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The Bank for International Settlements (BIS) is seldom discussed, but when it speaks, we ought to listen.
“As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 58 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies. Failures to keep monetary policy in line with reality and make monetary reforms in time, preferably as a simultaneous policy among all 58 member banks and also involving the International Monetary Fund, have historically led to losses in the billions as banks try to maintain a policy using open market methods that have proven to be based on unrealistic assumptions.”
Having said that, it is perhaps more important to recognize that the BIS was practically the only body that accurately predicted the 2008 financial crisis.
The BIS has just released its latest Quarterly Review. The outlook is not good. In fact, the bank is warning that all the indicators that existed prior to 2008 are once again appearing in their analysis.
Stephen Cecchetti, representing BIS, said, “Without structural adjustment, the economy won’t return to a strong and balanced path.” He said that “action take by central banks in Europe, the United States, Japan and elsewhere to help stimulate growth would not cut public debt levels or put banks on a firmer footing.”
In addition, he said that “We cannot wait and hope the problem will solve itself. We should and must continue to limit the size and complexity of financial institutions.” Of course, banking leaders do not agree. They believe that they can solve their own problems their own way — working with taxpayer bailout money. New liquidity regulations for banks will start to take effect at the beginning of 2013.
In brief, what the BIS is seeing is that “Some asset prices started to appear highly valued in historical terms relative to indicators of their riskiness. For example, global high-yield corporate bond spreads fell to levels comparable to those of late 2007, but with the default rate on these bonds running at around 3%, whereas it was closer to 1% in late 2007.”
The bank uncovered a fact that should be evident. Quantitative easing as well as easing of monetary policies in general have left the general public with the perception that “major near-term downside risks have eased.” The public perception problem is that we tend to believe everything we read as “the problem is solved.”
This would be a good time to review a couple of “rules of thumb” that are applicable, not only in the financial marker, but also in nearly every scenario in life.
- Long term goals tend to have elevated short-time risks. Short term goals tend to have elevated long-term risks.
- Cause and effect are not necessarily closely related in time and space.
Unfortunately, most individuals and institutions either choose to ignore them or fail to understand them at all. The 2008 financial crisis did not happen overnight. It developed over a period of time as lenders and banks played fast and loose, ignoring the cliff that was in front of them. Some fell off. Many others would have had our governments not thrown them a rope strung with taxpayer money.
BIS said that “Significant longer-term risks to future asset valuations remain.” In other words, “Proceed with caution – the problem is not fixed yet.” With the warning that the indicators are so similar to what they were in 2007 preceding the crisis, we should heed the warning signs.
