel risk-weighted assets (RWAs) were the root cause of the misallocation of bank credit and hence the misallocation of capital in the economy prior to the financial crisis: in order to optimise return on equity, bankers were incentivised by RWAs to allocate a growing share of available loanable funds to the real estate sector, creating an unsustainable boom...consequently, fewer financial resources were hence available for sectors that were penalised by regulatory-defined high RWAs (i.e. business lending)...What those researchers miss is that the growth of the financial sector has been similar in previous periods over the past 150 years, with no decline in secular growth rate and productivity. However, what changed since the 1980s is the allocation of this growth."

See also: http://www.frbsf.org/economic-research/files/wp2014-23.pdf & Summary: http://www.voxeu.org/article/great-mortgaging

[interestrateripoff]

Low rates will trigger civil unrest as central banks lose control

Bank for International Settlements warns that low rates risk backlash as effects spill over into the real economy

• Rock-bottom rates will threaten global financial stability, warn OECD

[interestrateripoff]

https://www.bis.org/publ/qtrpdf/r_qt1503e.htm

The costs of deflations: a historical perspective

by Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann

18 March 2015

Concerns about deflation - falling prices of goods and services - are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.¹

JEL classification: E31, E32, N10.

Concerns about deflation - falling prices of goods and services - have loomed large in recent policy discussions. The debate is shaped by the deep-seated view that deflation, regardless of context, is an economic pathology that stands in the way of any sustainable and strong expansion.

The almost reflexive association of deflation with economic weakness is easily explained. It is rooted in the view that deflation signals an aggregate demand shortfall, which simultaneously pushes down prices, incomes and output. But deflation may also result from increased supply. Examples include improvements in productivity, greater competition in the goods market, or cheaper and more abundant inputs, such as labour or intermediate goods like oil. Supply-driven deflations depress prices while raising incomes and output.

And even if deflation is seen as a cause, rather than a symptom, of economic conditions, its effects are not obvious. On the one hand, deflation can indeed reduce output. Rigid nominal wages may aggravate unemployment. Falling prices raise the real value of debt, undermining borrowers' balance sheets, both public and private - a prominent concern at present given historically high debt levels. Consumers might delay spending, in anticipation of lower prices. And if interest rates hit the zero lower bound, monetary policy will struggle to encourage spending. On the other hand, deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.²

The bottom line is that, whether deflation is seen as symptom or cause, its cost is ultimately an empirical question. As a symptom, it depends on its underlying drivers; as a cause, on the relative strength of various channels.

Moreover, while the impact of goods and services price deflations is ambiguous a priori, that of asset price deflations is not. As is widely recognised, asset price deflations erode wealth and collateral values and so undercut demand and output. Yet the strength of that effect is an empirical matter. One problem in assessing the cost of goods and services price deflations is that they often coincide with asset price deflations. It is possible, therefore, to mistakenly attribute to the former the costs induced by the latter.

Data limitations have so far made it difficult to answer these questions. In this special feature, we take a step forward based on a newly constructed data set that spans more than 140 years, from 1870 to 2013, and covers up to 38 economies. In particular, the data include information on both equity and property prices as well as on debt.

We highlight three conclusions. First, before accounting for the behaviour of asset prices, we find only a weak association between goods and services price deflations and growth; the Great Depression is the main exception. In some respects, this confirms previous work. Second, the link with asset price deflations is stronger and, once these are taken into account, it further weakens the association between goods and services price deflations and growth. Finally, we find some evidence that high private debt levels have amplified the impact of property price deflations but we detect no similar link with goods and services price deflations.

The rest of the article is organised as follows. The first section briefly reviews the historical deflation record. The second analyses the costs of deflation by considering its correlation with output growth, while the third extends the analysis to asset price deflations. The fourth section asks whether more debt in an economy has increased the costs of deflations. In conclusion, we briefly consider the implications of our findings for monetary policy, highlighting caveats when applying them to the current situation.

The deflation record

For current purposes, we define a deflation in the prices of goods and services - or "price deflation" for short - simply as a fall in the corresponding price index. This sidesteps a couple of issues. Analytically, economists make a distinction between one-off price changes, typically seen as reflecting relative adjustments (eg a fall in the price of oil), and self-sustaining rates of change. The term "deflation" is then restricted to the latter. Similarly, given its negative connotations, some would prefer to restrict the term to destabilising self-reinforcing downward wage-price spirals. Our choice reflects the practical difficulties in distinguishing one-off from self-sustaining changes and our wish to avoid prejudging the costs of deflation by incorporating them in the definition.

Pragmatically, we address the issue by distinguishing persistent from more transitory price declines. Persistent deflations should be expected to be more costly than transitory ones. We define persistent deflations as those for which the price level declines cumulatively over at least a five-year period, based on annual consumer price data.³ Using the cumulative change in the level rather than consecutive rates of change helps identify periods of persistent deflation that look through bursts of volatility in the index. Volatility was especially high during the gold standard period, given the index composition and the lack of core inflation measures.

Importantly, our sample covers a variety of monetary regimes. These include: the classical gold standard (1870-1913), in which currencies were tightly tied to gold; the interwar years (1919-38), in which countries first gradually re-established this link before abandoning it again; and the postwar era (1946-2013), in which the link was effectively absent and the authorities experimented with various arrangements that resulted in widely varying inflation rates, from the Great Inflation of the 1970s to the recent period of very low, sometimes negative, inflation. Our long sample allows us to see how far the costs of deflation depend on monetary regimes. We also consider the Great Depression (1930-33) separately, to examine whether it was sui generis (see also Box 1).⁴

https://www.bis.org/publ/qtrpdf/r_qt1503e.pdf

[interestrateripoff]

https://www.bis.org/publ/work494.htm

Financial crisis, US unconventional monetary policy and international spillovers

by Qianying Chen, Andrew Filardo, Dong He and Feng Zhu

Working Papers No 494
March 2015

We study the impact of US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error correction model (GVECM). We focus on the effects of reductions in the US term and corporate spreads. The estimated effects of QE are sizeable and vary across economies. First, we find the QE impact from reducing the US corporate spread to be more important than that from lowering the US term spread, consistent with Blinder's (2012) argument. Second, counterfactual exercises suggest that US QE measures, especially the cumulative effects of successive QE measures starting with the sizeable impact of the early actions, countered forces that could have led to episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on emerging economies are diverse but generally larger than those found for the United States and other advanced economies. The estimates suggest that US monetary policy spillovers contributed to overheating in Brazil, China and some other emerging economies in 2010 and 2011, but supported their respective recoveries in 2009 and 2012. These heterogeneous effects point to unevenly distributed benefits and costs of monetary policy spillovers.

JEL classification: E43, E44, E52, E65, F42, F47

Keywords: emerging economies, financial crisis, global VAR, international monetary policy spillovers, quantitative easing, unconventional monetary policy

Full text

• PDF 31 pages, 1,033 kb

[interestrateripoff]

The Great Depression

Japan's growth and deflation: two lost decades?

The economics of market-making

Inventory levels and asset price sensitivity: catching the falling knife?